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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549


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,
2001

or


o 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 000-24289

CLICK2LEARN, INC.

(Exact name of registrant as specified in its
charter)


|                                                                |  |                                     
|--------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                        |  | 91-1276003                          
|(State or other jurisdiction of
	incorporation or organization) |  | (I.R.S. Employer Identification No.)

110-110th Avenue NE, Bellevue, Washington
98004

(Address of principal executive
offices)  (Zip Code)


(425) 462-0501

(Registrants telephone number, including
area code)


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

None


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

Common Stock, $0.01 par value per
share


(Title of class)


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

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

The aggregate market value of common stock held
by non-affiliates of the registrant as of March 1, 2002 was
$54,964,496.

The number of shares outstanding of the
registrants common stock as of March 1, 2002 was
24,250,697.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting
of Stockholders to be held on May 29, 2002 are incorporated
by reference into Part III.



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TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                             
|              | Item 2. Properties                                                                           
|              | Item 3. Legal Proceedings                                                                    
|              | Item 4. Submission of Matters to a Vote of Securities Holders                                
|PART II      
|              | Item 5. Market for Registrants Common Stock and Related Stockholder Matters                 
|              | Item 6. Selected Consolidated Financial Data                                                 
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7a. Quantitative and Qualitative Disclosures about Market Risk                          
|              | Item 8. Financial Statements and Supplementary Data                                          
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                  
|              | Item 11. Executive Compensation                                                              
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13. Certain Relationships and Related Transactions                                      
|              | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES   
|Exhibit 4.14 
|Exhibit 21.01
|Exhibit 23.01



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CLICK2LEARN, INC.

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2001

INDEX

|           |  |                                                                                        |  |   
|---------- |  | -------------------------------------------------------------------------------------- |  | --
|PART I     |  |                                                                                       
|Item 1.    |  | Business                                                                               |  | 3 
|Item 2.    |  | Properties                                                                             |  | 7 
|Item 3.    |  | Legal Proceedings                                                                      |  | 8 
|Item 4.    |  | Submission of Matters to a Vote of Security
	Holders                                   |  | 8 
|PART II    |  |                                                                                       
|Item 5.    |  | Market for Registrants Common Stock and
	Related Stockholder Matters                  |  | 9 
|Item 6.    |  | Selected Consolidated Financial Data                                                   |  | 11
|Item 7.    |  | Managements Discussion and Analysis of
	Results of Operations and Financial Condition |  | 12
|Item 7a.   |  | Quantitative and Qualitative Disclosures about
	Market Risk                            |  | 28
|Item 8.    |  | Financial Statements and Supplementary Data                                            |  | 29
|Item 9.    |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosures |  | 49
|PART III   |  |                                                                                       
|Item 10.   |  | Directors and Executive Officers of the Registrant                                     |  | 49
|Item 11.   |  | Executive Compensation                                                                 |  | 49
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
	and Management                        |  | 49
|Item 13.   |  | Certain Relationships and Related Transactions                                         |  | 49
|PART IV    |  |                                                                                       
|Item 14.   |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                       |  | 49
|Signatures |  | 52                                                                                    

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PART I

This Annual Report and the documents
incorporated herein by reference include forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. This Act provides a safe
harbor for forward-looking statements to encourage
companies to provide prospective information about themselves so
long as they identify these statements as forward-looking and
provide meaningful cautionary statements identifying important
factors that could cause actual results to differ from the
projected results. All statements other than statements of
historical fact we make in this Annual Report or in any document
incorporated by reference are forward-looking. Such
forward-looking statements involve risks and uncertainties,
including, among other things, statements regarding our
anticipated costs and expenses and revenue mix. Such
forward-looking statements include, among others, those
statements including the words expect,
anticipate, intend, believe
and similar language. Our actual results may differ
significantly from those projected in the forward-looking
statements. Factors that might cause or contribute to such
differences include, but are not limited to those discussed in
the section Managements Discussion and Analysis of
Financial Condition and Results of Operations 
Factors That May Affect Future Results of Operations. You
are cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date of this Annual
Report on Form 10-K. We undertake no obligation to publicly
release any revisions to the forward-looking statements or
reflect events or circumstances after the date of this
document.




Item 1.     Business

Overview and History

We are a leading developer and provider of
enterprise e-Learning solutions for businesses, government
agencies and educational institutions. We design, develop,
market, license and support an integrated suite of e-Learning
software products and related services that allow our customers
to cost-effectively create, personalize and manage the delivery
of educational content across their extended enterprise of
employees, suppliers, distributors and customers. We recently
introduced our new Aspen Enterprise Learning Platform
(Aspen), a suite of software products that unifies
collaborative content development, personalized content delivery
and comprehensive learning management in an integrated system
designed to be open, flexible and scalable. We also offer a
range of professional services to support our e-Learning
software products.

Our e-Learning solutions focus on the needs of
organizations that realize the ability to provide relevant and
up-to-date knowledge when and where it is needed throughout the
extended enterprise is critical to their overall success. We
provide our e-Learning solutions to customers across a broad
range of industries including financial services, accounting,
healthcare, insurance, technology, manufacturing,
telecommunications, transportation, utilities, government and
education.

We were originally incorporated as Asymetrix
Corporation in the State of Washington in 1984 and developed and
marketed a wide range of software products. In 1995, we focused
our business on the e-Learning market and we released our first
authoring tool focused specifically on the creation of
e-Learning content. We created our first learning management
system in 1997 and our first web-based collaborative content
development system in 1999. As a result of our decision to focus
on e-Learning, we divested several product lines and made a
number of acquisitions to strengthen our position in this
market, and we changed our name to Asymetrix Learning Systems,
Inc. In connection with our initial public offering in June
1998, we reincorporated as a Delaware corporation and in 2001,
we changed our name to Click2learn, Inc.

In 2001, as part of our ongoing focus on the
Aspen platform, we acquired IntelliPrep Technologies,
Incorporated (IntelliPrep) and made the decision to
discontinue investing in our e-Learning Network, our hosted
application service platform. We intend to migrate our
e-Learning Network customers to Aspen as their existing
contracts expire. We also decided to limit our services
offerings to those directly related to the Aspen platform and
our ToolBook II product line. As a result, in January 2002
we sold the majority of

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our custom content development business to NIIT
(USA), Inc. (NIIT), the U.S. operation of NIIT
Limited, a global custom software development firm.


Products and Services

We offer the following products and services:

Aspen Enterprise Learning Platform.Aspen is a suite of three software
products, each of which can be implemented on a stand-alone
basis or in any combination. The Aspen product suite unifies
collaborative content development, personalized content delivery
and comprehensive learning management in an integrated system
designed to be open, flexible, modular, and scalable. Each
product in the Aspen suite is designed to offer comprehensive
support for industry standards such as SCORM, AICC, and IMS
Packaging specifications, and to work together with other
standards-compliant e-Learning products. The open architecture
of Aspen and a well-defined software development kit make it
possible for developers to integrate Aspen with other enterprise
applications such as systems for enterprise resource planning,
supply chain and customer relationship management, human
resources, e-commerce and financial management. We offer Aspen
as a behind-the-firewall solution for implementation on our
customers information systems or hosted at our data
center. Aspen can be licensed on a perpetual or subscription
basis.

The Aspen suite includes the following three
products, which are generally licensed based on the number of
individual users of the particular product:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Aspen Content Development Server (Aspen
	CDS).Aspen CDS enables
	customers to collaboratively create standards-compliant learning
	content in the form of reusable learning objects. Aspen CDS is
	designed to provide the instructional design, workflow,
	collaboration and management capabilities that enable a
	distributed team of subject matter experts, instructional
	designers and software developers to rapidly and
	cost-effectively develop engaging and flexible e-Learning
	courses. Courses created with Aspen CDS are designed to
	integrate with other standards-compliant learning management
	systems.                                                                                                                                                                                                                                          
|
| |  | Aspen Learning Experience Server (Aspen
	LXS).Aspen LXS is designed to
	provide an individual learner with a personalized learning
	experience that promotes rapid learning and knowledge exchange
	through adaptive delivery, collaboration tools, guided study
	paths, knowledge exchange tools and personalized feedback
	options. For example, Aspen LXS can adapt courses to the needs
	of individual learners by providing a guided path through the
	learning objects within a course. Aspen LXS includes features
	designed to increase learning effectiveness by annotating and
	highlighting relevant content, allowing the learner to access
	communities of experts for assistance with difficult subject
	matter and share knowledge, insights and experience with other
	learners.                                                                      
|
| |  | Aspen Learning Management Server (Aspen
	LMS).Aspen LMS is designed to
	allow organizations to manage learning resources from a central
	location and provide managers throughout the organization with
	access to those resources. Aspen LMS manages e-Learning,
	instructor-led training and other types of learning through a
	single interface, enabling organizations to efficiently use
	learning resources from a variety of sources, including custom
	content created with Aspen CDS and other standards-compliant
	content authoring programs, as well as commercially available
	content offerings. Aspen LMS also includes tools to analyze
	learning performance and capture data about the learning process
	at the learning-object level, providing organizations with the
	ability to quickly increase the effectiveness of their learning
	resources.

ToolBook II Products.In addition to Aspen CDS, we offer our
ToolBook II Instructor and ToolBook II Assistant
e-Learning content creation products targeted at small teams or
individual authors that do not require the collaborative
capabilities and learning object functionality of Aspen CDS.
These products enable our customers to create their own
media-rich interactive e-Learning content for deployment on the
Aspen platform, other standards-compliant e-Learning delivery
systems or CD-ROM. ToolBook II Instructor is a multimedia
development system for creating sophisticated e-Learning
applications that is targeted at professional software
developers. ToolBook II Assistant is designed to be an

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easy-to-use authoring product that automates much
of the process of developing e-Learning applications and is
targeted at learning professionals or content experts. Both
products are designed to integrate with the Aspen platform and
are licensed on a per copy basis.


Professional Services.We complement our Aspen and
ToolBook II product offerings with a range of professional
services to enable our customers to develop, implement, evaluate
and maintain their e-Learning solutions. Our professional
services offerings include:



| |   |                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Strategic
	Consulting.We assist our customers in
	evaluating their e-Learning needs, using e-Learning to increase
	effectiveness or add value to current offerings, developing
	e-Learning business models, defining a solution that best meets
	their e-Learning needs and providing on-going consulting on the
	effectiveness of their solution and return on investment.
|
| |  | Systems Integration.We provide the services necessary to
	implement and customize our customers e-Learning solutions
	and to integrate Aspen with our customers content,
	information systems and enterprise applications.                                                                                                                                               
|
| |  | Training and Technical Support.We offer training that helps
	organizations become more self-reliant in the use of our
	products and in e-Learning generally, and we offer technical
	support and maintenance packages for our products.                                                                                                                                    

A significant portion of our professional
services business in 2001 consisted of developing custom
e-Learning content. Although we sold the majority of our custom
content development business to NIIT in January 2002, we will
continue to provide custom content development services to the
Washington National Guard at least through 2002.

Customers

We provide our e-Learning products and services
to customers across a broad range of industries including
financial services, accounting, health care, insurance, computer
hardware and software, manufacturing, networking,
telecommunications, government and education. The following is a
partial list of our significant customers in 2001:

|                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Technology/ TelecommunicationsAT&T
	Avaya
	Charter Communications
	Fujitsu Network Communications
	Microsoft
	Symantec
	Williams Information ServicesOther IndustriesAccenture LLP
	Albertsons Inc.
	American Airlines
	Burlington Northern Santa Fe
	Georgia Pacific
	Pfizer
	Phillips 66
	Stream International
	Starwood Hotels and Resorts |  | Financial ServicesAllfirst Bank
	American Express
	Barclays Bank
	Citicorp
	CUNA Mutual Group
	Credit Suisse First Boston
	Fidelity Investments
	Conseco Finance
	JP Morgan Chase & Co.
	New York Stock Exchange
	Washington Mutual
	Wells Fargo BankGovernment/ Non-profitAmerican Cancer Society
	Memorial Sloan-Kettering Cancer Center
	Tufts Managed Care Institute
	Washington National Guard

The Washington National Guard accounted for 17.5%
of our total consolidated revenues and 38.6% of our Content
Services revenues during 2001. See Managements Discussion
and Analysis at page 12 for a description of Content
Services revenues and our other revenue categories. Although the
Washington National Guard will continue to be a significant
customer in 2002, we anticipate it will account for a smaller
percentage of our total consolidated revenues for 2002. However,
with the sale of the custom

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content development business other than the
Washington National Guard contract to NIIT, we expect that the
Washington National Guard will account for a significantly
higher percentage of our Content Services revenue during 2002.
No other single customer accounted for 10% or more of our total
consolidated revenues in any of the last three fiscal years.


Competition

The e-Learning market is a new market that is
quickly evolving and subject to rapid technological change. The
market is also highly fragmented, with no single competitor
holding a dominant market position. Because there are no
significant barriers to entry in this market, we expect a number
of new competitors to enter this market in the future. We face
competition from a variety of companies in different segments of
the e-Learning market. The Aspen platform faces competition from
vendors of other learning or content management systems, such as
Saba and Docent, and other companies, including existing
enterprise software vendors, may enter the e-Learning market in
the future. Our ToolBook II products face competition from
other web authoring products.

The principal competitive factors affecting the
market for e-Learning include:



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | the features and functionality of e-Learning
	solutions;                                                                   
|
| |  | scalability and the ability to integrate with a
	variety of content and other e-Learning and enterprise software
	products;
|
| |  | the scope and quality of professional services
	offered;                                                                   
|
| |  | pricing;                                                                                                                   
|
| |  | customer service and support;                                                                                              
|
| |  | reputation and financial position of the
	provider; and                                                                    
|
| |  | the effectiveness of sales and marketing efforts.                                                                          

Although we believe our solutions compete
favorably with respect to all these factors, we may not be able
to maintain a competitive position against current and potential
competitors.

Sales and Marketing

As of December 31, 2001, our combined sales
and marketing organization consisted of 98 employees based at
our corporate headquarters in Bellevue, Washington and at other
locations throughout the United States, Canada and the United
Kingdom. We sell our solutions primarily through a direct sales
force consisting of field sales representatives focused on
selling larger Aspen implementations and related services. We
also have inside sales representatives focused on selling the
ToolBook II authoring products and smaller Aspen licenses.
Our sales organization also includes sales engineers who provide
technical expertise, architect the technical aspects of our
e-Learning solutions, assist in proposal preparation and provide
ongoing sales support. We expect to add to our direct sales
force in the future.

Although in the past we have not used resellers
significantly in marketing our e-Learning solutions other than
the ToolBook II products, during 2001 we expanded our
distribution through key strategic partnerships. We signed an
agreement with Accenture LLP to enable them to market Aspen to
their clients and we have established several new reseller
relationships to bring the Aspen platform to a number of
additional markets in Europe, Asia and the Pacific Rim. Sales to
resellers accounted for 7% of total revenues in 2001, and may
increase in future years. We expect to appoint additional
resellers for the Aspen platform and ToolBook II products in the
future.

International revenue, based on the origin of the
customer, accounted for 16%, 6% and 13% of our total revenue for
1999, 2000 and 2001, respectively. We believe that the
e-Learning market is still in the early stages of development
outside the United States, but that businesses in many other
regions of the world are beginning to undertake e-Learning
initiatives. We intend to continue to expand internationally by

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releasing Aspen in additional languages and
establishing additional reseller relationships to expand the
geographic reach of our e-Learning solutions.


We conduct a variety of marketing programs to
promote our e-Learning solutions, including advertising in
national business and technology magazines and trade
publications, major trade shows, direct mail and e-mail
campaigns, public seminars, web-based seminars, and public
relations activities focused on company news and successful
applications of our e-Learning solutions. In cooperation with
the publisher of Training and Online Learning magazines, we are
founding sponsors of the largest e-Learning conference in the
industry. The next conference will be held in September 2002 in
Anaheim, California. We also participate as an exhibitor and
speaker at numerous training and e-Learning trade shows and we
maintain an area on our web site where potential customers can
obtain information about e-Learning and our solutions.

Research and Development

We believe our long-standing focus on technology
has attracted qualified engineering and other technical
personnel and has contributed to our core technology
capabilities. In May 2001, we significantly enhanced our
engineering team with the acquisition of IntelliPrep, which
brought a number of engineers who had previously held senior
positions within Microsoft Corporations engineering
organization. Our principal research and development groups are
located in Bellevue, Washington and Rochester, New York.
Research and development expenses were $7.4 million,
$9.5 million and $8.9 million in 1999, 2000 and 2001,
respectively and represented 21%, 22% and 20% of total revenue
in those periods.

We believe our future success will depend on our
ability to continue to enhance our e-Learning solutions to keep
pace with competitive product and service offerings, new
technologies and industry standards, and diverse and changing
customer requirements. As a result, we actively participate in a
number of standards bodies and are taking an active role in
defining standards for the e-Learning industry. We expect to
continue to commit significant resources to research and
development of our e-Learning solutions in the future.

Proprietary Rights

Our e-Learning solutions are based on technology
that is primarily internally developed, although some portions
are licensed from third parties. We rely on a combination of
copyrights, trademarks, trade secret laws, restrictions on
disclosure and other methods to protect our intellectual
property. We also enter confidentiality agreements with our
employees and consultants, and control access to our proprietary
information. Despite our precautions, however, unauthorized
parties may copy or otherwise obtain or use our intellectual
property and other companies may independently develop
equivalent technology or intellectual property.

We use the following trademarks in the conduct of
our business: CLICK2LEARN, ASPEN, TOOLBOOK II ASSISTANT and
TOOLBOOK II INSTRUCTOR.

Employees

As of December 31, 2001, we had
356 full-time employees, including 73 in research and
development, 98 in sales and marketing and technical
support, 138 in professional services and 47 in operations
and administration. None of our employees are represented by a
labor union. We have not experienced any work stoppages and we
consider our relations with our employees to be good. In
connection with the sale of the majority of our custom content
development business to NIIT in January 2002, 52 of our
employees became employees of NIIT or were terminated.




Item 2.     Properties

Our corporate headquarters and executive offices
are located in Bellevue, Washington in approximately
35,293 square feet of leased office space, with the lease
term expiring in October 2003. We also

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maintain regional offices in Fort Worth, Texas;
Framingham, Massachusetts; London, England and Rochester, New
York. Offices in Halifax, Nova Scotia and Atlanta, Georgia
will be closed in 2002 in connection with the sale of the
majority of our custom content development business to NIIT. We
believe that our current facilities will be adequate to meet our
needs, or that alternate leased space will be available at
reasonable rates to meet our needs for the foreseeable future.





Item 3.     Legal
Proceedings

From time to time, we are involved in legal
proceedings and litigation arising in the ordinary course of
business. We are not a party to any litigation or other legal
proceeding that, in the opinion of management, could have a
material adverse effect on our business, operating results and
financial condition, except as described below.

ComVest Venture Partners, L.P. v. Click2learn,
Inc.,Supreme Court of the State of
New York, County of New York, No. 01604817. On
October 10, 2001, ComVest Venture Partners, L.P.
(ComVest) filed suit against us alleging that we
breached our obligations under a term sheet to allow them to
purchase shares of our common stock and warrants for the
purchase of additional shares. On November 12, 2001, the
parties executed a settlement agreement and the suit was
formally discontinued by stipulation on December 20, 2001.

Richard B. Grant v. Asymetrix
Corporation,No. CV-96-3635 HLH,
Central District of California. On May 21, 1996, Richard B.
Grant filed a complaint alleging that our ToolBook and
Multimedia ToolBook products infringe a patent owned by him and
seeking unspecified damages. We have received an opinion from
patent counsel that the products do not infringe this patent and
that the patent is invalid. This action is still in the
discovery stage, and it is not yet possible to assess the
likelihood of its outcome. Currently discovery in the case has
been stayed pending the courts ruling on the
interpretation of the patent claims. Although we believe that we
do not infringe this patent and that the patent is invalid, and
although we intend to defend this action vigorously, the results
of litigation can never be predicted with certainty. An adverse
outcome in this litigation could have a material adverse effect
on our business, operating results and financial condition.
Moreover, the costs of defending the action, regardless of
outcome, could be time-consuming, distract management personnel
and have a negative effect on our business.




Item 4.     Submission
of Matters to a Vote of Securities Holders

Not applicable.

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PART II




Item 5.     Market
for Registrants Common Stock and Related Stockholder
Matters

Since the initial public offering, our common
stock has been listed on the Nasdaq National Market, originally
under the symbol ASYM and currently under the symbol CLKS. The
following table sets forth the high and low sales prices per
share for each fiscal quarter during 2000 and 2001.

|               |  |      |       |     |  |   |       |  |  | 
|-------------- |  | ---- | ----- | --- |  | - | ----- |  |  | 
|Fiscal Quarter |  | High |       | Low |  |  
|               |  |      |       |     |  |  
|2000           |  |      |       |     |  |   |       |  |  | 
|First Quarter  |  | $    | 22.94 |     |  | $ | 9.75  |  |  | 
|Second Quarter |  |      | 20.38 |     |  |   | 7.00  |  |  | 
|Third Quarter  |  |      | 19.94 |     |  |   | 11.25 |  |  | 
|Fourth Quarter |  |      | 18.25 |     |  |   | 7.00  |  |  | 
|2001           |  |      |       |     |  |   |       |  |  | 
|First Quarter  |  | $    | 10.25 |     |  | $ | 1.03  |  |  | 
|Second Quarter |  |      | 2.73  |     |  |   | 1.00  |  |  | 
|Third Quarter  |  |      | 4.35  |     |  |   | 1.50  |  |  | 
|Fourth Quarter |  |      | 3.82  |     |  |   | 2.25  |  |  | 

As of March 1, 2002, there were
219 holders of record of our common stock. Because brokers
and other institutions hold many of the shares on behalf of
stockholders, we are unable to estimate the actual number of
stockholders represented by these record holders. We have never
declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to finance growth
and, thus, we do not anticipate paying any cash dividends in the
foreseeable future.

The stock market from time to time has
experienced significant price and volume fluctuations. In
addition, the market price of our common stock has been highly
volatile since our initial public offering. Factors such as
fluctuations in our operating results, announcements of
technological innovations or introductions of new products by us
or our competitors, analysts reports and projections and
general market conditions may have a significant effect on the
market price of our common stock. In the past, following periods
of volatility in the market price of a companys
securities, securities class action litigation has often been
instituted against such a company. The institution of such
litigation against us could result in substantial costs and a
diversion of managements attention and resources, which
could have a material adverse effect on our business.

Recent Sales of Unregistered
Securities

In a private placement transaction closing on
November 20, 2001 and December 10, 2001, we sold
3,680,000 shares of our common stock to several accredited
investors for an aggregate purchase price of $9.2 million
in cash. In connection with the purchase of the common stock, we
issued the investors warrants for the purchase of an additional
1,840,000 shares of common stock at an exercise price of
$4.00 per share.

Jefferies & Company, Inc.
(Jefferies) acted as placement agent in connection
with a portion of the private placement closings on
November 20, 2001 and December 10, 2001 and was paid
commissions of $456,750. Jefferies was also issued warrants for
the purchase of 64,200 common shares on November 20,
2001 and for the purchase of 28,200 common shares on
December 10, 2001, both at an exercise price of
$2.50 per share.

ComVest acted as placement agent in connection
with a portion of the private placement closing on
November 20, 2001 and was paid commissions of $70,000.
ComVest was also issued warrants for the purchase of
12,000 common shares on November 20, 2001, at an
exercise price of $2.50 per share. ComVest was also an
investor in the November 20, 2001 private placement closing
and purchased stock

9



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##### Table of Contents



and warrants at the same price and on the same
terms and conditions as the other investors in that transaction.


Commonwealth Associates, L.P.
(Commonwealth) acted as placement agent in
connection with a portion of the private placement closing on
November 20, 2001 and was paid commissions of $105,000.
Commonwealth was also issued warrants for the purchase of 18,000
common shares on December 10, 2001, at an exercise price of
$2.50 per share.

The sale of shares and warrants was made only to
accredited investors pursuant to Rule 506 of
Regulation D under the Securities Act of 1933 as amended
(the Act) and was therefore exempt under the Act.
The shares sold in the private placement and issuable upon
exercise of the warrants were subsequently registered for resale
pursuant to a Registration Statement on Form S-3. The proceeds
have and will be used for working capital requirements.

The warrants are exercisable at any time prior to
their expiration dates in whole or in part upon the payment of
the exercise price for the number of shares with respect to
which the warrants are being exercised. In addition, the
warrants may be exercised on a net exercise basis, pursuant to
which the exercise price for an exercise of warrants is paid by
the cancellation of a portion of the shares being exercised
having a fair market value equal to the exercise price for all
the shares being exercised. However, a net exercise may only be
made if there is not an effective registration statement in
place on the date of such exercise covering the resale of the
warrant shares. The terms of the warrants are summarized in the
following table:

|                            |  |               |           |          |  |                 |      |  |  |                  
|--------------------------- |  | ------------- | --------- | -------- |  | --------------- | ---- |  |  | -----------------
|                            |  | Total No. of  |           | Exercise |  |                
|Warrant Holder(s)           |  | Common Shares |           | Price    |  | Expiration Date
|                            |  |               |           |          |  |                
|November 20, 2001 Investors |  |               | 1,370,000 |          |  | $               | 4.00 |  |  | November 20, 2008
|December 10, 2001 Investors |  |               | 470,000   |          |  | $               | 4.00 |  |  | December 10, 2008
|Jefferies                   |  |               | 64,200    |          |  | $               | 2.50 |  |  | November 20, 2006
|Jefferies                   |  |               | 28,200    |          |  | $               | 2.50 |  |  | December 10, 2006
|ComVest                     |  |               | 12,000    |          |  | $               | 2.50 |  |  | November 20, 2006
|Commonwealth                |  |               | 18,000    |          |  | $               | 2.50 |  |  | December 10, 2006

10



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|        |                                     
|------- | ------------------------------------
|Item 6. | Selected Consolidated Financial Data

|                                                               |                  |                                                 |                       |        |        |        |        |        |        |        |         |        |        |        |         |        |        |        |         |        |        |        | 
|-------------------------------------------------------------- | ---------------- | ----------------------------------------------- | --------------------- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | 
|                                                               |                  |                                                
|                                                               |                  | Years Ended December 31,                       
|                                                               |                  |                                                
|                                                               |                  | 1997                                            |                       | 1998   |        | 1999   |        | 2000   |        | 2001  
|                                                               |                  |                                                 |                       |        |        |        |        |        |        |       
|                                                               |                  |                                                
|                                                               |                  | (In thousands, except per share data)          
|Statement of Operations Data:                                  |                  |                                                 |                       |        |        |        |        |        |        |        |         |        |        |        |         |        |        |        |         |       
|Revenue:                                                       |                  |                                                 |                       |        |        |        |        |        |        |        |         |        |        |        |         |        |        |        |         |       
|                                                               | Tools            |                                                 | $                     | 19,759 |        |        | $      | 17,914 |        |        | $       | 15,312 |        |        | $       | 8,602  |        |        | $       | 6,983  |       
|                                                               | Content services |                                                 |                       | 4,305  |        |        |        | 12,889 |        |        |         | 13,778 |        |        |         | 21,461 |        |        |         | 17,062 |       
|                                                               | Platforms        |                                                 |                       | 1,641  |        |        |        | 2,549  |        |        |         | 5,643  |        |        |         | 12,494 |        |        |         | 21,046 |       
|                                                               |                  |                                                 |                       |        |        |        |        |        |        |        |         |        |        |        |         |        |        |        |         |       
|                                                               |                  |                                                 | Total revenue         |        |        | 25,705 |        |        |        | 33,352 |         |        |        | 34,733 |         |        |        | 42,557 |         |        |        | 45,091 | 
|                                                               |                  |                                                 |                       |        |        |        |        |        |        |        |         |        |        |        |         |        |        |        |         |       
|Cost of revenue:                                               |                  |                                                 |                       |        |        |        |        |        |        |        |         |        |        |        |         |        |        |        |         |       
|                                                               | Tools            |                                                 |                       | 3,759  |        |        |        | 2,934  |        |        |         | 3,646  |        |        |         | 1,821  |        |        |         | 1,546  |       
|                                                               | Content services |                                                 |                       | 3,032  |        |        |        | 10,860 |        |        |         | 11,173 |        |        |         | 18,460 |        |        |         | 16,394 |       
|                                                               | Platforms        |                                                 |                       | 579    |        |        |        | 623    |        |        |         | 1,258  |        |        |         | 1,903  |        |        |         | 3,536  |       
|                                                               |                  |                                                 |                       |        |        |        |        |        |        |        |         |        |        |        |         |        |        |        |         |       
|                                                               |                  |                                                 | Total cost of revenue |        |        | 7,370  |        |        |        | 14,417 |         |        |        | 16,077 |         |        |        | 22,184 |         |        |        | 21,476 | 
|                                                               |                  |                                                 |                       |        |        |        |        |        |        |        |         |        |        |        |         |        |        |        |         |       
|Gross margin                                                   |                  |                                                 | 18,335                |        |        |        | 18,935 |        |        |        | 18,656  |        |        |        | 20,373  |        |        |        | 23,615  |       
|                                                               |                  |                                                 |                       |        |        |        |        |        |        |        |         |        |        |        |         |        |        |        |         |       
|Operating expenses:                                            |                  |                                                 |                       |        |        |        |        |        |        |        |         |        |        |        |         |        |        |        |         |       
|                                                               |                  | Research and development                        |                       |        | 8,423  |        |        |        | 6,113  |        |         |        | 7,425  |        |         |        | 9,535  |        |         |        | 8,869  |       
|                                                               |                  | Sales and marketing                             |                       |        | 14,704 |        |        |        | 14,149 |        |         |        | 15,977 |        |         |        | 20,530 |        |         |        | 18,536 |       
|                                                               |                  | General and administrative                      |                       |        | 4,491  |        |        |        | 5,767  |        |         |        | 5,227  |        |         |        | 6,623  |        |         |        | 6,457  |       
|                                                               |                  | Amortization of goodwill and impairment charges |                       |        | 119    |        |        |        | 825    |        |         |        | 888    |        |         |        | 946    |        |         |        | 9,134  |       
|                                                               |                  | Acquired in-process research and development    |                       |        | 4,064  |        |        |        |       |        |         |        |       |        |         |        |       |        |         |        |       |       
|                                                               |                  |                                                 |                       |        |        |        |        |        |        |        |         |        |        |        |         |        |        |        |         |       
|                                                               |                  | Total operating expenses                        |                       |        | 31,801 |        |        |        | 26,854 |        |         |        | 29,517 |        |         |        | 37,634 |        |         |        | 42,996 |       
|                                                               |                  |                                                 |                       |        |        |        |        |        |        |        |         |        |        |        |         |        |        |        |         |       
|Loss from operations                                           |                  |                                                 | (13,466               | )      |        |        | (7,919 | )      |        |        | (10,861 | )      |        |        | (17,261 | )      |        |        | (19,381 | )     
|Other income (expense)                                         |                  |                                                 | (228                  | )      |        |        | 2,760  |        |        |        | 856     |        |        |        | 475     |        |        |        | (200    | )     
|                                                               |                  |                                                 |                       |        |        |        |        |        |        |        |         |        |        |        |         |        |        |        |         |       
|Net loss                                                       |                  | $                                               | (13,694               | )      |        | $      | (5,159 | )      |        | $      | (10,005 | )      |        | $      | (16,786 | )      |        | $      | (19,581 | )     
|Accretion of redemption value of redeemable
	common stock      |                  |                                                 |                      |        |        |        | (1,370 | )      |        |        |        |        |        |        |        |        |        |        |        |       
|Non cash dividend associated with preferred stock              |                  |                                                 |                      |        |        |        |       |        |        |        | (2,754  | )      |        |        |        |        |        |        |        |       
|                                                               |                  |                                                 |                       |        |        |        |        |        |        |        |         |        |        |        |         |        |        |        |         |       
|Net loss attributable to common stockholders                   |                  | $                                               | (13,694               | )      |        | $      | (6,529 | )      |        | $      | (12,759 | )      |        | $      | (16,786 | )      |        | $      | (19,581 | )     
|                                                               |                  |                                                 |                       |        |        |        |        |        |        |        |         |        |        |        |         |        |        |        |         |       
|Net loss per common share, basic and diluted                   |                  | $                                               | (2.17                 | )      |        | $      | (.62   | )      |        | $      | (.87    | )      |        | $      | (.99    | )      |        | $      | (.99    | )     
|                                                               |                  |                                                 |                       |        |        |        |        |        |        |        |         |        |        |        |         |        |        |        |         |       
|Weighted average common shares outstanding, basic
	and diluted |                  |                                                 | 6,306                 |        |        |        | 10,599 |        |        |        | 14,626  |        |        |        | 16,956  |        |        |        | 19,748  |       
|                                                               |                  |                                                 |                       |        |        |        |        |        |        |        |         |        |        |        |         |        |        |        |         |       
|Balance Sheet Data:                                            |                  |                                                 |                       |        |        |        |        |        |        |        |         |        |        |        |         |        |        |        |         |       
|Cash and cash equivalents                                      |                  | $                                               | 2,541                 |        |        | $      | 21,713 |        |        | $      | 19,481  |        |        | $      | 15,321  |        |        | $      | 9,553   |       
|Working capital (deficit)                                      |                  |                                                 | (66                   | )      |        |        | 24,913 |        |        |        | 27,818  |        |        |        | 21,801  |        |        |        | 20,877  |       
|Total assets                                                   |                  |                                                 | 22,169                |        |        |        | 43,622 |        |        |        | 49,406  |        |        |        | 44,880  |        |        |        | 39,354  |       
|Long-term obligations                                          |                  |                                                 | 425                   |        |        |        | 268    |        |        |        | 92      |        |        |        | 4       |        |        |        | 417     |       
|Stockholders equity                                           |                  |                                                 | 8,958                 |        |        |        | 37,010 |        |        |        | 41,355  |        |        |        | 35,053  |        |        |        | 29,560  |       



---



|    |                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Historical information was restated to reflect
	the combination of Click2learn and Meliora in 1998, accounted
	for as a pooling-of-interests.                                                                                                                                                                                   
|   
|(b) | Historical results of operations are not
	necessarily indicative of future results. Refer to the
	Factors that May Affect Future Results of Operations
	under Item 7: Managements Discussion and
	Analysis of Financial Condition and Results of Operations
	for the discussion of factors which may impact future results.

11



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|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of
	Financial Condition and Results of Operations

The following discussion of our financial
condition and results of operations should be read in
conjunction with Selected Consolidated Financial
Data and our Consolidated Financial Statements and related
Notes thereto included elsewhere in this Report.

Overview

We are a leading developer and provider of
enterprise e-Learning software products and services for
companies, government agencies and educational institutions. We
design, develop, market, license and support an integrated suite
of e-Learning software products and related services that allow
our customers to cost-effectively create, personalize and manage
the delivery of educational content. In the third quarter of
2001, we introduced our new Aspen platform that unifies
collaborative content development, personalized content delivery
and comprehensive learning management in an integrated system
designed to be open, flexible and scalable. We provide our
e-Learning products and services to customers across a broad
range of industries including financial services, accounting,
healthcare, insurance, technology, manufacturing,
telecommunications, transportation, utilities, government and
education.

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

Platforms revenues include software licenses,
subscription and hosting fees, implementation, customization,
training and support related to the Aspen platform, our Ingenium
learning management system, the precursor product to the Aspen
Learning Management Server, and our e-Learning Network, an
Internet e-Learning ASP offering that is not material to our
current business.

Content Services revenues are derived from the
creation of custom e-Learning courses, consulting, fees for
licensing, implementing and hosting our Rapid e-Learning
Development System (ReDS) and sales of third party
off-the-shelf content. ReDS is a collaborative development
system that was licensed in connection with custom content
development engagements and is no longer offered.

Tools revenues primarily include software
licenses, technical support and training related to our
ToolBook II line of products.

We recognize revenues for software licenses upon
shipment; for technical support, subscription licenses and
hosting evenly over the life of the contract; and for services
such as content development and implementation based on the
percentage of completion method or on a time and materials
basis. We recognize non-refundable royalty advances paid by
resellers or distributors upon execution of the agreement and
shipment of the master copy of the software. To the extent
royalties exceed the advances they are recognized as earned
based on regular reports from such resellers or distributors.

Costs related to revenues consist of media,
manuals, royalties, packaging and distribution for software
licenses and primarily salaries and overhead for service related
offerings. Costs of revenues for the Platforms and Tools
categories are similar due to a relatively high mix of software
licenses versus services with costs averaging 15% to 25% of
related revenue. Contrasting the mix for Platforms and Tools,
Content Services consist primarily of relatively high personnel
costs associated with providing professional services compared
to the lower materials, packaging and other costs of software.

Critical Accounting Policies and
Estimates

Our critical accounting policies and estimates
are as follows:



| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | Revenue recognition                                                             
|
| |  | Estimating allowances for sales returns and the
	allowance for doubtful accounts
|
| |  | Valuation of long-lived assets and goodwill                                     

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##### Table of Contents



Revenue recognition.We report our revenue in three
categories Tools, Content Services, and Platforms. Tools include
software licenses and technical support and training for
ToolBook II and other products. Content Services includes custom
development of e-Learning courses, consulting, licensing and
fees for ReDS, and royalties from resale of third party content.
Platforms includes software licenses, subscription and hosting
fees, implementation, and training and support for the Aspen
platform as well as Ingenium and the e-Learning Network.

We recognize revenue pursuant to the requirements
of Statement of Position No. 97-2, Software Revenue
Recognition (SOP 97-2), as amended by Statement of
Position No. 98-9, Software Revenue Recognition with
Respect to Certain Arrangements. Under SOP 97-2, revenue
attributable to an element in a customer arrangement is
recognized when persuasive evidence of an arrangement exists and
delivery has occurred, provided the fee is fixed or
determinable, collectibility is probable and the arrangement
does not require significant customization of the software.

For all sales, we use either a binding purchase
order or signed agreement, depending on the nature of the
transaction, as evidence of an arrangement. Sales through our
reseller are evidenced by a master agreement governing the
relationship.

For software license fees in single element
arrangements and multiple element arrangements which do not
include customization or consulting services, delivery typically
occurs when the product is shipped to customers.

At the time of each transaction, we assess
whether the fee associated with our revenue transactions is
fixed and determinable and whether or not collection is
reasonably assured. We assess whether the fee is fixed and
determinable based on the payment terms associated with the
transaction. If a significant portion of a fee is due after our
normal payment terms, is based upon a variable matrix such as a
minimum level of distribution or is subject to refund, we
account for the fee as not being fixed and determinable. In
these cases, we defer revenue and recognize it when it becomes
due and payable.

We assess the probability of collection based on
a number of factors, including past transaction history with the
customer and the current financial condition of the customer. We
do not request collateral from our customers. If we determine
that collection of a fee is not reasonably assured, we defer
revenue until the time collection becomes reasonably assured.

For multiple element arrangements, when
Company-specific objective evidence of fair value exists for all
of the undelivered elements of the arrangement, but does not
exist for one or more of the delivered elements in the
arrangement, we recognize revenue under the residual method.
Under the residual method, at the outset of the arrangement with
a customer, we defer revenue for the fair value of its
undelivered elements such as consulting services and product
support and upgrades, and recognize the revenue for the
remainder of the arrangement fee attributable to the elements
initially delivered, such as software licenses, when the
criteria in SOP 97-2 have been met. Company-specific objective
evidence is established for support and upgrades of standard
products for which no installation or customization is required
based upon the amounts we charge when support and upgrades are
sold separately. Company-specific objective evidence is
established for consulting and installation services based on
the hourly rates we charge for our employees when they are
performing these services provided we have the ability to
accurately estimate the hours required to complete a project
based upon our experience with similar projects. For multiple
element arrangements involving installation or customization,
Company specific objective evidence is established for support
and maintenance arrangements if our customers have an optional
annual renewal rate specified in the arrangement and the rate is
substantive.

Professional services revenue is recognized from
fixed price contracts as services are provided or by using the
percentage-of-completion method of accounting, based on the
ratio of costs incurred to the total estimated project cost, for
individual fixed-price contracts. Provisions for any estimated
losses on uncompleted contracts are made in the period in which
such losses become evident. Professional services revenue from
time and materials contracts and training services is recognized
as revenue as services are performed.

13



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##### Table of Contents



We recognize revenue from non-refundable minimum
royalty agreements from distributors or resellers upon delivery
of product to the distributor or reseller, provided no
significant obligations remain outstanding and the conditions of
SOP 97-2 have been met. Additional royalties are recognized
as revenue to the extent the minimums are exceeded when earned,
based on the distributors or resellers contractual
reporting obligations.

Revenue from subscription licenses, hosting
agreements and support agreements is recognized on a
straight-line basis over the life of the contract. Revenues from
the e-Learning Network include site fees, hosting, royalties,
and content sales. The revenues are determined by individual
contracts, one to three years in length, which specify
functionality of the site and the commerce conducted on the
site. The e-Learning Network fees are recognized ratably over
the life of the contract. Content revenue is either recognized
evenly over the life of the contract for course usage on bundled
curriculum courses or recognized at the time of the purchase of
individual e-Learning courses. Revenues from tangible goods,
including books, videotapes and CD-ROMs are recognized at the
time of shipment.

Allowances for Sales returns and doubtful
accounts.The preparation of financial
statements requires us to make estimates and assumptions that
affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reported period. Specifically, we must make estimates
of potential future product returns related to current period
product revenue. We analyze historical returns, current economic
trends, and changes in customer demand and acceptance of our
products when evaluating the adequacy of the sales returns and
other allowances. Significant judgments and estimates must be
made and used in connection with establishing reserves for sales
returns and the allowance for doubtful accounts in any
accounting period. Material differences may result in the amount
and timing of our revenue for any period if we made different
judgments or utilized different estimates. Similarly, we must
make estimates of the uncollectability of our accounts
receivables. We specifically analyze the age of accounts
receivable and analyze historical bad debts, customer
concentrations, customer credit-worthiness and current economic
trends when evaluating the adequacy of the allowance for
doubtful accounts.

Valuation of long-lived assets and goodwill.We assess the impairment of long-lived
assets and goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors
we consider important which could trigger an impairment review
include poor economic performance relative to expected
historical or projected future operating results, significant
negative industry, economic or company specific trends,
significant declines in valuations of similar businesses in
comparison with the market valuations at the time the Company
invested in the acquired businesses and changes in the manner of
our use of the assets or the plans for our business. If we were
to determine that the carrying value of goodwill may not be
recoverable based upon the existence of one or more of the above
indicators of impairment, we measure impairment based on a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. As a result of our
analysis, we recorded an impairment charge for goodwill related
to our custom e-Learning content development business of
$7.6 million in 2001.

In 2002, Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible
Assets became effective and as a result, we will cease to
amortize goodwill. In lieu of amortization, we are required to
perform an initial impairment review of our goodwill in 2002 and
an annual impairment review thereafter. We currently do not
expect to record an impairment charge upon completion of the
initial impairment review. However, there can be no assurance
that at the time the review is completed a material impairment
charge will not be recorded.

14



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##### Table of Contents



Results of Operations

The following table presents Click2learns
results of operations as a percentage of total revenue for the
periods indicated.

|                              |                  |                                                 |                              |      |      |       |       |      |      |       |       |      |      |       |  
|----------------------------- | ---------------- | ----------------------------------------------- | ---------------------------- | ---- | ---- | ----- | ----- | ---- | ---- | ----- | ----- | ---- | ---- | ----- | -
|Statement of Operations Data: |                  | 1999                                            |                              | 2000 |      | 2001 
|                              |                  |                                                 |                              |      |      |      
|Revenue:                      |                  |                                                 |                              |      |      |       |       |      |      |       |       |     
|                              | Tools            |                                                 |                              | 44.1 | %    |       |       | 20.2 | %    |       |       | 15.5 | %   
|                              | Content services |                                                 |                              | 39.7 |      |       |       | 50.4 |      |       |       | 37.8 |     
|                              | Platforms        |                                                 |                              | 16.2 |      |       |       | 29.4 |      |       |       | 46.7 |     
|                              |                  |                                                 |                              |      |      |       |       |      |      |       |       |     
|                              |                  |                                                 | Total revenue                |      |      | 100.0 |       |      |      | 100.0 |       |      |      | 100.0 |  
|                              |                  |                                                 |                              |      |      |       |       |      |      |       |       |     
|Cost of revenue:              |                  |                                                 |                              |      |      |       |       |      |      |       |       |     
|                              | Tools            |                                                 |                              | 10.5 |      |       |       | 4.3  |      |       |       | 3.4  |     
|                              | Content services |                                                 |                              | 32.2 |      |       |       | 43.4 |      |       |       | 36.4 |     
|                              | Platforms        |                                                 |                              | 3.6  |      |       |       | 4.5  |      |       |       | 7.8  |     
|                              |                  |                                                 |                              |      |      |       |       |      |      |       |       |     
|                              |                  |                                                 | Total cost of revenue        |      |      | 46.3  |       |      |      | 52.2  |       |      |      | 47.6  |  
|                              |                  |                                                 |                              |      |      |       |       |      |      |       |       |     
|Gross margin                  |                  |                                                 | 53.7                         |      |      |       | 47.8  |      |      |       | 52.4  |     
|                              |                  |                                                 |                              |      |      |       |       |      |      |       |       |     
|Operating expenses:           |                  |                                                 |                              |      |      |       |       |      |      |       |       |     
|                              |                  | Research and development                        |                              |      | 21.4 |       |       |      | 22.4 |       |       |      | 19.7 |      
|                              |                  | Sales and marketing                             |                              |      | 46.0 |       |       |      | 48.2 |       |       |      | 41.1 |      
|                              |                  | General and administrative                      |                              |      | 15.0 |       |       |      | 15.6 |       |       |      | 14.3 |      
|                              |                  | Amortization of goodwill and impairment charges |                              |      | 2.6  |       |       |      | 2.2  |       |       |      | 20.3 |      
|                              |                  |                                                 |                              |      |      |       |       |      |      |       |       |     
|                              |                  |                                                 | Total operating expenses     |      |      | 85.0  |       |      |      | 88.4  |       |      |      | 95.4  |  
|                              |                  |                                                 |                              |      |      |       |       |      |      |       |       |     
|Loss from operations          |                  |                                                 | (31.3                        | )    |      |       | (40.6 | )    |      |       | (43.0 | )   
|                              |                  |                                                 |                              |      |      |       |       |      |      |       |       |     
|Other income (expense):       |                  |                                                 |                              |      |      |       |       |      |      |       |       |     
|                              |                  | Other income                                    |                              |      | 0.1  |       |       |      | 0.0  |       |       |      | 0.2  |      
|                              |                  | Interest income, net                            |                              |      | 2.4  |       |       |      | 2.3  |       |       |      | 0.2  |      
|                              |                  | Equity in losses of affiliate                   |                              |      | 0.0  |       |       |      | (1.2 | )     |       |      | (0.8 | )    
|                              |                  |                                                 |                              |      |      |       |       |      |      |       |       |     
|                              |                  |                                                 | Total other income (expense) |      |      | 2.5   |       |      |      | 1.1   |       |      |      | (0.4  | )
|                              |                  |                                                 |                              |      |      |       |       |      |      |       |       |     
|Net loss                      |                  |                                                 | (28.8                        | )%   |      |       | (39.5 | )%   |      |       | (43.4 | )%  
|                              |                  |                                                 |                              |      |      |       |       |      |      |       |       |     

Year Ended December 31, 2001 Compared To
Year Ended December 31, 2000

Revenue.Our total
revenue increased 6% from $42.6 million in 2000 to
$45.1 million in 2001. Growth was attributable to our focus
on the Platforms portion of our business and new customers
choosing these systems to address their e-Learning technology
requirements.

The following table sets forth for the periods
indicated the year over year revenue growth or decline for each
category of revenue:

|                          |                  |                          |  |      |    |   |  |     |    |  
|------------------------- | ---------------- | ------------------------ |  | ---- | -- | - |  | --- | -- | -
|                          |                  |                         
|                          |                  | Years Ended December 31,
|                          |                  |                         
|                          |                  | 2000                     |  | 2001
|                          |                  |                          |  |     
|Revenue growth (decline): |                  |                          |  |      |    |   |  |    
|                          | Tools            |                          |  | (44  | %) |   |  | (19 | %)
|                          | Content Services |                          |  | 56   | %  |   |  | (21 | %)
|                          | Platforms        |                          |  | 121  | %  |   |  | 68  | % 
|                          |                  |                          |  |      |    |   |  |    
|                          |                  | Total revenue growth     |  |      | 23 | % |  |     | 6  | %

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Platforms revenue includes revenue from software
licenses and services associated with our new Aspen platform.
The Aspen platform is the evolution of our strategy to provide
an integrated e-Learning platform to address the need to manage
individual users and multiple types of content, personalize the
learning experience, and manage the creation of content. The
Aspen platform was officially launched in the third quarter of
2001 by integrating the latest release of our Ingenium Learning
Management System, now known as Aspen Learning Management Server
(LMS), with two new server products, the Aspen Learning
Experience Server (LXS) and the Aspen Content Development
Server (CDS). We experienced higher overall Platforms revenue in
the last two quarters of 2001 as a result of the release of the
Aspen product suite. We experienced full year Platforms revenue
growth of 68% from $12.5 million in 2000 to
$21.0 million in 2001. For overall revenue growth to
continue, sales growth of the Aspen platform must continue to
trend upwards.

Offsetting the growth of our Platforms business
in 2001 were declines in the Tools and Content Services revenue
categories.

The Tools category is comprised primarily of
revenue from the sale of software licenses and services related
to our Toolbook II line of products. In 1998, we made the
decision to focus our primary research and development (R&D)
and sales and marketing efforts on the platform technology area
of e-Learning. As a result, Tools has declined as a percentage
of our total revenue and in absolute revenue dollars. Tools
revenue declined 19% from $8.6 million in 2000 to
$7.0 million in 2001. We do not anticipate increasing our
Tools related R&D or sales and marketing investments from
their current levels in the near term. As a result we do not
expect Tools related revenues to increase and they are likely to
continue to decline.

The Content Services category of revenue consists
of custom content development, consulting services and to a
lesser extent the sale of third party content. The demand for
the services portion of this category grew significantly in 2000
as new customers adopted e-Learning and contracted for the
creation of custom content. In 2001, the general economic
decline resulted in an overall decrease in budgets for these
services. Customers reduced their spending and sought the lowest
cost alternatives, resulting in a large portion of the custom
content development market moving outside of the United States.
As a result, we significantly reduced our capacity and Content
Services revenue declined 21% from $21.5 million in 2000 to
$17.1 million in 2001. During January of 2002, we sold most
of this business to NIIT (U.S.A.), Inc. In the future, we will
only offer custom content development services to a limited part
of the government market, in particular the Washington National
Guard, which will result in a significant reduction of Content
Services revenue in coming years.

Cost of Revenue.Though revenue increased in 2001, total cost of revenue
decreased from $22.2 million in 2000 to $21.5 million
in 2001. The reduction was due primarily to a change in the mix
of our revenues and the related costs of each revenue category.
Platforms and Tools revenues carry a much lower cost as a
percent of revenue than does Content Services. The overall mix
of Platforms and Tools revenue grew from 50% of total revenue in
2000 to 62% in 2001. As a result, total gross margin improved
from 48% in 2000 to 52% in 2001. With the sale of our commercial
Content Development business, we anticipate gross margins to
continue to increase as Platforms and Tools becomes a larger
portion of total revenue.

The following table sets forth for the periods
indicated, our Tools, Content Services and Platforms revenues as
a percent of net revenue:

|                    |                  |                          |  |      |     |      |  |    |     |   |  |    |     |  
|------------------- | ---------------- | ------------------------ |  | ---- | --- | ---- |  | -- | --- | - |  | -- | --- | -
|                    |                  |                         
|                    |                  | Years Ended December 31,
|                    |                  |                         
|                    |                  | 1999                     |  | 2000 |     | 2001
|                    |                  |                          |  |      |     |     
|Percent of revenue: |                  |                          |  |      |     |      |  |    |     |   |  |   
|                    | Tools            |                          |  | 44   | %   |      |  | 20 | %   |   |  | 15 | %  
|                    | Content Services |                          |  | 40   | %   |      |  | 51 | %   |   |  | 38 | %  
|                    | Platforms        |                          |  | 16   | %   |      |  | 29 | %   |   |  | 47 | %  
|                    |                  |                          |  |      |     |      |  |    |     |   |  |   
|                    |                  | Total revenue            |  |      | 100 | %    |  |    | 100 | % |  |    | 100 | %

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The following table sets forth for the periods
indicated, the costs as a percent of associated revenue for each
category of revenue reported.

|                              |                  |                          |  |      |   |      |  |    |   |  |  |    |   |  | 
|----------------------------- | ---------------- | ------------------------ |  | ---- | - | ---- |  | -- | - |  |  | -- | - |  | 
|                              |                  |                          |  |     
|                              |                  | Years Ended December 31, |  |     
|                              |                  |                          |  |     
|                              |                  | 1999                     |  | 2000 |   | 2001 |  |   
|                              |                  |                          |  |      |   |      |  |   
|Cost as a percent of revenue: |                  |                          |  |      |   |      |  |    |   |  |  |    |   | 
|                              | Tools            |                          |  | 24   | % |      |  | 21 | % |  |  | 22 | % |  | 
|                              | Content Services |                          |  | 81   | % |      |  | 86 | % |  |  | 96 | % |  | 
|                              | Platforms        |                          |  | 22   | % |      |  | 15 | % |  |  | 17 | % |  | 

Offsetting the improved gross margins in 2001
resulting from revenue mix changes was an increase in cost of
revenues from our Content Services category. In response to the
decline in demand for these services, we reduced costs 11% from
$18.5 million in 2000 to $16.4 million in 2001,
however due to lower billable utilization rates, employee
severance payments and fixed facility costs we were not able to
maintain our gross margins as a percentage of content services
revenue as compared to 2000. Gross margins as a percentage of
revenue declined from 14% in 2000 to 4% in 2001. In response to
this environment, we sold the commercial portion of this
business in January of 2002, and anticipate that we will take a
charge of $2.5 million during the quarter ending March 31,
2002 to cover the costs associated with employee severance and
excess office facilities. By eliminating these expenses, costs
for Content Services revenue will decrease significantly in the
future.

Tools costs of revenue are primarily labor
associated with training customers on the use of Toolbook and to
a lesser extent packaging, royalties and CD replication costs
associated with software license sales. Tools costs declined 15%
from $1.8 million in 2000 to $1.5 million in 2001. The
primary reason for the decline was the decrease in revenue.

Platforms costs of revenue are primarily labor
costs associated with software implementations and to a lesser
extent packaging and CD replication costs associated with
software license sales. Costs of revenue increased 86% from
$1.9 million in 2000 to $3.5 million in 2001. The
increase in costs was attributed to demand for the Aspen
platform and an expansion of our implementation services
organization to assist these clients with the installation of
Aspen. Costs as a percent of revenue grew from 15% in 2000 to
17% in 2001 due to lower service staff utilization prior to
Aspens launch in the second half of 2001. We anticipate
that software licenses will continue to make up the majority of
Platforms revenue, however, if this changes and services become
a greater portion of Platforms revenue then cost as a percent of
revenue would increase.

Operating Expenses.

Research and
Development.Research and development
expenses include expenses associated with the development of new
products and new product versions and consist primarily of
salaries, depreciation of development equipment, supplies and
overhead. Research and development expenses decreased 7% from
$9.5 million in 2000 to $8.9 million in 2001. This
decrease was due to a reduction in incremental spending on the
e-Learning Network platform offset by higher expenditures for
Aspen product development. Research and development expenses as
a percentage of total revenue decreased from 22% in 2000 to 20%
in 2001. In the near term, we expect research and development
expenses to increase in absolute dollars as we work to expand
the functionality of the Aspen platform.

Sales and Marketing.Sales and marketing expenses consist
primarily of sales and marketing personnel costs, including
sales commissions, travel, advertising, public relations,
seminars, trade shows and other marketing literature and
overhead costs. Sales and marketing expenses decreased 10% from
$20.5 million in 2000 to $18.5 million in 2001. The
decrease was due primarily to the inclusion of a
$2.1 million charge in 2000 to accelerate all remaining
costs from a three-year co-marketing agreement with Go2Net, Inc.
Excluding the charge, sales and marketing costs were comparable.
Sales and marketing expenses as a percentage of total revenue
decreased from 48% in 2000 to 41% in 2001. Excluding the 2000
charge, sales and marketing as a percent of revenue declined
from 43% in 2000 to 41% in 2001. We expect

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that sales and marketing expenses will increase
in absolute dollars in the near term as we expand our sales and
marketing efforts related to the Aspen platform.


General and Administrative.General and administrative expenses
consist primarily of salaries and other personnel-related
expenses for administrative, executive and finance personnel as
well as outside advisors. General and administrative expenses
decreased 3% from $6.6 million in 2000 to $6.5 million
in 2001. The slight reduction was due to lower overall headcount
in the company, which reduced administrative requirements.
General and administrative expenses as a percentage of total
revenue decreased from 16% in 2000 to 14% in 2001. We expect
that general and administrative expenses will increase in
absolute dollars in the near term if we continue to experience
growth in revenues.

Amortization of Goodwill and Impairment
Charges.Amortization of goodwill
relates to the amortization of excess purchase price over the
fair value of identifiable tangible and intangible assets
acquired in acquisitions recorded using the purchase method of
accounting. Amortization of goodwill and impairment charges
increased 867% from $946,000 in 2000 to $9.1 million in
2001. We periodically assess the recoverability of our
long-lived assets, including goodwill for indications of
impairment. During the fourth quarter of 2001, we determined
that the declining profitability of our custom content
development business provided an indication that an impairment
had occurred and all of the goodwill related to acquired content
development businesses was written-off. As a result, we
wrote-off $7.6 million of unamortized goodwill from our
acquisitions of Oakes Interactive, Inc., TopShelf Multimedia,
Inc., Acorn Consulting, Inc., Communication Strategies, Inc.,
Strategic Systems Associates, Inc., Graham-Wright Interactive,
Inc., 3 Dog Multimedia, Inc. and other small custom
development companies acquired over the past several years.
Unamortized goodwill at December 31, 2001 relates to our
Platforms business. To a lesser extent, the increase in
amortization of goodwill is related to the acquisition of
IntelliPrep in May of 2001. We recognized approximately $550,000
of amortization expense in 2001 related to this acquisition. For
2002, we are required to adopt Financial Accounting Standards
Board Statement 142, Goodwill and Other Intangible
Assets (Statement 142). Statement 142 requires
that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead be tested for impairment at
least annually. Intangible assets with definite useful lives
will continue to be amortized over their respective estimated
useful lives. Click2learn will adopt the provisions of Statement
142 effective January 1, 2002.

Other Income (Expense).Interest income, net, on cash and cash
equivalents in 2001 was $107,000 as compared to $981,000 in
2000. The reduction was due primarily to lower cash balances and
reduced interest rates in 2001. In April 2000, we established a
joint venture with SOFTBANK Media & Marketing Corp. and
SOFTBANK Forums Japan, Inc. creating Click2learn Japan K.K. We
account for our portion of the joint ventures operating
results under the equity method. In 2001 we recorded a loss of
$400,000 as compared to $510,000 in 2000. The remaining value of
our investment at December 31, 2001 was approximately
$470,000. We anticipate in the near term our portion of the
joint ventures losses will remain at current levels or decline
slightly. We do not have obligations to provide future financing.

Year Ended December 31, 2000 Compared To
Year Ended December 31, 1999

Revenue.Our total
revenue increased 23% from $34.7 million in 1999 to
$42.6 million in 2000. Revenue growth was attributable to a
121% growth in the Platforms category from $5.6 million in
1999 to $12.5 million in 2000. Additional growth was
achieved through the Content Services category, which grew 56%
from $13.8 million in 1999 to $21.5 million in 2000.
These increases were due to our increased success at selling
e-Learning solutions that include elements of each category.
Solutions that include both our Platforms and Content Services
offerings grew 75% from $19.4 million in 1999 to
$34.0 million in 2000 and represented 80% of total revenues
up from 56% in 1999. Offsetting the e-Learning solutions growth
was a decline in the Tools category of 44% from
$15.3 million in 1999 to $8.6 million in 2000. Our
primary sales and marketing focus in 2000 was on our e-Learning
solutions including Platforms and Content Services and which
seldom included the products and services from the Tools
category. As a result, little marketing or sales effort was
focused on the Tools category contributing to the decline in
revenues.

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Cost of Revenue.Total cost of revenue increased 38%
from $16.1 million in 1999 to $22.2 million in 2000.
Increased costs of revenue were due primarily to higher total
revenues and a change in the revenue mix between Tools, Content
Services and Platforms. In 1999, Content Services represented
40% of total revenues and grew to 50% in 2000. The costs
associated with Content Services were primarily labor and
overhead and are therefore significantly higher as a percentage
of revenue than is the case for the costs of the Tools or
Platforms categories, which are primarily costs associated with
product licenses and the services that support them. The cost of
Content Services revenues grew 65% from $11.2 million in
1999 to $18.5 million in 2000. Cost of Platforms revenues
grew 46% from $1.3 million in 1999 to $1.9 million in
2000. The increased costs for both categories were due primarily
to the higher revenues produced. The cost of Tools revenues
declined 50% from $3.6 million in 1999 to $1.8 million
in 2000 due to the lower revenues from this category.

Operating Expenses

Research and Development.Research and development expenses
increased 28% from $7.4 million in 1999 to
$9.5 million in 2000. This increase was due to increases in
spending to develop the e-Learning Network platform as well as
increased functionality development for the Ingenium platform.
Research and development expenses as a percentage of total
revenue increased from 21% in 1999 to 22% in 2000.

Sales and Marketing.Sales and marketing expenses increased
28% from $16.0 million in 1999 to $20.5 million in
2000. Sales and marketing expenses as a percentage of total
revenue increased from 46% in 1999 to 48% in 2000. The increase
was due primarily to increased staffing in the sales area and a
charge of $2.1 million to accelerate all remaining costs
from a three-year co-marketing agreement with Go2Net, Inc.
Excluding the one-time charge, sales and marketing as a percent
of revenue declined from 46% in 1999 to 43% in 2000.

General and Administrative.General and administrative expenses
increased 27% from $5.2 million in 1999 to
$6.6 million in 2000. This increase was due primarily to
the support of higher total headcount and expansion of European
operations. General and administrative expenses as a percentage
of total revenue increased from 15% in 1999 to 16% in 2000.

Amortization of Goodwill.Amortization of goodwill increased 7%
from $888,000 in 1999 to $946,000 in 2000 as a result of a full
years amortization being taken on an acquisition completed
in 1999.

Other Income (Expense).Interest income on cash and cash
equivalents in 1999 was $853,000 as compared to $981,000 in
2000. Our portion of Click2learn Japan K.K.s operating
loss under the equity method was $510,000 in 2000.

IntelliPrep Acquisition

In May 2001, we acquired IntelliPrep, a provider
of technology for personalized learning. We issued 1,812,500
shares of common stock and 450,000 options to acquire its common
stock valued at $4,419,688. In connection with the acquisition,
we incurred approximately $600,000 of acquisition related
expenditures of which $241,000 was unpaid as of December 31,
2001. Goodwill of $3.3 million and other identifiable
intangible assets of $1.4 million representing acquired
software were recorded in connection with the acquisition. No
elements of in-process research and development were identified
as part of the acquisition. Goodwill is amortized over
5 years through December 31, 2001 and other intangible
assets are amortized over 3 years.

New Accounting Pronouncements

In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting
Standards No. 141, Business Combinations
(Statement 141), and No. 142, Goodwill and Other
Intangible Assets (Statement 142). Statement 141 requires
that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, as well as all
purchase method business combinations completed after
June 30, 2001. Statement 141 also specifies the criteria
that

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must be met for intangible assets acquired in a
purchase method business combination to be recognized and
reported apart from goodwill. Statement 142 requires that
goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142.
Statement 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for
impairment in accordance with Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of (Statement 121).


The provisions of Statement 141 were adopted
effective June 30, 2001. We did not complete any business
combinations during the period from July 1, 2001 to
December 31, 2001. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 have
been amortized through December 31, 2001.

Statement 141 requires, upon adoption of
Statement 142 on January 1, 2002, that we evaluate our
existing intangible assets and goodwill that were acquired in
prior purchase business combinations, and that we make any
necessary reclassifications in order to conform with the new
criteria in Statement 141 for recognition apart from goodwill.
Upon adoption of Statement 142, we are required to reassess the
useful lives and residual values of all intangible assets
acquired in purchase business combinations, and make any
necessary amortization period adjustments by the end of the
first interim period after adoption. In addition, to the extent
an intangible asset is identified as having an indefinite useful
life, we are required to test the intangible asset for
impairment in accordance with the provisions of Statement 142
within the first quarter of 2002. Any impairment loss will be
measured as of January 1, 2002 and recognized as the
cumulative effect of a change in accounting principle in the
first quarter of 2002.

In connection with the transitional goodwill
impairment evaluation, Statement 142 requires that we perform an
assessment of whether there is an indication that goodwill and
equity-method goodwill is impaired as of January 1, 2002. To
accomplish this we must identify our reporting units and
determine the carrying value of each reporting unit by assigning
the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of the date of
adoption. We will then have until June 30, 2002 to
determine the fair value of each reporting unit and compare it
to the reporting units carrying amount. To the extent a
reporting units carrying amount exceeds its fair value, an
indication exists that the reporting units goodwill may be
impaired and we must perform the second step of the transitional
impairment test. In the second step, we must compare the implied
fair value of the reporting units goodwill, determined by
allocating the reporting units fair value to all of its
assets (recognized and unrecognized) and liabilities in a manner
similar to a purchase price allocation in accordance with
Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than
December 31, 2002.

Upon adoption of Statement 142, we will no longer
amortize goodwill. During 2001, 2000 and 1999, we recognized
goodwill amortization expense and impairment charges of
$888,000, $946,000 and $9.1 million, respectively. Although
we do not anticipate an impairment charge upon the adoption of
Statement 142, we have not yet completed our analysis as of the
date of this report.

In October 2001, the FASB issued Statement of
Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets
(Statement 144), which is effective for fiscal years beginning
after December 15, 2001. Statement 144 supersedes certain
provisions of APB Opinion No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions and
supersedes Statement 121. We do not expect the adoption of
Statement 144 to have a material effect on our consolidated
financial position or results of operations

Liquidity and Capital Resources

At December 31, 2001, our principal source
of liquidity was $20.9 million of working capital, a
decrease from $21.8 million the prior year. At
December 31, 2001, we had cash and cash equivalents

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totaling $ 9.6 million, a decrease of $5.8
million from December 31, 2000. The decrease in cash was
due primarily to uses of cash for operating expenses. In
addition to our cash and cash equivalents the other primary
component of working capital was our accounts receivable. At
December 31, 2001, we had $19.4 million in
receivables, up from $15.0 million in 2000. The increase
was due to receivables from our contracts with the Washington
National Guard.


In order to increase the liquidity of our
receivables, we have established a $4 million working
capital line of credit and a two-year $1 million term loan
facility for purchases of capital assets with Silicon Valley
Bank. Both lines bear interest at the Silicon Valley Bank prime
rate plus 1.50% and are collateralized by our assets. Covenants
in the loan agreements include restrictions on our ability to
pay dividends or make other distributions, make acquisitions or
investments, merge or consolidate with others or dispose of
assets. If not renewed the working capital line terminates and
any advances made are due on November 5, 2002. The term
loan is payable in 24 monthly payments of $41,666.67 plus
interest ending October 1, 2003. At December 31, 2001,
we had a balance of $917,000 on the two-year term loan facility
and $0 on the working capital line.

We have had negative cash flows from operating
activities to date. Net cash used by operating activities was
$13.1 million, $12.4 million, and $13.4 million in
1999, 2000 and 2001, respectively. However, over the past three
quarters cash used in operating activities has declined, with
the $1.2 million of cash used in the fourth quarter of 2001
representing less than 10% of cash used from operations in 2001.
This trend is a result of our emphasis on the Platforms portion
of our business and its higher gross margins. In the near term,
we intend to increase this focus further as evidenced by the
sale of our commercial content development business in the first
quarter of 2002. As a result, we believe that the revenue
required to generate positive cash from operations is now lower
than have been historically. Based on these trends we anticipate
that our cash and cash equivalents will be sufficient to meet
our working capital needs and capital expenditures for at least
the next 12 months.

Net cash used in investing activities was
$2.5 million, $2.0 million, and $2.8 million in
1999, 2000 and 2001, respectively. In 1999, net cash used in
investing activities was primarily the result of capital
expenditures for computer equipment, purchased software, office
equipment, furniture and fixtures. Net cash used in investing
activities in 2000 and 2001 was primarily the result of capital
expenditures and investments in Click2learn Japan K.K. As
of December 31, 2001, we had no material commitments for
capital expenditures and had commitments under non-cancelable
operating leases with terms in excess of one year of
$5.6 million through 2007.

Cash provided by financing activities was
$13.5 million, $10.5 million, and $10.5 million
in 1999, 2000 and 2001, respectively, resulting primarily from
our private placements of common and preferred stock and
warrants with Go2Net, Inc., Marshall Capital Management, Inc.
and Vulcan Ventures, Inc., in 1999; a private placement of
common stock and warrants with Marshall Capital Management, Inc.
in 2000; and a private placement of common stock and warrants
managed by Jefferies & Company, Inc. in 2001. Cash provided
by financing activities also includes amounts received from
exercise of employee stock options and purchases under our
Employee Stock Purchase Plan. Cash used for payments on
long-term debt was $120,000, $4,000, and $87,000 in 1999, 2000
and 2001, respectively.

Although we anticipate that our business will
become cash flow positive during 2002, it currently does not
generate the cash needed to finance our operations and may not
begin to do so in 2002. Our long-term liquidity will be affected
by numerous factors, including acquisitions of businesses or
technologies, demand for our Aspen platform, the extent to which
our e-Learning solutions achieve market acceptance, the timing
and extent to which we invest in new technology, the expenses of
sales and marketing and new product development, the extent to
which competitors are successful in developing their own
products and services and increasing their own market share, the
level and timing of revenues, the collection of these
receivables, the availability of our lines of credit and other
factors. Our loan agreement requires us to maintain certain
financial ratios and meet other financial covenants. The failure
to meet those covenants could prevent us from accessing the
working capital line and result in the acceleration of any
balances under either the working capital line or the term loan.
We were in compliance with these covenants at

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December 31, 2001 or have obtained
appropriate waivers from the bank. To the extent that resources
are insufficient to fund our activities, we may need to raise
additional funds. Such additional funding, if needed, may not be
available on attractive terms or at all. If adequate funds are
not available on acceptable terms, we may be unable to expand
our business, develop or enhance our products and services, take
advantage of future opportunities or respond to competitive
pressures, any of which could have a material adverse effect on
our business.


We had the following contractual commitments and
obligations at December 31, 2001:

|                                   |  |                        |       |           |  |           |       |           |  |         |       |  |  |   |     |  |  |   |     | 
|---------------------------------- |  | ---------------------- | ----- | --------- |  | --------- | ----- | --------- |  | ------- | ----- |  |  | - | --- |  |  | - | --- | 
|                                   |  |                       
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  |                        |       | Less than |  |           |       | After    
|Contractual Obligation             |  | Total                  |       | 1 Year    |  | 1-3 Years |       | 4-5 Years |  | 5 Years
|                                   |  |                        |       |           |  |           |       |           |  |        
|Long-Term Debt                     |  | $                      | 917   |           |  | $         | 500   |           |  | $       | 417   |  |  | $ |    |  |  | $ |    | 
|Capital Lease Obligations          |  |                        | 27    |           |  |           | 27    |           |  |         |      |  |  |   |    |  |  |   |    | 
|Operating Leases                   |  |                        | 5,589 |           |  |           | 1,943 |           |  |         | 2,101 |  |  |   | 813 |  |  |   | 732 | 
|Other Long Term Obligations        |  |                        | 360   |           |  |           | 165   |           |  |         | 195   |  |  |   |    |  |  |   |    | 
|                                   |  |                        |       |           |  |           |       |           |  |         |       |  |  |   |     |  |  |   |     | 
|Total Contractual Cash Obligations |  | $                      | 6,893 |           |  | $         | 2,635 |           |  | $       | 2,713 |  |  | $ | 813 |  |  | $ | 732 | 
|                                   |  |                        |       |           |  |           |       |           |  |         |       |  |  |   |     |  |  |   |     | 

Factors That May Affect Future Results of
Operations

Our quarterly operating results are uncertain
and may fluctuate significantly, which could negatively affect
the value of your investment.

Our operating results have varied significantly
from quarter to quarter and are likely to continue to fluctuate
as a result of a variety of factors, many of which we cannot
control. Factors that may adversely affect our quarterly
operating results include:



| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the size and timing of product orders and the
	timing and execution of professional services engagements;                                             
|
| |  | the mix of revenue from products and services;                                                                                                        
|
| |  | the mix of products sold;                                                                                                                             
|
| |  | the ability to meet client project milestones;                                                                                                        
|
| |  | the market acceptance of our products and
	services;                                                                                                  
|
| |  | our ability to develop and market new or enhanced
	products and services in a timely manner and the market
	acceptance of these products and services;
|
| |  | the timing of revenues and expenses;                                                                                                                  
|
| |  | recognition of impairment of existing assets; and                                                                                                     
|
| |  | the timing of revenue recognition.                                                                                                                    

Our future revenues are difficult to predict and
we may not be able to adjust spending in response to revenue
shortfalls. Our limited operating history with our current
e-Learning solutions, possible acquisitions and the emerging
nature of the e-Learning market, make prediction of future
revenue and expenses difficult. Expense levels are based, in
part, on expectations as to future revenue and largely are fixed
in the short term. We will likely be unable to, or may not elect
to, reduce spending quickly enough to offset any unexpected
revenue shortfall. If we are unable to predict future revenue
accurately, we may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall.

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We have a limited operating history in our
current markets, which makes it difficult to predict our future
performance.

Our limited operating history in our current
markets makes it difficult to predict our future performance and
may not provide investors with a meaningful basis for evaluating
an investment in our common stock. From our inception until
early 1995, we were engaged in various research and development
activities and in developing and marketing multimedia-authoring
products, database and Internet tools, web publishing products
and other ancillary products, most of which we do not currently
sell. In 1995, we began to focus our development and marketing
efforts on products and services for the enterprise learning
market. We released the Aspen platform in September 2001.
Accordingly, we have a limited operating history on which to
evaluate our current business and future prospects.

Our business currently does not generate the
cash needed to finance our operations, and for that and other
reasons we may need additional financing in the future, which we
may be unable to obtain.

Our business currently does not generate the cash
needed to finance our operations and may not begin to do so in
2002. As a result, we may need additional funds to finance our
operations in the future as well as to enhance our products and
services, fund our expansion, respond to competitive pressures
or acquire complementary businesses or technologies. In
addition, poor financial results, additional expenses or
unanticipated opportunities that require capital commitments
could give rise to additional financing requirements sooner than
we expect. We may be unable to obtain financing on terms
favorable to us, or at all. If adequate funds are not available
or are not available on acceptable terms, we may be unable to
finance our operations, enhance our services, fund our
expansion, respond to competitive pressures or take advantage of
business opportunities and we may need to significantly restrict
our operations.

We have a history of losses and may have
continued losses in the future.

We incurred a net loss of approximately
$19.6 million in the year ended December 31, 2001. As
of December 31, 2001, our accumulated deficit was $211.9
million. Although we anticipate that we will achieve
profitability on a quarterly basis by the end of 2002, we have
not yet achieved profitability and may not do so during 2002.
Even if we do achieve profitability, we may be unable to sustain
or increase profitability on a quarterly or annual basis.

We face risks encountered by early-stage
companies in emerging markets and may be unsuccessful in
addressing these risks.

We face risks frequently encountered by
early-stage companies in new and rapidly evolving markets.
Specific risks we face relate to the demand for and market
acceptance of our e-Learning solutions. We may fail to
adequately address these risks, and therefore our business may
suffer. To address these risks, we must:



| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | effectively market our e-Learning solutions to
	new and existing customers;                                                   
|
| |  | continue to enhance the technology upon which our
	e-Learning solutions are based;                                            
|
| |  | successfully implement our e-Learning solutions
	for our customers and generate continuing revenues from those
	customers; and
|
| |  | address and establish new technologies and
	technology standards.                                                             

The e-Learning market is in the early stages
of development and may not grow to a sufficient size or at a
sufficient rate to sustain our business.

The e-Learning market is in the early stages of
development, and may not grow to a sufficient size or at a
sufficient rate for our business to succeed. Corporate training
and education historically have been conducted primarily through
classroom instruction and traditionally have been performed by
internal personnel. Although technology-based training
applications have been available for several years, they

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currently account for only a small portion of the
overall training market. Accordingly, our success will depend on
the extent to which companies migrate from traditional training
methods to e-Learning solutions in connection with their
training activities. In addition, our success will depend upon
the extent to which companies utilize the products or services
of third-party providers.


Many companies that have already invested
substantial resources in traditional training methods may be
reluctant to adopt a new strategy that may limit or compete with
their existing investments. Even if companies implement
technology-based training or e-Learning solutions, they may
still choose to design, develop, deliver or manage all or a part
of their education and training internally. If e-Learning does
not become widespread, or if companies do not use the products
and services of third parties to develop, deliver or manage
their training needs, then our e-Learning solutions may not be
commercially successful.

A deterioration of general economic conditions
may materially and adversely affect our business.

Our revenues are subject to fluctuation as a
result of general economic conditions. A significant portion of
our revenue is derived from the sale of products and services to
large companies or government agencies, which historically have
reduced their expenditures for education and training during
economic downturns. In recent months, our sales force has
experienced increased delays, cancellations or reductions in
scope of sales opportunities as a result of the downturn in the
economy. Additional incidents of terrorism could cause the
economy to weaken further. Should the economy weaken further in
any future period, these organizations may further delay,
cancel, or reduce their expenditures on education and training,
which could adversely affect our business.

We face intense competition from other
e-Learning providers and may be unable to compete
successfully.

The e-Learning market is highly fragmented and
competitive, with no single firm accounting for a dominant
market share. Our competitors vary in size, scope and the
breadth of products and services offered. We face competition
from:



| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | other developers of learning management systems,
	such as Saba and Docent, as well as publishers of e-Learning
	courses that sell management systems with their titles such as
	SmartForce;
|
| |  | large professional consulting firms and in-house
	training departments;                                                                                                                    
|
| |  | many small, regional e-Learning and
	technology-based training services businesses; and                                                                                                    
|
| |  | developers of web authoring tools.                                                                                                                                                         

Certain of our existing and potential competitors
have longer operating histories and significantly greater
financial, technical, marketing and other resources and
therefore may be able to respond more quickly to new or changing
opportunities, technologies, standards and customer requirements
or to compete more aggressively on pricing. Price competition
would likely result in reduced gross margins and may prevent the
Aspen platform from yielding results sufficient for our business
to succeed.

Strategic relationships are important in
expanding the distribution reach of companies in the e-Learning
market. If our competitors were to establish strategic
relationships to bundle their products with the products and
services of their strategic partners, the demand for our
products and services might be substantially reduced and our
ability to market and sell products and services successfully
may be substantially diminished. In addition, the existence or
announcement of strategic relationships involving our
competitors could adversely affect our ability to attract and
retain customers.

Because of the lack of significant barriers to
entry in the e-Learning market, new competitors are likely to
enter this market in the future. In particular, vendors of other
enterprise software applications such as enterprise resource
planning, human resource management or customer relationship
management have indicated an intent to add e-Learning
functionality to extend their current product lines within their
existing customer base. If such vendors were to announce plans
to add such functionality, our ability to sell to our products
and service to their customers could be substantially diminished
and our business could be

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adversely affected. Increased competition is
likely to result in price reductions, reduced gross margins and
loss of market share. We may not be able to contend effectively
with such increased competition.


Our Aspen platform is a new product and may
contain defects or otherwise perform improperly.

Our Aspen platform was initially released in
September 2001, and we anticipate continuing to add new
features, functionality and components. Complex enterprise
software products frequently contain errors or failures,
especially when first introduced or when new versions are
released. In the past, we have discovered errors in our products
after their initial release. Because the Aspen platform products
are complex software packages with new features and
functionality being added and new versions being released on a
regular basis, there is a greater likelihood that they may
contain such errors. In addition, since the Aspen platform is
targeted at enterprise customers with large numbers of users,
customers and potential customers may have a greater sensitivity
to product defects or product integration than the market for
software products generally. To date we have experienced minor
errors in the Aspen platform that are typical of a newly
released software product. Although these errors have not had a
material impact on our business, serious product defects could
result in loss of revenue or delay in market acceptance,
diversion of development resources, damage to our reputation, or
increased service and warranty costs.

If we are unable to build the Click2learn and
Aspen brands, we may be unable to grow our business.

We believe that establishing and maintaining the
Click2learn and Aspen brands will be critical to the success of
our e-Learning strategy and that the importance of brand
recognition will increase due to the growing number of
enterprise learning software products. We intend to increase our
marketing and branding expenditures in our effort to increase
our brand awareness. If our brand building strategy is
unsuccessful, these expenses may never be recovered, and our
business could be materially harmed.

Acquisitions or investments may drain capital
and equity resources, divert managements attention or
otherwise harm our business.

In the future we may acquire or make investments
in other businesses, products or technologies. Such acquisitions
or investments may require that we pay significant cash, issue
stock or incur substantial debt. In addition, such acquisitions
or investments may require significant managerial attention,
which may be diverted from our other operations. These capital,
equity and managerial commitments may impair the operation of
our business. Furthermore, acquired businesses may not be
effectively integrated, may be unable to maintain key
pre-acquisition business relationships, may contribute to
increased fixed costs and may expose us to unanticipated
liabilities.

International expansion may impose substantial
burdens on our resources, divert managements attention or
otherwise harm our business.

Our current and planned expansion into
international markets will require extensive management
attention and resources. In addition, we will need to rely
extensively on third parties in foreign countries to help
conduct our international operations and conduct sales and
marketing efforts. Our success in international markets
consequently will depend to a large degree on the success of
these third parties, over which we have little control. If they
are unwilling or unable to dedicate sufficient resources to our
relationships, our international operations will suffer.
Furthermore, our efforts abroad are subject to a number of
additional risks inherent in international operations, including:



| |   |                                                                  
| | - | -----------------------------------------------------------------
| |  | difficulties and costs of staffing and managing
	foreign offices;
|
| |  | different learning styles and cultures;                          
|
| |  | numerous and potentially conflicting regulatory
	requirements;   
|
| |  | export controls, import tariffs and other
	barriers to trade;    

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| |   |                                                     
| | - | ----------------------------------------------------
| |  | reduced protection of intellectual property
	rights;
|
| |  | regional political and economic instability; and    
|
| |  | fluctuations in currency exchange rates.            

The loss of the services of our senior
executives and key personnel would likely cause our business to
suffer.

Our success depends to a significant degree on
the performance of the senior management team and other key
employees. The loss of any of these individuals could harm our
business. We do not have employment agreements with several of
our executives or with any other key employees, and we do not
maintain key person life insurance for any officers or key
employees.

Our success also depends on our ability to
attract, integrate, motivate and retain additional highly
skilled technical, sales and marketing and professional services
personnel. Competition for qualified personnel in the e-Learning
and enterprise software industries is intense. To the extent we
are unable to attract and retain a sufficient number of
additional skilled personnel our business will suffer.

We may not be able to adapt to rapidly
changing technology and evolving industry standards.

The e-Learning market is characterized by rapidly
changing technologies, frequent new product and service
introductions, short development cycles and evolving industry
standards. The introduction of new products and services
embodying new technologies and the emergence of new industry
standards may render our products and services obsolete. Our
success depends on our ability to adapt to a rapidly changing
landscape and to offer new products and services to address our
customers changing demands. We may experience difficulties
that delay or prevent the successful design, development,
introduction or marketing of our products and services. To the
extent we in fact experience such delays, we may experience
difficulty in attracting new customers and may lose existing
ones.

Our intellectual property may become subject
to legal challenges, unauthorized use or infringement, any of
which could diminish the value of our products and
services.

Our success depends in large part on our
proprietary technology. We rely on a combination of copyrights,
trademarks, trade secret laws, restrictions on disclosure and
other methods to protect our proprietary technology. While we
have patent applications pending, we do not have issued patents
for any of the technology underlying our Aspen platform. If we
fail to successfully enforce our intellectual property rights,
the value of these rights, and consequently the value of our
products and services to our customers, could diminish
substantially. It may be possible for third parties to copy or
otherwise obtain and use our intellectual property or trade
secrets without our authorization, and it may be possible for
third parties to independently develop substantially equivalent
intellectual property.

Litigation may be necessary in the future to
enforce our intellectual property rights, to protect trade
secrets or to determine the validity and scope of the
proprietary rights of others. From time to time we have
received, and may in the future receive, notice of claims of
infringement of other parties proprietary rights. Such
claims could result in costly litigation and could divert
management and technical resources. They could also delay
product shipment or require us to develop non-infringing
technology or enter into royalty or licensing agreements, which
agreements may not be available on reasonable terms, or at all.

Our products include third-party technology,
the loss of which could materially harm our business.

We use some licensed third-party technology
components in our products. Future licenses to this technology
may not be available to us on commercially reasonable terms, or
at all. The loss of or inability to obtain or maintain any of
these technology licenses could result in delays in the
introduction of new products or could force us to discontinue
offering portions of our e-Learning solutions until equivalent
technology, if available, is identified, licensed and
integrated. Furthermore, we may become subjected to

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legal claims related to licensed technology based
on product liability, infringement of intellectual property or
other legal theories.


We face the risk of liability for failures to
meet unique customer requirements, and the risk of cost overruns
on fixed-price projects.

The failure or inability to meet a
customers unique expectations or requirements in the
performance of services could impair our reputation or result in
a claim for damages, regardless of our responsibility for the
failure. Although generally we attempt to limit contractually
our liability for damages arising from product defects and other
mistakes in rendering professional services, these contractual
protections are not always obtained and may not be enforced or
otherwise may not protect us from liability. Our insurance may
not be sufficient to cover any of these claims.

In addition, many of our professional services
projects are performed on a fixed-price basis rather than on a
time and materials basis. If we do not accurately predict the
costs of these projects, we could incur unexpected costs. If we
do not complete fixed-price engagements within budget, on time
and to clients satisfaction, we bear the risk of cost
overruns.

An increase in the traffic may strain our
hosted e-Learning systems, and our hosted e-Learning systems are
vulnerable to other technical malfunctions.

The systems that support our hosted e-Learning
network may be unable to accommodate an increased volume of
traffic. Internet sites and service providers have been subject
to denial of service attacks, in which unauthorized persons
intentionally overload systems with a heavy volume of traffic.
Consequently, our hosted e-Learning systems may experience
slower response times or other problems. In addition, we depend
on Internet service providers and telecommunications companies
and the efficient operation of their computer networks and other
computer equipment for the operation and delivery of our hosted
e-Learning solutions. Each of these has experienced significant
outages in the past and could experience outages, delays and
other difficulties due to system failures unrelated to our
systems. Any delays in response time or performance problems
could cause users to perceive our systems as not functioning
properly and therefore not use our hosted e-Learning solutions
for their training needs.

Security and privacy breaches could subject us
to litigation and liability and deter consumers from using our
hosted e-Learning solutions.

Our hosted e-Learning solutions are often
delivered over the Internet. The Internet is a public network
and data is sent over this network from many sources. Although
we take reasonable steps in accordance with current industry
practices to ensure the security of our hosted solutions,
computer viruses could be introduced into our systems or those
of our customers, which could disrupt our hosted e-Learning
solutions or make them inaccessible to users. In addition,
well-publicized Internet security breaches could deter customers
from using the Internet to conduct transactions that involve the
transmission of confidential information. We cannot predict the
extent to which transactions over the Internet will be, or will
be perceived to be, secure against breaches by third parties. As
a result, we cannot be certain the Internet ultimately will
become widely accepted for the delivery of e-Learning solutions.

We could become subject to litigation and
liability if third parties penetrate security for our hosted
e-Learning solutions or otherwise misappropriate our users
confidential information. Advances in computer capabilities, new
discoveries in the field of cryptography or other technological
events or developments could result in compromises or breaches
of our security systems. Anyone who circumvents our security
measures could misappropriate proprietary information or cause
interruptions in our services or operations. We may be required
to expend significant capital and other resources to protect
against the threat of security breaches or to alleviate problems
caused by breaches. Furthermore, to the extent that our hosted
e-Learning solutions may involve the storage and transmission of
proprietary information, security breaches could expose us to a
risk of loss or litigation and possible liability.

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Our debt covenants may significantly restrict
our operations.

We are subject to numerous covenants in our
agreement with Silicon Valley Bank that impose financial and
operating restrictions on our business. These restrictions may
affect our ability to operate our business, may limit our
ability to take advantage of potential business opportunities as
they arise, and may adversely affect the conduct of our current
business. These covenants place restrictions on our ability to,
among other things:



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | incur more debt;                                                           
|
| |  | pay dividends, redeem or repurchase our stock or
	make other distributions;
|
| |  | make acquisitions or investments;                                          
|
| |  | use assets as security in other transactions;                              
|
| |  | enter into transactions with affiliates;                                   
|
| |  | merge or consolidate with others;                                          
|
| |  | dispose of assets or use asset sale proceeds;                              
|
| |  | create liens on our assets; and                                            
|
| |  | extend credit.                                                             

In addition, the terms of our indebtedness
require that we meet certain financial ratios and tests. The
covenants governing our existing indebtedness restrict our
operations and those of our subsidiaries, and these limitations
could impair our ability to meet such financial ratios and
tests. In addition, our ability to meet these ratios and tests
and to comply with other provisions governing our indebtedness
may be affected by changes in economic or business conditions or
other events beyond our control. Moreover, our failure to comply
with our debt-related obligations could result in an event of
default that, if not cured or waived, could result in an
acceleration of our indebtedness.






|         |                                                            
|-------- | -----------------------------------------------------------
|Item 7a. | Quantitative and Qualitative Disclosures about
	Market Risk

Market Rate Risk.We
are exposed to market risk related to changes in interest rates
and foreign currency exchange rates. We do not use derivative
financial instruments for speculative or trading purposes.

Interest Rate Risk.We hold our assets primarily in cash
and cash equivalents, such as short-term marketable debt
securities, money market funds and other cash equivalents. We
minimize risk by investing in financial instruments with
maturity of three months or less. As a result, if market
interest rates were to increase immediately and uniformly by 10%
from levels at December 31, 2001, the fair value of cash
and cash equivalents would not change by a material amount.

Foreign Currency Exchange Risk.We have foreign currency risk as a
result of foreign subsidiary activities. For the year ended
December 31, 2001, international revenues from foreign
subsidiaries accounted for approximately 5% of total revenues.
All foreign subsidiaries use the local currency as their
functional currency.

Our exposure to foreign exchange rate
fluctuations arises in part from intercompany accounts in which
costs incurred in the United States are charged to the foreign
subsidiaries. These intercompany accounts are typically
denominated in the functional currency of the foreign subsidiary
in order to centralize foreign exchange risk with the parent
company in the United States. We are also exposed to foreign
exchange rate fluctuations as the financial results of foreign
subsidiaries are translated in U.S. dollars in consolidation. As
exchanges rates vary, these results, when translated, may vary
from expectations and adversely impact overall expected
profitability. The effect of foreign exchange rate fluctuations
for the year ended December 31, 2001 was not material. Due to
the substantial volatility of currency exchange rates, among
other factors, we cannot predict the effect of exchange rate
fluctuations on our future operating results.

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|        |                                             
|------- | --------------------------------------------
|Item 8. | Financial Statements and Supplementary
	Data

Index to Financial Statements, Supplementary
Data, and Financial Statement Schedule

|                                   |                                                                                                        |      |  |    | 
|---------------------------------- | ------------------------------------------------------------------------------------------------------ | ---- |  | -- | 
|                                   |                                                                                                        | Page
|                                   |                                                                                                        |     
|Consolidated Financial Statements: |                                                                                                        |      |  |   
|                                  
|                                   | Independent Auditors Report                                                                           |      |  | 30 | 
|                                  
|                                   | Consolidated Balance Sheets as of
	December 31, 2000 and 2001                                          |      |  | 31 | 
|                                  
|                                   | Consolidated Statements of Operations for the
	Years Ended December 31, 1999, 2000, and 2001           |      |  | 32 | 
|                                  
|                                   | Consolidated Statements of Stockholders
	Equity for the Years Ended December 31, 1999, 2000, and 2001 |      |  | 33 | 
|                                  
|                                   | Consolidated Statements of Cash Flows for the
	Years Ended December 31, 1999, 2000, and 2001           |      |  | 34 | 
|                                  
|                                   | Notes to Consolidated Financial Statements                                                             |      |  | 35 | 
|                                  
|Supplementary Data (unaudited):    |                                                                                                        |      |  |   
|                                  
|                                   | Quarterly Results (Note 16 of Notes to
	Consolidated Financial Statements)                             |      |  | 48 | 
|                                  
|Financial Statement Schedule:      |                                                                                                        |      |  |   
|                                  
|                                   | Independent Auditors Report on Consolidated
	Financial Statement Schedule                             |      |  | 54 | 
|                                  
|                                   | Schedule II. Valuation and Qualifying
	Accounts                                                        |      |  | 55 | 

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INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders

Click2learn, Inc.:


We have audited the accompanying consolidated
balance sheets of Click2learn, Inc. and subsidiaries as of
December 31, 2000 and 2001, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the years in the three-year period ended
December 31, 2001. These consolidated 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
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Click2learn,
Inc. and subsidiaries as of December 31, 2000 and 2001, and
the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2001,
in conformity with accounting principles generally accepted in
the United States of America.

KPMG LLP

January 30, 2002

Seattle, Washington


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CLICK2LEARN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


(In thousands except share data)


|                                          |                                                                                                                                               |                                            |        |          |        |  |       |          |        | 
|----------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | -------- | ------ |  | ----- | -------- | ------ | 
|                                          |                                                                                                                                               |                                           
|                                          |                                                                                                                                               | December 31,                              
|                                          |                                                                                                                                               |                                           
|                                          |                                                                                                                                               | 2000                                       |        | 2001    
|                                          |                                                                                                                                               |                                            |        |         
|Assets                                   
|Current assets:                           |                                                                                                                                               |                                            |        |          |        |  |       |         
|                                          | Cash and cash equivalents                                                                                                                     |                                            | $      | 15,321   |        |  | $     | 9,553    |       
|                                          | Accounts receivable, net of allowance for returns
	and doubtful accounts of $962 in 2000 and $1,430 in 2001                                   |                                            |        | 14,969   |        |  |       | 19,449   |       
|                                          | Inventories                                                                                                                                   |                                            |        | 192      |        |  |       | 62       |       
|                                          | Prepaid royalties and licenses                                                                                                                |                                            |        | 237      |        |  |       | 180      |       
|                                          | Receivables from related companies                                                                                                            |                                            |        | 11       |        |  |       | 9        |       
|                                          | Other                                                                                                                                         |                                            |        | 894      |        |  |       | 1,001    |       
|                                          |                                                                                                                                               |                                            |        |          |        |  |       |         
|                                          |                                                                                                                                               | Total current assets                       |        |          | 31,624 |  |       |          | 30,254 | 
|Property and equipment, net               |                                                                                                                                               |                                            | 2,695  |          |        |  | 2,250 |         
|Goodwill and other intangible assets, net |                                                                                                                                               |                                            | 10,006 |          |        |  | 6,061 |         
|Other                                     |                                                                                                                                               |                                            | 555    |          |        |  | 789   |         
|                                          |                                                                                                                                               |                                            |        |          |        |  |       |         
|                                          |                                                                                                                                               | Total assets                               |        | $        | 44,880 |  |       | $        | 39,354 | 
|                                          |                                                                                                                                               |                                            |        |          |        |  |       |         
|Liabilities and Stockholders
	Equity    
|Current liabilities:                      |                                                                                                                                               |                                            |        |          |        |  |       |         
|                                          | Accounts payable                                                                                                                              |                                            | $      | 2,978    |        |  | $     | 2,617    |       
|                                          | Accrued compensation and benefits                                                                                                             |                                            |        | 3,810    |        |  |       | 2,788    |       
|                                          | Deferred revenue                                                                                                                              |                                            |        | 1,680    |        |  |       | 2,453    |       
|                                          | Customer prepayments                                                                                                                          |                                            |        | 428      |        |  |       | 166      |       
|                                          | Other                                                                                                                                         |                                            |        | 927      |        |  |       | 1,353    |       
|                                          |                                                                                                                                               |                                            |        |          |        |  |       |         
|                                          |                                                                                                                                               | Total current liabilities                  |        |          | 9,823  |  |       |          | 9,377  | 
|Other noncurrent liabilities              |                                                                                                                                               |                                            | 4      |          |        |  | 417   |         
|                                          |                                                                                                                                               |                                            |        |          |        |  |       |         
|                                          |                                                                                                                                               | Total liabilities                          |        |          | 9,827  |  |       |          | 9,794  | 
|                                          |                                                                                                                                               |                                            |        |          |        |  |       |         
|Stockholders equity:                     |                                                                                                                                               |                                            |        |          |        |  |       |         
|                                          | Preferred stock, $0.01 par value; authorized
	2,000,000 shares; issued and outstanding no shares in 2000
	and 2001                            |                                            |        |         |        |  |       |         |       
|                                          | Common stock, $0.01 par value; authorized
	40,000,000 shares, issued and outstanding
	17,886,563 shares in 2000 and 24,104,009 shares in 2001 |                                            |        | 180      |        |  |       | 242      |       
|                                          | Additional paid-in capital                                                                                                                    |                                            |        | 227,766  |        |  |       | 241,769  |       
|                                          | Accumulated deficit                                                                                                                           |                                            |        | (192,313 | )      |  |       | (211,894 | )     
|                                          | Deferred stock compensation                                                                                                                   |                                            |        | (72      | )      |  |       | (5       | )     
|                                          | Accumulated other comprehensive loss                                                                                                          |                                            |        | (508     | )      |  |       | (552     | )     
|                                          |                                                                                                                                               |                                            |        |          |        |  |       |         
|                                          |                                                                                                                                               | Total stockholders equity                 |        |          | 35,053 |  |       |          | 29,560 | 
|                                          |                                                                                                                                               |                                            |        |          |        |  |       |         
|                                          |                                                                                                                                               | Total liabilities and stockholders equity |        | $        | 44,880 |  |       | $        | 39,354 | 
|                                          |                                                                                                                                               |                                            |        |          |        |  |       |         

See accompanying notes to Consolidated Financial
Statements

31



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##### Table of Contents



CLICK2LEARN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS


(In thousands, except per share
data)


|                                                               |                                                 |                              |         |        |        |      |         |        |        |   |         |        |        |  
|-------------------------------------------------------------- | ----------------------------------------------- | ---------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                                                               |                                                 |                             
|                                                               |                                                 | Year Ended December 31,     
|                                                               |                                                 |                             
|                                                               |                                                 | 1999                         |         | 2000   |        | 2001
|                                                               |                                                 |                              |         |        |        |     
|Revenue:                                                       |                                                 |                              |         |        |        |      |         |        |        |   |         |       
|                                                               | Tools                                           |                              | $       | 15,312 |        |      | $       | 8,602  |        |   | $       | 6,983  |       
|                                                               | Content services                                |                              |         | 13,778 |        |      |         | 21,461 |        |   |         | 17,062 |       
|                                                               | Platforms                                       |                              |         | 5,643  |        |      |         | 12,494 |        |   |         | 21,046 |       
|                                                               |                                                 |                              |         |        |        |      |         |        |        |   |         |       
|                                                               |                                                 | Total revenue                |         |        | 34,733 |      |         |        | 42,557 |   |         |        | 45,091 |  
|                                                               |                                                 |                              |         |        |        |      |         |        |        |   |         |       
|Cost of revenue:                                               |                                                 |                              |         |        |        |      |         |        |        |   |         |       
|                                                               | Tools                                           |                              |         | 3,646  |        |      |         | 1,821  |        |   |         | 1,546  |       
|                                                               | Content services                                |                              |         | 11,173 |        |      |         | 18,460 |        |   |         | 16,394 |       
|                                                               | Platforms                                       |                              |         | 1,258  |        |      |         | 1,903  |        |   |         | 3,536  |       
|                                                               |                                                 |                              |         |        |        |      |         |        |        |   |         |       
|                                                               |                                                 | Total cost of revenue        |         |        | 16,077 |      |         |        | 22,184 |   |         |        | 21,476 |  
|                                                               |                                                 |                              |         |        |        |      |         |        |        |   |         |       
|Gross margin                                                   |                                                 |                              | 18,656  |        |        |      | 20,373  |        |        |   | 23,615  |       
|                                                               |                                                 |                              |         |        |        |      |         |        |        |   |         |       
|Operating expenses:                                            |                                                 |                              |         |        |        |      |         |        |        |   |         |       
|                                                               | Research and development                        |                              |         | 7,425  |        |      |         | 9,535  |        |   |         | 8,869  |       
|                                                               | Sales and marketing                             |                              |         | 15,977 |        |      |         | 20,530 |        |   |         | 18,536 |       
|                                                               | General and administrative                      |                              |         | 5,227  |        |      |         | 6,623  |        |   |         | 6,457  |       
|                                                               | Amortization of goodwill and impairment charges |                              |         | 888    |        |      |         | 946    |        |   |         | 9,134  |       
|                                                               |                                                 |                              |         |        |        |      |         |        |        |   |         |       
|                                                               |                                                 | Total operating expenses     |         |        | 29,517 |      |         |        | 37,634 |   |         |        | 42,996 |  
|                                                               |                                                 |                              |         |        |        |      |         |        |        |   |         |       
|Loss from operations                                           |                                                 |                              | (10,861 | )      |        |      | (17,261 | )      |        |   | (19,381 | )     
|                                                               |                                                 |                              |         |        |        |      |         |        |        |   |         |       
|Other income (expense):                                        |                                                 |                              |         |        |        |      |         |        |        |   |         |       
|                                                               | Other income, net                               |                              |         | 3      |        |      |         | 4      |        |   |         | 93     |       
|                                                               | Interest income, net                            |                              |         | 853    |        |      |         | 981    |        |   |         | 107    |       
|                                                               | Equity in losses of affiliate                   |                              |         |       |        |      |         | (510   | )      |   |         | (400   | )     
|                                                               |                                                 |                              |         |        |        |      |         |        |        |   |         |       
|                                                               |                                                 | Total other income (expense) |         |        | 856    |      |         |        | 475    |   |         |        | (200   | )
|                                                               |                                                 |                              |         |        |        |      |         |        |        |   |         |       
|Net loss                                                       |                                                 | $                            | (10,005 | )      |        | $    | (16,786 | )      |        | $ | (19,581 | )     
|Non cash dividend associated with preferred stock              |                                                 |                              | (2,754  | )      |        |      |        |        |        |   |        |       
|                                                               |                                                 |                              |         |        |        |      |         |        |        |   |         |       
|Net loss attributable to common stockholders                   |                                                 | $                            | (12,759 | )      |        | $    | (16,786 | )      |        | $ | (19,581 | )     
|                                                               |                                                 |                              |         |        |        |      |         |        |        |   |         |       
|Net loss per common share, basic and diluted                   |                                                 | $                            | (.87    | )      |        | $    | (.99    | )      |        | $ | (.99    | )     
|                                                               |                                                 |                              |         |        |        |      |         |        |        |   |         |       
|Weighted average common shares outstanding, basic
	and diluted |                                                 |                              | 14,626  |        |        |      | 16,956  |        |        |   | 19,748  |       
|                                                               |                                                 |                              |         |        |        |      |         |        |        |   |         |       

See accompanying notes to Consolidated Financial
Statements

32



---



##### Table of Contents



CLICK2LEARN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


(In thousands, except share data)


|                                                                       |                         |                 |         |              |  |            |   |          |  |               |            |             |  |               |     |         |  |      |         |       |  |   |      |   |  |   |      |      |   |   |          |         |   |   |         |         |   |   |        |         |  
|---------------------------------------------------------------------- | ----------------------- | --------------- | ------- | ------------ |  | ---------- | - | -------- |  | ------------- | ---------- | ----------- |  | ------------- | --- | ------- |  | ---- | ------- | ----- |  | - | ---- | - |  | - | ---- | ---- | - | - | -------- | ------- | - | - | ------- | ------- | - | - | ------ | ------- | -
|                                                                       |                         |                 |         |              |  |            |   |          |  |               |            | Accumulated |  |               |     |         |  |     
|                                                                       |                         | Preferred Stock |         |              |  |            |   | Deferred |  | Other         |            |             |  |               |     |        
|                                                                       |                         | Series A        |         | Common Stock |  | Additional |   | Stock    |  | Comprehensive |            |             |  |               |     |        
|                                                                       |                         |                 |         |              |  | Paid-In    |   | Compen-  |  | Income        |            | Accumulated |  | Comprehensive |     |        
|                                                                       |                         | Shares          |         | Amount       |  | Shares     |   | Amount   |  | Capital       |            | sation      |  | (Loss)        |     | Deficit |  | Loss |         | Total
|                                                                       |                         |                 |         |              |  |            |   |          |  |               |            |             |  |               |     |         |  |      |         |      
|Balances at December 31, 1998                                          |                         |                 |        |              |  |            |  |          |  |               | 13,948,018 |             |  | $             | 140 |         |  | $    | 203,249 |       |  | $ | (580 | ) |  | $ | (277 | )    |   | $ | (165,522 | )       |   |   |         |         |   | $ | 37,010 |        
|Stock options exercised                                                |                         |                 |        |              |  |            |  |          |  |               | 348,437    |             |  |               | 4   |         |  |      | 865     |       |  |   |     |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   | 869    |        
|Amortization of deferred stock compensation                            |                         |                 |        |              |  |            |  |          |  |               |           |             |  |               |    |         |  |      |        |       |  |   | 96   |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   | 96     |        
|Common stock issued in business combinations                           |                         |                 |        |              |  |            |  |          |  |               | 100,000    |             |  |               | 1   |         |  |      | 399     |       |  |   |     |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   | 400    |        
|Sale of common stock, net of offering costs of
	$141                   |                         |                 |        |              |  |            |  |          |  |               | 428,571    |             |  |               | 4   |         |  |      | 2,854   |       |  |   |     |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   | 2,858  |        
|Common stock warrants issued for services                              |                         |                 |        |              |  |            |  |          |  |               |           |             |  |               |    |         |  |      | 240     |       |  |   |     |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   | 240    |        
|Sale of preferred stock, net of offering costs of
	$73                 |                         |                 | 10,000  |              |  |            |  |          |  |               |           |             |  |               |    |         |  |      | 7,173   |       |  |   |     |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   | 7,173  |        
|Non cash preferred stock dividend                                      |                         |                 |        |              |  |            |  |          |  |               |           |             |  |               |    |         |  |      | 2,754   |       |  |   |     |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   | 2,754  |        
|Conversion of preferred stock, Series A, to
	common stock              |                         |                 | (10,000 | )            |  |            |  |          |  |               | 1,290,313  |             |  |               | 13  |         |  |      | (13     | )     |  |   |     |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   |       |        
|Comprehensive loss:                                                    |                         |                 |         |              |  |            |   |          |  |               |            |             |  |               |     |         |  |      |         |       |  |   |      |   |  |   |      |      |   |   |          |         |   |   |         |         |   |   |        |        
|                                                                       | Net loss                |                 |         |             |  |            |   |         |  |               |            |            |  |               |     |        |  |      |         |      |  |   |      |  |  |   |      |     |   |   |          | (10,005 | ) |   |         | (10,005 | ) |   |        | (10,005 | )
|                                                                       | Translation adjustments |                 |         |             |  |            |   |         |  |               |            |            |  |               |     |        |  |      |         |      |  |   |      |  |  |   |      | (40  | ) |   |          |        |   |   |         | (40     | ) |   |        | (40     | )
|                                                                       |                         |                 |         |              |  |            |   |          |  |               |            |             |  |               |     |         |  |      |         |       |  |   |      |   |  |   |      |      |   |   |          |         |   |   |         |         |   |   |        |        
|Total comprehensive loss                                               |                         |                 |         |              |  |            |   |          |  |               |            |             |  |               |     |         |  |      |         |       |  |   |      |   |  |   |      |      |   |   |          |         |   | $ | (10,045 | )       |   |   |        |        
|                                                                       |                         |                 |         |              |  |            |   |          |  |               |            |             |  |               |     |         |  |      |         |       |  |   |      |   |  |   |      |      |   |   |          |         |   |   |         |         |   |   |        |        
|Balances at December 31, 1999                                          |                         |                 |        |              |  |            |  |          |  |               | 16,115,339 |             |  | $             | 162 |         |  | $    | 217,521 |       |  | $ | (484 | ) |  | $ | (317 | )    |   | $ | (175,527 | )       |   |   |         |         |   | $ | 41,355 |        
|Stock options exercised                                                |                         |                 |        |              |  |            |  |          |  |               | 1,167,309  |             |  |               | 12  |         |  |      | 4,692   |       |  |   |     |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   | 4,704  |        
|Amortization of deferred stock compensation                            |                         |                 |        |              |  |            |  |          |  |               |           |             |  |               |    |         |  |      |        |       |  |   | 71   |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   | 71     |        
|Forfeitures of deferred compensation                                   |                         |                 |        |              |  |            |  |          |  |               |           |             |  |               |    |         |  |      | (341    | )     |  |   | 341  |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   |       |        
|Sale of common stock and warrants, net of
	offering costs of $177      |                         |                 |        |              |  |            |  |          |  |               | 410,678    |             |  |               | 4   |         |  |      | 4,819   |       |  |   |     |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   | 4,823  |        
|Exercise of common stock warrants                                      |                         |                 |        |              |  |            |  |          |  |               | 10,000     |             |  |               |    |         |  |      | 93      |       |  |   |     |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   | 93     |        
|Common stock sold pursuant to the employee stock
	purchase plan        |                         |                 |        |              |  |            |  |          |  |               | 183,237    |             |  |               | 2   |         |  |      | 982     |       |  |   |     |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   | 984    |        
|Comprehensive loss:                                                    |                         |                 |         |              |  |            |   |          |  |               |            |             |  |               |     |         |  |      |         |       |  |   |      |   |  |   |      |      |   |   |          |         |   |   |         |         |   |   |        |        
|                                                                       | Net loss                |                 |         |             |  |            |   |         |  |               |            |            |  |               |     |        |  |      |         |      |  |   |      |  |  |   |      |     |   |   |          | (16,786 | ) |   |         | (16,786 | ) |   |        | (16,786 | )
|                                                                       | Translation adjustments |                 |         |             |  |            |   |         |  |               |            |            |  |               |     |        |  |      |         |      |  |   |      |  |  |   |      | (191 | ) |   |          |        |   |   |         | (191    | ) |   |        | (191    | )
|                                                                       |                         |                 |         |              |  |            |   |          |  |               |            |             |  |               |     |         |  |      |         |       |  |   |      |   |  |   |      |      |   |   |          |         |   |   |         |         |   |   |        |        
|Total comprehensive loss                                               |                         |                 |         |              |  |            |   |          |  |               |            |             |  |               |     |         |  |      |         |       |  |   |      |   |  |   |      |      |   |   |          |         |   | $ | (16,977 | )       |   |   |        |        
|                                                                       |                         |                 |         |              |  |            |   |          |  |               |            |             |  |               |     |         |  |      |         |       |  |   |      |   |  |   |      |      |   |   |          |         |   |   |         |         |   |   |        |        
|Balances at December 31, 2000                                          |                         |                 |        |              |  |            |  |          |  |               | 17,886,563 |             |  | $             | 180 |         |  | $    | 227,766 |       |  | $ | (72  | ) |  | $ | (508 | )    |   | $ | (192,313 | )       |   |   |         |         |   | $ | 35,053 |        
|Stock options exercised                                                |                         |                 |        |              |  |            |  |          |  |               | 342,101    |             |  |               | 3   |         |  |      | 560     |       |  |   |     |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   | 563    |        
|Amortization of deferred stock compensation                            |                         |                 |        |              |  |            |  |          |  |               |           |             |  |               |    |         |  |      | 62      |       |  |   | 51   |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   | 113    |        
|Forfeitures of deferred compensation and
	modification to option award |                         |                 |        |              |  |            |  |          |  |               |           |             |  |               |    |         |  |      | (16     | )     |  |   | 16   |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   |       |        
|Common stock and options issued in business
	combinations              |                         |                 |        |              |  |            |  |          |  |               | 1,812,500  |             |  |               | 18  |         |  |      | 4,402   |       |  |   |     |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   | 4,420  |        
|Sale of common stock and warrants, net of
	offering costs of $1,127    |                         |                 |        |              |  |            |  |          |  |               | 3,680,000  |             |  |               | 37  |         |  |      | 8,036   |       |  |   |     |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   | 8,073  |        
|Exercise of common stock warrants                                      |                         |                 |        |              |  |            |  |          |  |               | 74,759     |             |  |               | 1   |         |  |      |        |       |  |   |     |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   | 1      |        
|Common stock sold pursuant to the employee stock
	purchase plan        |                         |                 |        |              |  |            |  |          |  |               | 308,086    |             |  |               | 3   |         |  |      | 959     |       |  |   |     |   |  |   |     |      |   |   |         |         |   |   |        |         |   |   | 962    |        
|Comprehensive loss:                                                    |                         |                 |         |              |  |            |   |          |  |               |            |             |  |               |     |         |  |      |         |       |  |   |      |   |  |   |      |      |   |   |          |         |   |   |         |         |   |   |        |        
|                                                                       | Net loss                |                 |         |             |  |            |   |         |  |               |            |            |  |               |     |        |  |      |         |      |  |   |      |  |  |   |      |     |   |   |          | (19,581 | ) |   |         | (19,581 | ) |   |        | (19,581 | )
|                                                                       | Translation adjustments |                 |         |             |  |            |   |         |  |               |            |            |  |               |     |        |  |      |         |      |  |   |      |  |  |   |      | (44  | ) |   |          |        |   |   |         | (44     | ) |   |        | (44     | )
|                                                                       |                         |                 |         |              |  |            |   |          |  |               |            |             |  |               |     |         |  |      |         |       |  |   |      |   |  |   |      |      |   |   |          |         |   |   |         |         |   |   |        |        
|Total comprehensive loss                                               |                         |                 |         |              |  |            |   |          |  |               |            |             |  |               |     |         |  |      |         |       |  |   |      |   |  |   |      |      |   |   |          |         |   | $ | (19,625 | )       |   |   |        |        
|                                                                       |                         |                 |         |              |  |            |   |          |  |               |            |             |  |               |     |         |  |      |         |       |  |   |      |   |  |   |      |      |   |   |          |         |   |   |         |         |   |   |        |        
|Balances at December 31, 2001                                          |                         |                 |        |              |  |            |  |          |  |               | 24,104,009 |             |  | $             | 242 |         |  | $    | 241,769 |       |  | $ | (5   | ) |  | $ | (552 | )    |   | $ | (211,894 | )       |   |   |         |         |   | $ | 29,560 |        
|                                                                       |                         |                 |         |              |  |            |   |          |  |               |            |             |  |               |     |         |  |      |         |       |  |   |      |   |  |   |      |      |   |   |          |         |   |   |         |         |   |   |        |        

See accompanying notes to Consolidated Financial
Statements

33



---



##### Table of Contents



CLICK2LEARN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In thousands)


|                                                           |                                                                                 |                                    |                                                    |                                           |       |        |         |         |       |        |         |         |        |        |         |  
|---------------------------------------------------------- | ------------------------------------------------------------------------------- | ---------------------------------- | -------------------------------------------------- | ----------------------------------------- | ----- | ------ | ------- | ------- | ----- | ------ | ------- | ------- | ------ | ------ | ------- | -
|                                                           |                                                                                 |                                   
|                                                           |                                                                                 | Year Ended December 31,           
|                                                           |                                                                                 |                                   
|                                                           |                                                                                 | 1999                               |                                                    | 2000                                      |       | 2001  
|                                                           |                                                                                 |                                    |                                                    |                                           |       |       
|Cash flows from operating activities:                      |                                                                                 |                                    |                                                    |                                           |       |        |         |         |       |        |         |        
|                                                           | Net loss                                                                        |                                    | $                                                  | (10,005                                   | )     |        | $       | (16,786 | )     |        | $       | (19,581 | )     
|                                                           | Adjustments to reconcile net loss to net cash
	used in operating activities:    |                                    |                                                    |                                           |       |        |         |         |       |        |         |         |       
|                                                           |                                                                                 | Depreciation and amortization      |                                                    |                                           | 2,222 |        |         |         | 2,674 |        |         |         | 11,206 |       
|                                                           |                                                                                 | Stock compensation expense         |                                                    |                                           | 96    |        |         |         | 71    |        |         |         | 113    |       
|                                                           |                                                                                 | Equity in loss of affiliate        |                                                    |                                           |      |        |         |         | 510   |        |         |         | 400    |       
|                                                           |                                                                                 | Changes in assets and liabilities: |                                                    |                                           |       |        |         |         |       |        |         |         |        |       
|                                                           |                                                                                 |                                    | Accounts receivable                                |                                           |       | (5,776 | )       |         |       | (1,939 | )       |         |        | (4,385 | )      
|                                                           |                                                                                 |                                    | Inventories                                        |                                           |       | 167    |         |         |       | 11     |         |         |        | 130    |        
|                                                           |                                                                                 |                                    | Prepaid royalties and licenses                     |                                           |       | (29    | )       |         |       | (142   | )       |         |        | 57     |        
|                                                           |                                                                                 |                                    | Receivables from related companies                 |                                           |       | (76    | )       |         |       | (2     | )       |         |        | 3      |        
|                                                           |                                                                                 |                                    | Other current assets                               |                                           |       | (1,192 | )       |         |       | 1,446  |         |         |        | (107   | )      
|                                                           |                                                                                 |                                    | Accounts payable                                   |                                           |       | 642    |         |         |       | 730    |         |         |        | (665   | )      
|                                                           |                                                                                 |                                    | Accrued liabilities                                |                                           |       | 732    |         |         |       | 1,402  |         |         |        | (1,020 | )      
|                                                           |                                                                                 |                                    | Deferred revenue                                   |                                           |       | 286    |         |         |       | (6     | )       |         |        | 773    |        
|                                                           |                                                                                 |                                    | Other current liabilities and customer prepayments |                                           |       | (204   | )       |         |       | (411   | )       |         |        | (336   | )      
|                                                           |                                                                                 |                                    |                                                    |                                           |       |        |         |         |       |        |         |        
|                                                           |                                                                                 |                                    |                                                    | Net cash used in operating activities     |       |        | (13,137 | )       |       |        | (12,442 | )       |        |        | (13,412 | )
|                                                           |                                                                                 |                                    |                                                    |                                           |       |        |         |         |       |        |         |        
|Cash flows from investing activities:                      |                                                                                 |                                    |                                                    |                                           |       |        |         |         |       |        |         |        
|                                                           | Purchase of property and equipment                                              |                                    |                                                    | (2,195                                    | )     |        |         | (1,462  | )     |        |         | (1,935  | )     
|                                                           | Payments related to acquisitions, net of cash
	acquired                         |                                    |                                                    | (126                                      | )     |        |         |        |       |        |         | (247    | )     
|                                                           | Investment in affiliate                                                         |                                    |                                                    |                                          |       |        |         | (740    | )     |        |         | (639    | )     
|                                                           | Other                                                                           |                                    |                                                    | (185                                      | )     |        |         | 159     |       |        |         | (3      | )     
|                                                           |                                                                                 |                                    |                                                    |                                           |       |        |         |         |       |        |         |        
|                                                           |                                                                                 |                                    |                                                    | Net cash used in investing activities     |       |        | (2,506  | )       |       |        | (2,043  | )       |        |        | (2,824  | )
|                                                           |                                                                                 |                                    |                                                    |                                           |       |        |         |         |       |        |         |        
|Cash flows from financing activities:                      |                                                                                 |                                    |                                                    |                                           |       |        |         |         |       |        |         |        
|                                                           | Repayment of notes payable                                                      |                                    |                                                    | (82                                       | )     |        |         | (84     | )     |        |         |        |       
|                                                           | Repayments on long-term debt                                                    |                                    |                                                    | (120                                      | )     |        |         | (4      | )     |        |         | (87     | )     
|                                                           | Proceeds from borrowings                                                        |                                    |                                                    |                                          |       |        |         |        |       |        |         | 1,000   |       
|                                                           | Proceeds from exercise of stock options                                         |                                    |                                                    | 869                                       |       |        |         | 4,704   |       |        |         | 563     |       
|                                                           | Net proceeds from sale of common and preferred
	stock and common stock warrants |                                    |                                                    | 12,785                                    |       |        |         | 5,900   |       |        |         | 9,036   |       
|                                                           |                                                                                 |                                    |                                                    |                                           |       |        |         |         |       |        |         |        
|                                                           |                                                                                 |                                    |                                                    | Net cash provided by financing activities |       |        | 13,452  |         |       |        | 10,516  |         |        |        | 10,512  |  
|                                                           |                                                                                 |                                    |                                                    |                                           |       |        |         |         |       |        |         |        
|Effect of foreign exchange rate changes on cash            |                                                                                 |                                    | (41                                                | )                                         |       |        | (191    | )       |       |        | (44     | )      
|                                                           |                                                                                 |                                    |                                                    |                                           |       |        |         |         |       |        |         |        
|Net decrease in cash and cash equivalents                  |                                                                                 |                                    | (2,232                                             | )                                         |       |        | (4,160  | )       |       |        | (5,768  | )      
|Cash and cash equivalents at beginning of year             |                                                                                 |                                    | 21,713                                             |                                           |       |        | 19,481  |         |       |        | 15,321  |        
|                                                           |                                                                                 |                                    |                                                    |                                           |       |        |         |         |       |        |         |        
|Cash and cash equivalents at end of year                   |                                                                                 | $                                  | 19,481                                             |                                           |       | $      | 15,321  |         |       | $      | 9,553   |        
|                                                           |                                                                                 |                                    |                                                    |                                           |       |        |         |         |       |        |         |        
|Supplemental disclosure of non cash investing
	activities: |                                                                                 |                                    |                                                    |                                           |       |        |         |         |       |        |         |        
|                                                           | Non cash acquisition of software                                                |                                    | $                                                  |                                          |       |        | $       | 690     |       |        | $       |        |       
|                                                           | Common stock issued in purchase business
	combinations                          |                                    | $                                                  | 400                                       |       |        | $       |        |       |        | $       | 4,420   |       

See accompanying notes to Consolidated Financial
Statements

34



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##### Table of Contents



CLICK2LEARN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 1999, 2000,
AND 2001


(1) Summary of Significant
Accounting Policies

(a) Description
of Business



| |                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Click2learn, Inc. (Click2learn)
	develops, markets, distributes and supports an integrated suite
	of enterprise software products. Click2learns markets are
	worldwide and include a broad range of industries.

(b) Basis
of Presentation



| |                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The accompanying consolidated financial
	statements include the accounts of Click2learn and its wholly
	owned subsidiaries. All significant intercompany accounts and
	transactions have been eliminated in consolidation. Investments
	in 20% to 50% owned companies are accounted for using the equity
	method of accounting.

(c) Use
of Estimates



| |                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The preparation of financial statements requires
	management to make estimates and assumptions that affect the
	amounts reported in the financial statements and accompanying
	notes. Accordingly, actual results may differ from these
	estimates.

(d) Foreign
Currency Translation



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The functional currency of Click2learns
	foreign subsidiaries is the local currency in the country in
	which the subsidiary is located. Assets and liabilities
	denominated in foreign currencies are translated to U.S. dollars
	at the exchange rate in effect on the balance sheet date.
	Revenues and expenses are translated at the average rates of
	exchange prevailing during the year. The translation adjustment
	resulting from this process is presented separately as a
	component of accumulated other comprehensive loss in
	stockholders equity. Gains and losses on foreign currency
	transactions are included in the consolidated statement of
	operations as incurred. To date, gains and losses on foreign
	currency transactions have not been significant.

(e) Cash
and Cash Equivalents



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All highly liquid financial instruments purchased
	with a remaining maturity of three months or less at the date of
	purchase are reported as cash equivalents.

(f) Concentration
of Credit and Sales Risk



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Click2learn has a diverse customer base including
	customers in numerous industries and governmental organizations.
	Click2learn performs ongoing credit evaluations of its
	customers financial condition and generally requires no
	collateral. No single customer accounted for greater than 10% of
	total revenues during the years ended December 31, 1999 and
	2000. For the year ended December 31, 2001, one customer
	accounted for 17.5% of total revenues and 30% of accounts
	receivable at December 31, 2001.

(g) Inventories



| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | Inventories are stated at the lower of cost or
	market. Cost is determined principally using a first-in,
	first-out cost flow assumption.

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##### Table of Contents



(h) Financial
Instruments



| |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2000 and 2001, the carrying
	values of financial instruments, such as cash and cash
	equivalents, trade receivables and accounts payable approximated
	their fair values based on the short-term maturities of these
	instruments. The carrying value of the bank term loan
	outstanding approximated fair value as the interest rate on the
	debt instrument is variable in nature and tied to prevailing
	market rates.

(i) Property
and Equipment



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Property and equipment are recorded at cost less
	accumulated depreciation and amortization. Depreciation is
	computed using the straight-line method over the estimated
	useful lives of three to seven years. Leasehold improvements are
	amortized over the lesser of the lease term or estimated useful
	life. Repairs and maintenance that do not improve or extend the
	lives of the respective assets are expensed in the period
	incurred.

(j) Goodwill
and Other Intangible Assets



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Goodwill represents the excess of the purchase
	price over the fair value of tangible and identifiable
	intangible assets acquired and is amortized over their estimated
	useful lives of 5 to 15 years.                                                                                                                                                                                                                                                                                                                                     
|
| | Other intangible assets consist of software
	products acquired by Click2learn from third parties. At the time
	of their acquisition, the products had either reached
	technological feasibility or were complete. Purchased technology
	is amortized on a product-by-product basis using the greater of
	the amount computed using the ratio that current sales bear to
	the total of current and anticipated future gross revenues for
	that product or the straight-line method over the remaining
	estimated economic life of the product.

(k) Impairment
of Long-Lived Assets



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Click2learn reviews its long-lived assets for
	impairment whenever events or changes in circumstances indicate
	that the carrying amount of an asset may not be recoverable.
	Recoverability of assets held and used other than goodwill is
	measured by a comparison of the carrying amount of an asset to
	future net cash flows expected to be generated by the asset. If
	such assets are considered to be impaired, the impairment to be
	recognized is measured by the amount by which the carrying
	amount of the assets exceeds the fair value of the assets.
	Assets to be disposed of are reported at the lower of their
	carrying amount or fair value less cost to sell. The
	recoverability of goodwill is assessed whenever the facts and
	circumstances suggest that the asset may be impaired and the
	write-down material. Click2learn assesses the recoverability of
	goodwill by determining whether the unamortized goodwill balance
	can be recovered through undiscounted future cash flows.

(l) Revenue
Recognition



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Click2learn recognizes revenue in accordance with
	Statement of Position 97-2 (SOP 97-2),
	Software Revenue Recognition, issued by the American
	Institute of Certified Public Accountants, which, as amended,
	stipulates that revenue recognized from software arrangements is
	to be allocated to each element of the arrangement based upon
	the relative fair values of the elements, such as software
	products, upgrades, enhancements, post contract customer
	support, installation or training, using evidence which is
	specific to the vendor. If such evidence of fair value for each
	element does not exist, all revenue from the arrangement is
	deferred until such time that fair value does exist or until all
	elements are delivered. Revenue from software licenses is
	recognized upon shipment provided vendor specific evidence
	exists for remaining obligations, if any, and collection of the
	resulting receivable is probable. An allowance for product
	returns is provided at the time of the sale. Revenue from
	subscription licenses, hosting agreements and support agreements
	is recognized on a straight-line basis over the life of the
	contract.

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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Click2learn recognizes revenue from
	non-refundable minimum royalties from distributors or resellers
	in the amount of the non-refundable royalties when product has
	been delivered to the distributor or reseller, provided no
	significant obligations remain outstanding and collection of the
	resulting receivable is probable. Additional royalties are
	earned to the extent the minimums are exceeded and these
	additional royalties are recognized as revenue when received,
	based on the distributors or resellers contractual
	reporting obligations.                                                                                                                                                    
|
| | Professional services revenue is recognized from
	fixed price contracts as services are provided or by using the
	percentage-of-completion method of accounting, based on the
	ratio of costs incurred to the total estimated project cost, for
	individual fixed-price contracts. Provisions for any estimated
	losses on uncompleted contracts are made in the period in which
	such losses become evident. Revenue from time and materials
	contracts is recognized as services are performed.                                                                                                                                                                                                                        
|
| | Revenue from the e-Learning Network includes site
	fees, hosting, royalties and content sales. The revenues are
	determined by individual contracts, one to three years in
	length, which specify functionality of the site and the commerce
	conducted on the site. The e-Learning Network fees are
	recognized ratably over the life of the contract. Royalty
	revenue is recognized as earned. Content revenue is either
	recognized evenly over the life of the contract for course usage
	on bundled curriculum courses or recognized at the time of the
	purchase of individual e-Learning courses. Revenues from
	tangible goods, including books, videotapes and CD-ROMs are
	recognized at the time of shipment.

(m) Research
and Development



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Research and development costs, which consist
	primarily of software development costs, are expensed as
	incurred. Financial accounting standards provide for the
	capitalization of certain software development costs after
	technological feasibility of software is established. Under
	Click2learns current practice of developing new products
	and enhancements, the technological feasibility of the
	underlying software is not established until the completion of a
	working model at which time all product development is
	substantially complete. Accordingly, no such costs have been
	capitalized because the impact would not be material.

(n) Income
Taxes



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Income taxes are computed using the asset and
	liability method. Under this method, deferred tax assets and
	liabilities are recognized for the future tax consequences
	attributable to the differences between the financial statement
	carrying amounts of existing assets and liabilities and their
	respective tax bases and operating loss and tax credit
	carryforwards. A valuation allowance is established to reduce
	deferred tax assets to the amount expected to be realized.
	Deferred tax assets and liabilities are measured using enacted
	tax rates expected to apply to taxable income in the years in
	which those temporary differences are expected to be recovered
	or settled. The effect on deferred tax assets and liabilities of
	a change in tax rates is recognized in results of operations in
	the period that includes the enactment date.

(o) Stock-Based
Compensation



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Click2learn has adopted the disclosure-only
	provisions of Statement of Financial Accounting Standards
	No. 123, Accounting for Stock-Based Compensation(Statement 123) and applies Accounting
	Principles Board Opinion No. 25, Accounting for Stock
	Issued to Employees(APB 25) and related
	interpretations in accounting for its stock-based compensation
	for employees. Accordingly, Click2learns stock-based
	compensation expense for stock option grants to employees is
	recognized based on the intrinsic value of the option on the
	date of grant. Recognition of stock-based compensation expense
	under Statement 123 for employee awards requires the use of a
	fair value method to value stock options using option valuation
	models. Pro forma disclosure of net loss under Statement 123 is
	provided in Note 12 to the consolidated financial statements.
	Click2learn

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##### Table of Contents



| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | measures compensation cost for non-employee
	awards based on the fair value of the awards in accordance with
	Statement 123 and related interpretations.                    
|
| | Compensation expense related to fixed employee
	awards is recognized on a straight-line basis over the
	applicable vesting period in the consolidated financial
	statements.

(p) Advertising



| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Advertising costs are expensed as incurred and
	are included in sales and marketing expenses. Advertising
	expense was $694,000, $564,000, and $555,000, respectively,
	during the years ended December 31, 1999, 2000, and 2001.

(q) Net
Loss Per Share



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Basic net loss per share is computed by dividing
	the sum of net loss plus the non-cash preferred stock dividend
	by the weighted average number of common shares outstanding
	during the period. Diluted earnings per share is computed by
	dividing the sum of net loss plus the non cash preferred stock
	dividend by the weighted average number of common and dilutive
	shares outstanding during the period. As Click2learn had a net
	loss attributable to common stockholders in each of the periods
	presented, basic and diluted net losses per share are the same.                                                                                                                                                                                                                                                                                                          
|
| | Excluded from the computation of diluted earnings
	per share for the year ended December 31, 2001 are options
	to acquire approximately 5,669,125 shares of common stock with a
	weighted average share price of $6.49 and warrants to purchase
	3,633,686 shares of common stock with a weighted average share
	price of $5.75 because their effects would be anti-dilutive.
	Excluded from the computation of diluted earnings per share for
	the years ended December 31, 1999 and 2000 are options to
	acquire approximately 4,745,612 and 5,196,433 shares,
	respectively, of common stock with a weighted average exercise
	price of $5.36 and $9.64, respectively, and warrants to purchase
	1,426,313 and 1,797,829 shares, respectively, of common stock
	with a weighted average share price of $8.61 and $8.45,
	respectively, because their effects would be anti-dilutive.

(r) Comprehensive
Loss



| |                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Click2learns total comprehensive loss for
	the years ended December 31, 1999, 2000, and 2001 consisted
	of net loss and foreign currency translation adjustments.
	Accumulated other comprehensive loss as of December 31,
	1999, 2000, and 2001 consists of foreign currency translation
	adjustments. The tax effects on the foreign currency translation
	adjustments were not significant.

(s) Derivative
Financial Instruments



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective January 1, 2001, Click2learn
	adopted Statement of Financial Standards No. 133,
	Accounting for Derivative Instruments and Hedging
	Activities (Statement 133). The adoption
	of Statement 133 did not impact Click2learns
	consolidated financial statements as of January 1, 2001.                                                                                                                                                                                                                                                                                                                                             
|
| | Statement 133, as amended, requires that all
	derivative instruments be recorded on the balance sheet at fair
	value. Changes in the fair value of derivatives are recorded
	each period in current results of operations or other
	comprehensive income (loss) depending on whether a derivative is
	designated as part of a hedge transaction, and if so, the type
	of risk being hedged.                                                                                                                                                                                                                                                     
|
| | For a derivative designated as a fair value
	hedge, the gain or loss of the derivative in the period of
	change and the offsetting loss or gain of the hedged item
	attributed to the hedged risk are recognized in results of
	operations. For a derivative designated as a cash flow hedge,
	the effective portion of the derivatives gain or loss is
	initially reported as a component of other comprehensive income
	(loss) and subsequently reclassified into results of operations
	when the hedged exposure affects results of operations. The
	ineffective portion of the gain or loss of a cash flow hedge is
	recognized immediately

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##### Table of Contents



| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | in results of operations. For a derivative not
	designated as a hedging instrument, the gain or loss is
	recognized in results of operations in the period of change.
|
| | Click2learn had no derivative financial
	instruments outstanding as of December 31, 2001.                                                                            

(t) New
Pronouncements



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In July 2001, the Financial Accounting Standards
	Board issues Statement No. 141, Business
	Combinations (Statement 141), and
	Statement No. 142, Goodwill and Other Intangible
	Assets (Statement 142).
	Statement 141 requires business combinations initiated
	after June 30, 2001 to be accounted for using the purchase
	method of accounting, and specifies criteria for recognizing
	intangible assets acquired in a business combination. No
	business combinations were completed during the period from
	July 1, 2001 to December 31, 2001. Goodwill resulting
	from business combinations completed prior to June 30, 2001
	was amortized through December 31, 2001.
|
| | Statement 142 requires that goodwill and
	intangible assets with indefinite useful lives no longer be
	amortized, but instead be tested for impairment at least
	annually. Intangible assets with definite useful lives will
	continue to be amortized over their respective estimated useful
	lives. Click2learn adopted the provisions of Statement 141
	as of June 30, 2001 and will adopt the provisions of
	Statement 142 effective January 1, 2002.                                                                                                                                                                                                                              
|
| | Although it does not anticipate an impairment
	charge upon adoption of Statement 142, the Company has not
	yet completed its analysis as of the date of this report.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | In October 2001, the FASB issued Statement
	No. 144, Accounting for the Impairment or Disposal of
	Long-Lived Assets (Statement 144), which
	is effective for fiscal years beginning after December 15,
	2001. Statement 144 supersedes certain provisions of APB
	Opinion No. 30, Reporting the Results of
	Operations  Reporting the Effects of Disposal of a
	Segment of a Business, and Extraordinary, Unusual and
	Infrequently Occurring Events and Transactions, and
	supersedes Statement 121. The Company does not expect the
	adoption of Statement 144 to have a material effect on its
	consolidated financial position or results of operations.                   

(u) Reclassifications



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | Certain reclassifications were made to the 1999
	and 2000 consolidated financial statements to conform with the
	2001 presentation.

(2) Inventories



| |                                                      
| | -----------------------------------------------------
| | Inventories consist of the following (in
	thousands):

|               |  |              |     |      |  |   |    | 
|-------------- |  | ------------ | --- | ---- |  | - | -- | 
|               |  |             
|               |  | December 31,
|               |  |             
|               |  | 2000         |     | 2001
|               |  |              |     |     
|Raw materials  |  | $            | 167 |      |  | $ | 47 | 
|Finished goods |  |              | 25  |      |  |   | 15 | 
|               |  |              |     |      |  |   |    | 
|               |  | $            | 192 |      |  | $ | 62 | 
|               |  |              |     |      |  |   |    | 

39



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##### Table of Contents



(3) Property and
Equipment



| |                                                                  
| | -----------------------------------------------------------------
| | Property and equipment consists of the following
	(in thousands):

|                                               |  |              |        |      |  |   |        | 
|---------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2000         |        | 2001
|                                               |  |              |        |     
|Leasehold improvements                         |  | $            | 636    |      |  | $ | 651    | 
|Computer and office equipment                  |  |              | 8,376  |      |  |   | 9,093  | 
|Furniture and fixtures                         |  |              | 1,139  |      |  |   | 1,283  | 
|                                               |  |              |        |      |  |   |        | 
|                                               |  |              | 10,151 |      |  |   | 11,027 | 
|Less accumulated depreciation and amortization |  |              | 7,456  |      |  |   | 8,777  | 
|                                               |  |              |        |      |  |   |        | 
|                                               |  | $            | 2,695  |      |  | $ | 2,250  | 
|                                               |  |              |        |      |  |   |        | 

(4) Goodwill and Other Intangible
Assets



| |                                                                                
| | -------------------------------------------------------------------------------
| | Goodwill and other intangible assets consists of
	the following (in thousands):

|                                                      |  |              |        |      |  |   |       | 
|----------------------------------------------------- |  | ------------ | ------ | ---- |  | - | ----- | 
|                                                      |  |             
|                                                      |  | December 31,
|                                                      |  |             
|                                                      |  | 2000         |        | 2001
|                                                      |  |              |        |     
|Goodwill                                              |  | $            | 11,379 |      |  | $ | 3,310 | 
|Other intangible assets, primarily acquired
	software |  |              | 3,700  |      |  |   | 6,323 | 
|                                                      |  |              |        |      |  |   |       | 
|                                                      |  |              | 15,079 |      |  |   | 9,633 | 
|Less accumulated amortization                         |  |              | 5,073  |      |  |   | 3,572 | 
|                                                      |  |              |        |      |  |   |       | 
|                                                      |  | $            | 10,006 |      |  | $ | 6,061 | 
|                                                      |  |              |        |      |  |   |       | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2000, Click2learn acquired software valued
	at $690,000 for use in its e-Learning Network in exchange for
	certain software licenses and support services. Revenue of
	$590,000 and deferred revenue of $100,000, related to technical
	support, were recorded of the time of the transaction.
	Click2learn determined the amount of the transaction based upon
	values established through cash transactions involving similar
	products and services.

(5) Click2learn Japan
K.K.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2000, Click2learn Japan K.K., a Japanese
	corporation, owned 36% by Click2learn was formed to promote
	e-Learning networks in Japan. Click2learn recognized $510,000
	and $400,000 in the years ending December 31, 2000 and
	2001, respectively, for its equity share in the losses of
	Click2learn Japan K.K. No sales were made to Click2learn
	Japan K.K. in 2000 or 2001. Click2learn does not have
	contractual commitments to provide financing to Click2learn
	Japan K.K. as of December 31, 2001.
|
| | In June 2001, Click2learn Japan K.K. became an
	exclusive distributor of Click2learns Toolbook II
	products in Japan and will pay Click2learn royalties on the
	Toolbook II products sold. No royalties were paid as of
	December 31, 2001.                                                                                                                                                                                                                                                                 

(6) Bank Credit Facility



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Click2learn has a credit facility with a bank
	that provides for a $4 million revolving credit line and a
	$1 million term loan. Borrowings under the credit facility
	are secured by accounts receivable, chattel paper, equipment,
	fixtures and certain intangibles. Interest on outstanding
	borrowings is the banks prime rate plus 1.50% per annum
	(6.25% at December 31, 2001). Interest is payable monthly
	on borrowings under the revolving credit line that is due in
	November 2002. Interest and principal under term loan borrowings
	are payable in equal monthly installments, with the final
	installment due

40



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| |                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | in 2003. Click2learn is subject to certain
	financial covenants including minimum tangible net worth, quick
	ratio and restrictions on the maximum allowable quarterly loss.                                                                       
|
| | Click2learn believes it was in compliance with
	these covenants as of December 31, 2001 except for the
	restriction on the maximum quarterly loss for which it has
	obtained appropriate waivers.                                                  
|
| | No borrowings were outstanding under the
	revolving credit line as of December 31, 2001. Borrowings
	outstanding under the term loan were $916,667 at
	December 31, 2001 of which $500,004 is repayable in 2002
	and $416,663 is repayable in 2003.

(7) Leases



| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Click2learn leases office space under
	noncancelable operating leases expiring through 2007. Future
	minimum lease payments under noncancelable operating leases with
	terms in excess of one year are as follows (in thousands):

|                          |                              |   |       |       | 
|------------------------- | ---------------------------- | - | ----- | ----- | 
|Years ending December 31: |                              |   |       |      
|2002                      |                              | $ | 1,943 |      
|2003                      |                              |   | 1,480 |      
|2004                      |                              |   | 621   |      
|2005                      |                              |   | 499   |      
|2006                      |                              |   | 314   |      
|Thereafter                |                              |   | 732   |      
|                          |                              |   |       |      
|                          | Total minimum lease payments |   | $     | 5,589 | 
|                          |                              |   |       |      



| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Rent expense under operating leases approximated
	$1,887,000, $2,057,000, and $2,425,000 during the years ended
	December 31, 1999, 2000, and 2001, respectively.

(8) Income Taxes



| |                                                         
| | --------------------------------------------------------
| | Net loss before income taxes consists of the
	following:

|        |                                    |                         |        |         |   |      |         |         |   |   |         |         |  
|------- | ---------------------------------- | ----------------------- | ------ | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|        |                                    |                        
|        |                                    | Year Ended December 31,
|        |                                    |                        
|        |                                    | 1999                    |        | 2000    |   | 2001
|        |                                    |                         |        |         |   |     
|        |                                    |                        
|        |                                    | (In thousands)         
|U.S.    |                                    | $                       | (8,345 | )       |   | $    | (15,130 | )       |   | $ | (18,086 | )      
|Foreign |                                    |                         | (1,660 | )       |   |      | (1,656  | )       |   |   | (1,495  | )      
|        |                                    |                         |        |         |   |      |         |         |   |   |         |        
|        | Total net loss before income taxes |                         | $      | (10,005 | ) |      | $       | (16,786 | ) |   | $       | (19,581 | )
|        |                                    |                         |        |         |   |      |         |         |   |   |         |        



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Click2learns income tax benefit differs
	from the expected income tax benefit computed by applying the
	U.S. federal statutory rate of 34% to net loss before income
	taxes as follows:

|                                                             |                          |                         |        |      |  |      |        |   |  |   |        |   | 
|------------------------------------------------------------ | ------------------------ | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | - | 
|                                                             |                          |                        
|                                                             |                          | Year Ended December 31,
|                                                             |                          |                        
|                                                             |                          | 1999                    |        | 2000 |  | 2001
|                                                             |                          |                         |        |      |  |     
|                                                             |                          |                        
|                                                             |                          | (In thousands)         
|Income tax benefit at statutory rate of 34%                  |                          | $                       | (3,402 | )    |  | $    | (5,707 | ) |  | $ | (6,658 | )
|Losses producing no current tax benefit                      |                          |                         | 3,067  |      |  |      | 5,328  |   |  |   | 3,514  |  
|Non-deductible goodwill amortization and
	impairment charges |                          |                         | 301    |      |  |      | 322    |   |  |   | 3,106  |  
|Other, net                                                   |                          |                         | 34     |      |  |      | 57     |   |  |   | 38     |  
|                                                             |                          |                         |        |      |  |      |        |   |  |   |        |  
|                                                             | Total income tax benefit |                         | $      |     |  |      | $      |  |  |   | $      |  | 
|                                                             |                          |                         |        |      |  |      |        |   |  |   |        |  

41



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| |                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2001, Click2learn had net
	operating loss carry forwards (NOL) and research and
	development tax credit carry forwards (R&D), substantially
	all of which relate to the U.S., available to offset future
	taxable income, whose expiration dates approximated the
	following:

|                       |  |                |         |     |  |   |       | 
|---------------------- |  | -------------- | ------- | --- |  | - | ----- | 
|                       |  | NOL            |         | R&D
|                       |  |                |         |    
|                       |  |               
|                       |  | (In thousands)
|2002                   |  | $              | 8,139   |     |  | $ |      | 
|2003                   |  |                | 42,865  |     |  |   |      | 
|From 2004 through 2009 |  |                | 72,725  |     |  |   | 929   | 
|From 2010 through 2022 |  |                | 84,965  |     |  |   | 3,236 | 
|                       |  |                |         |     |  |   |       | 
|                       |  | $              | 208,694 |     |  | $ | 4,165 | 
|                       |  |                |         |     |  |   |       | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Excluded from the schedule above and net
	operating losses included in deferred tax assets are net
	operating losses acquired in business combinations available to
	offset U.S. federal taxable income of $32,235,000, expiring
	between 2006 and 2012, the ultimate utilization of which is
	severely limited by existing regulations. Click2learns
	ability to utilize NOL carryforwards generated prior to June
	1998 is limited due to the change in ownership, as defined in
	the Internal Revenue Code, which occurred at the time of
	Click2learns initial public offerings of securities (IPO).
|
| | Deferred income tax assets consist of the
	following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                     |                                                         |                         |        |         |   |  |        |         |   | 
|-------------------- | ------------------------------------------------------- | ----------------------- | ------ | ------- | - |  | ------ | ------- | - | 
|                     |                                                         |                        
|                     |                                                         | December 31,           
|                     |                                                         |                        
|                     |                                                         | 2000                    |        | 2001   
|                     |                                                         |                         |        |        
|                     |                                                         |                        
|                     |                                                         | (In thousands)         
|Deferred tax assets: |                                                         |                         |        |         |   |  |        |        
|                     | Net operating loss carry forwards                       |                         | $      | 67,805  |   |  | $      | 70,956  |  
|                     | Research and development tax credit carry forwards      |                         |        | 3,625   |   |  |        | 4,165   |  
|                     | Allowance for doubtful accounts and sales returns       |                         |        | 322     |   |  |        | 486     |  
|                     | Other provisions and expenses not currently
	deductible |                         |        | 630     |   |  |        | 555     |  
|                     |                                                         |                         |        |         |   |  |        |        
|                     |                                                         |                         | 72,382 |         |   |  | 76,162 |        
|                     | Valuation allowance for deferred tax assets             |                         |        | (72,382 | ) |  |        | (76,162 | )
|                     |                                                         |                         |        |         |   |  |        |        
|                     |                                                         | Net deferred tax assets |        | $       |  |  |        | $       |  | 
|                     |                                                         |                         |        |         |   |  |        |        



| |                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For financial reporting purposes, a valuation
	allowance has been established due to the uncertainty of the
	realization of the deferred tax assets. The valuation allowance
	for deferred tax assets increased $3,190,000, $6,215,000, and
	$3,780,000 in the years ended December 31, 1999, 2000, and
	2001 respectively.

(9) Related-Party
Transactions



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In March 1998, Click2learn entered into a
	Directed Engineering Agreement (the Engineering
	Agreement) with Vulcan Northwest Inc., d/b/a APEX Online
	Learning, an entity controlled by Click2learns largest
	stockholder pursuant to whom Click2learn has developed
	customized extensions of its Librarian product on a best efforts
	basis. Under the Engineering Agreement, Click2learn recognized
	revenue of $171,000, $0, and $0 in the years ended
	December 31, 1999, 2000, and 2001, respectively.    
|
| | In August 1999, Click2learn entered into a three
	year Co-branding and Marketing Agreement (the Marketing
	Agreement) with Go2Net, Inc. (Go2Net), at the
	time a 5% stockholder in Click2learn and an entity in which
	Click2learns largest stockholder had a large ownership
	interest. The agreement did not generate significant revenues
	and as a result, Click2learn and Go2Net modified the Marketing
	Agreement and accelerated all remaining liabilities resulting in
	a $2.1 million charge in 2000.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In April 2000, Click2learn entered into a Master
	Software Development Agreement with Vulcan Northwest, Inc., an
	entity controlled by Click2learns largest stockholder, to
	provide consulting and e-Learning custom content development.
	The terms of the Agreement are similar to those of other custom
	development arrangements that Click2learn has entered into with
	other third parties. Click2learn recognized revenue of $253,000
	and $0 in the years ended December 31, 2000 and 2001,
	respectively.                                                                                    
|
| | In May 2000, Click2learn entered into a Master
	Software Development Agreement with Digeo Inc.
	(Digeo), an entity controlled by Click2learns
	significant stockholder, to provide consulting and e-Learning
	custom content development. The terms of the Agreement are
	similar to those of other custom development arrangements that
	Click2learn has entered into with other third parties. Revenue
	is recognized as the services are provided on a time and
	materials basis. Click2learn recognized revenue of $243,000 and
	$0 in the years ended December 31, 2000 and 2001,
	respectively.

(10) Acquisitions



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following transactions were accounted for as
	purchases and accordingly, the results of operations are
	included from the acquisition dates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Pixelmedia Visual Communications, Inc.
	(Pixelmedia)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | In July 1999, Click2learn acquired Pixelmedia, an
	online learning development firm based in Richmond, British
	Columbia. Click2learn issued 100,000 shares of Common Stock
	valued at $400,000, and paid approximately $500,000 to acquire
	all of the issued and outstanding Pixelmedia capital stock and
	to repay debt owed by Pixelmedia to its principal stockholders.
	Click2learn recorded $901,788 of goodwill associated with the
	acquisition.                                                                                                                                                                                                                                                                                                                                          
|
| | IntelliPrep Technologies, Incorporated
	(IntelliPrep)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | In May 2001, Click2learn acquired IntelliPrep, a
	provider of technology for personalized learning. Click2learn
	issued 1,812,500 shares of common stock and 450,000 options to
	acquire its common stock valued at $4,419,688. In connection
	with the acquisition, Click2learn incurred approximately
	$600,000 of acquisition related expenditures of which $241,000
	was unpaid as of December 31, 2001. Goodwill of
	$3.3 million and other identifiable intangible assets of
	$1.4 million representing acquired software were recorded
	in connection with the acquisition. No elements of in-process
	research and development were identified as part of the
	acquisition. Goodwill is amortized over 5 years through
	December 31, 2001 and acquired software is amortized over
	3 years.
|
| | The following table presents unaudited proforma
	results of operations as if the acquisition of IntelliPrep had
	occurred as of January 1, 2000 (in thousands, except per
	share data):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                   |  |              |         |      |  |   |         |  
|------------------ |  | ------------ | ------- | ---- |  | - | ------- | -
|                   |  |             
|                   |  | Years Ended 
|                   |  | December 31,
|                   |  |             
|                   |  | 2000         |         | 2001
|                   |  |              |         |     
|Revenue            |  | $            | 42,612  |      |  | $ | 45,528  |  
|Net Loss           |  |              | (18,854 | )    |  |   | (20,115 | )
|Net loss per share |  |              | (1.11   | )    |  |   | (1.02   | )

(11) Impairment of Goodwill



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the fourth quarter of 2001, Click2learn
	identified indicators of possible impairment of its recorded
	goodwill related to its custom e-Learning content development
	business. Such indicators included the general slowdown in the
	custom e-Learning content development business evidenced by
	general declines in demand, utilization rates of related
	personnel and profit margins. Additional indicators were
	significant declines in valuations of similar businesses in
	comparison with the market valuations at the time Click2learn
	invested in the acquired businesses and changes in
	Click2learns

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | plans for custom content development services.
	Based on the results of its discounted cash flow analyses,
	Click2learn recognized impairment charges in connection with the
	following acquisitions made primarily in 1997 through 1999:
	Oakes Interactive, Inc.; TopShelf Multimedia, Inc.; Acorn
	Consulting, Inc.; Communication Strategies, Inc.; Strategic
	Systems Associates, Inc.; Graham-Wright Interactive, Inc.;
	Pixelmedia Ltd. and 3 Dog Multimedia, Inc. Accordingly,
	Click2learn recorded an impairment loss of $7.6 million
	during the fourth quarter of 2001 included in goodwill
	amortization and impairment charges in the consolidated
	statements of operations.

(12) Stockholders Equity



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Preferred Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | On October 6, 1999, Click2learn sold 6,000
	shares of Series A Convertible Preferred Stock
	(Series A Stock) to Marshall Capital
	Management, Inc. (Marshall Capital) and sold 4,000
	shares of Series A Stock to Vulcan Ventures, Inc.
	(Vulcan Ventures), a company controlled by
	Click2learns significant stockholder, for a total purchase
	price of $10,000,000 in connection with a securities purchase
	agreement dated September 30, 1999. On November 1,
	1999, the Series A Stock held by Marshall Capital converted
	into 774,193 shares of common stock and the Series A Stock
	held by Vulcan Ventures converted into 516,120 shares of common
	stock at a conversion price of $7.75 per share.                                                                                                                                                                                                                                                                                                                                        
|
| | (b) Common Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | On August 18, 1999, Click2learn sold 428,571
	shares of common stock and warrants to purchase 428,571 shares
	of common stock with an exercise price of $7 per share to Go2Net
	for an aggregate purchase price of $3 million, which
	includes the cost of warrants allocated to services provided
	under the Marketing Agreement. A portion of the fair value of
	the warrants was allocated to the Marketing Agreement and was
	being amortized over the term of the Agreement. The fair value
	of these warrants was determined using the Black-Scholes option
	pricing model and substantially the same assumptions as
	discussed in the following paragraph. An anti-dilution clause
	was triggered by the private placement transactions closing in
	2001 resulting in adjustments to the number of shares of common
	stock which can be purchased with the warrants from 428,571 to
	488,205 and adjustment to the exercise price from $7 per share
	to $6.14. The warrants were all outstanding at December 31,
	2001 and expire on August 18, 2004.



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On October 6, 1999, in connection with the
	purchase of the Series A Stock, Click2learn issued Marshall
	Capital warrants for the purchase of 580,646 shares of common
	stock and Vulcan Ventures warrants for the purchase of 387,096
	shares of common stock at an exercise price of $9.30 per share.
	Click2learn allocated approximately $3.4 million of the
	proceeds to the warrants using the Black-Scholes option pricing
	model with the following assumptions: (1) the stock price
	at the date of the securities purchase agreement, (2) a
	five-year life of the warrants, (3) no dividends,
	(4) risk-free interest rate of 5.0%, and (5) a
	volatility of approximately 60%. Because the fair value of the
	preferred stock and common stock warrants issued exceeded the
	proceeds received, Click2learn recorded a non-cash dividend
	associated with the preferred stock of $2.8 million. An
	anti-dilution clause was triggered by the private placement
	transactions closing in 2001 resulting in an adjustment to the
	exercise price of the warrants from $9.30 per share to $7.93.
	The warrants were all outstanding at December 31, 2001 and
	expire on October 6, 2004. Alpine Capital Partners, Inc.
	received warrants for the purchase of 30,000 shares of
	commons stock at an exercise price of $9.30 as a finders
	fee. An anti-dilution clause was triggered by the private
	placement transactions closing in 2001 resulting in an
	adjustment to the exercise price of the warrants from $9.30 per
	share to $7.93. Warrants for 10,000 shares of common stock,
	which expire on October 6, 2004, were outstanding at
	December 31, 2001.
|
| |  | On December 12, 2000, Click2learn sold
	410,678 shares of common stock to Marshall Capital for an
	aggregate purchase price of $5 million. In connection with
	the purchase of common stock, Click2learn issued warrants for
	the purchase of 205,339 shares of common stock at an exercise
	price                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | of $14.61 per share. An anti-dilution clause was
	triggered by the private placement transactions closing in 2001
	resulting in an adjustment to the exercise price from $14.61 per
	share to $12.10. The warrants were all outstanding as of
	December 31, 2001 and expire on December 12, 2005. In
	addition, Click2learn issued Marshall Capital warrants for the
	purchase of up to 176,177 shares of common stock at an exercise
	price of $.01, which would be exercisable if the price of
	Click2learns common stock declined between the closing of
	the purchase and the effective date of a related registration
	statement. The number of shares with respect to which this
	warrant would become exercisable was determined by the change in
	Click2learns stock price. On January 19, 2001,
	Marshall Capital exercised the warrants for nominal additional
	consideration and received 74,759 additional shares. Warrants
	for the remaining 101,418 shares expired on January 20,
	2001.



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In transactions closing on November 20, 2001
	and December 10, 2001, Click2learn sold 3,680,000 shares of
	common stock to several accredited investors for an aggregate
	purchase price of $9.2 million. In connection with the
	purchase of the common stock, Click2learn issued the investors
	warrants for the purchase of an additional 1,840,000 shares of
	common stock at an exercise price of $4.00 per share. Jefferies
	& Company, Inc. acted as placement agent in connection with
	these transactions and was issued warrants for the purchase of
	64,200 common shares on November 20, 2001 and for the
	purchase of 28,200 common shares on December 10, 2001, both
	at an exercise price of $2.50 per share. On November 20,
	2001, Click2learn issued warrants to ComVest Venture Partners,
	L.P. for the purchase of 12,000 shares and to Commonwealth
	Associates, L.P. for the purchase of 18,000 shares, both at an
	exercise price of $2.50 per share. Both ComVest Venture
	Partners, L.P. and Commonwealth Associates, L.P. acted as
	placement agents in connection with a portion of the private
	placement closing on November 20, 2001. All of these
	warrants were outstanding at December 31, 2001.

(c) Stock
Option Plans



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Click2learn has adopted or assumed stock option
	plans in acquisitions (the Plans) that provide for
	the issuance of nonqualified and incentive stock options to
	officers, employees, consultants, and directors to acquire up to
	11,227,073 shares of common stock. The Compensation
	Committee determines the terms and conditions of options granted
	under the Plans, including the exercise price. The exercise
	price for incentive stock options shall not be less than the
	fair market value at the date of grant, and the options expire
	ten years from the date of grant. Option grants generally vest
	at 25% after the first year and ratably each month for the next
	three years. When options are issued at less than fair market
	value, compensation expense is recorded. All canceled options
	revert back to the option pool.
|
| |  | Under APB 25, because the exercise price of
	Click2learns employee stock options generally equals the
	fair value of the underlying stock on the date of grant, no
	compensation expense is recognized. Had stock compensation
	expense for Click2learns stock plans been determined based
	on the fair value methodology under Statement 123,
	Click2learns net loss would have increased to the pro
	forma amounts as follows:                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                      |             |                         |   |         |   |      |   |         |   |  |   |         |  
|------------------------------------- | ----------- | ----------------------- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                      |             |                        
|                                      |             | Year Ended December 31,
|                                      |             |                        
|                                      |             | 1999                    |   | 2000    |   | 2001
|                                      |             |                         |   |         |   |     
|                                      |             |                        
|                                      |             | (In thousands)         
|Net loss:                             |             |                         |   |         |   |      |   |         |   |  |   |        
|                                      | As reported |                         | $ | (10,005 | ) |      | $ | (16,786 | ) |  | $ | (19,581 | )
|                                      | Pro forma   |                         | $ | (12,778 | ) |      | $ | (23,208 | ) |  | $ | (26,079 | )
|Basic and diluted net loss per share: |             |                         |   |         |   |      |   |         |   |  |   |        
|                                      | As reported |                         | $ | (.87    | ) |      | $ | (.99    | ) |  | $ | (.99    | )
|                                      | Pro forma   |                         | $ | (1.05   | ) |      | $ | (1.37   | ) |  | $ | (1.32   | )



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Prior to the IPO in June 1998, the fair value for
	the options was estimated at the date of grant using the minimum
	value method that takes into account (1) the stock price at
	the grant date, (2) a five-year expected life of the
	options, (3) no dividends, and (4) a risk-free
	interest rate of 6.0%. After the IPO, the fair value for the
	options granted was estimated using the Black-Scholes option
	pricing

45



---



##### Table of Contents



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | model using the above assumptions and volatility
	of 60% in 1999, 74% in 2000 and 130% in 2001 and a risk free
	interest rate of 5.5% during 1999, 5.3% during 2000, and 4.4%
	during 2001. Compensation expense included in pro forma
	disclosures may not be representative of the effects on pro
	forma income or loss for future years because the amounts above
	include only the amortization for the fair value of the grants
	after the IPO.



| |  |                                                                                                                                        
| |  | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | The weighted-average fair value of stock options
	granted in 1999, 2000 and 2001 was $3.54, $9.44, and $2.42 per
	option, respectively.
|
| |  | A summary of Click2learns stock option
	activity is as follows:                                                                       

|                              |                                                        |               |           |                     |   |                |           |            |   |   |      |       | 
|----------------------------- | ------------------------------------------------------ | ------------- | --------- | ------------------- | - | -------------- | --------- | ---------- | - | - | ---- | ----- | 
|                              |                                                        |               |           |                    
|                              |                                                        |               |           | Outstanding Options
|                              |                                                        |               |           |                    
|                              |                                                        | Shares        |           |                     |   | Weighted      
|                              |                                                        | available for |           | Number of           |   | average       
|                              |                                                        | grant         |           | shares              |   | exercise price
|                              |                                                        |               |           |                     |   |               
|Balances at December 31, 1998 |                                                        |               | 1,046,386 |                     |   |                | 3,990,190 |            |   | $ | 5.05 |      
|                              | Increase in shares available for grant                 |               |           | 1,000,000           |   |                |           |           |   |   |      |      | 
|                              | Options granted                                        |               |           | (1,857,343          | ) |                |           | 1,857,343  |   |   |      | 6.26  | 
|                              | Options exercised                                      |               |           |                    |   |                |           | (348,437   | ) |   |      | 2.51  | 
|                              | Options canceled                                       |               |           | 753,484             |   |                |           | (753,484   | ) |   |      | 7.29  | 
|                              |                                                        |               |           |                     |   |                |           |            |   |   |      |      
|Balances at December 31, 1999 |                                                        |               | 942,527   |                     |   |                | 4,745,612 |            |   |   | 5.36 |      
|                              | Increase in shares available for grant                 |               |           | 1,513,923           |   |                |           |           |   |   |      |      | 
|                              | Options granted                                        |               |           | (2,458,437          | ) |                |           | 2,458,437  |   |   |      | 14.67 | 
|                              | Options exercised                                      |               |           |                    |   |                |           | (1,167,309 | ) |   |      | 4.03  | 
|                              | Options canceled                                       |               |           | 840,307             |   |                |           | (840,307   | ) |   |      | 7.84  | 
|                              |                                                        |               |           |                     |   |                |           |            |   |   |      |      
|Balances at December 31, 2000 |                                                        |               | 838,320   |                     |   |                | 5,196,433 |            |   |   | 9.64 |      
|                              | Increase in shares available for grant                 |               |           | 2,750,000           |   |                |           |           |   |   |      |      | 
|                              | Options granted and assumption of plan in
	acquisition |               |           | (3,058,685          | ) |                |           | 3,058,685  |   |   |      | 2.71  | 
|                              | Options exercised                                      |               |           |                    |   |                |           | (342,101   | ) |   |      | 1.65  | 
|                              | Options canceled                                       |               |           | 2,243,892           |   |                |           | (2,243,892 | ) |   |      | 9.08  | 
|                              |                                                        |               |           |                     |   |                |           |            |   |   |      |      
|Balances at December 31, 2001 |                                                        |               | 2,773,527 |                     |   |                | 5,669,125 |            |   |   | 6.49 |      
|                              |                                                        |               |           |                     |   |                |           |            |   |   |      |      



| |  |                                                                                                                            
| |  | ---------------------------------------------------------------------------------------------------------------------------
| |  | The following table summarizes information
	concerning currently outstanding and exercisable options at
	December 31, 2001:

|                |  |                     |           |                     |  |          |            |           |  |           |       |  |  |  |           |  |  |   |       | 
|--------------- |  | ------------------- | --------- | ------------------- |  | -------- | ---------- | --------- |  | --------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |  |                     |           |                    
|                |  | Options Outstanding |           | Options Exercisable
|                |  |                     |           |                    
|                |  |                     |           | Weighted-           |  |          |            |          
|                |  |                     |           | average             |  | Weighted |            |           |  | Weighted-
|Range of        |  |                     |           | remaining           |  | -average |            |           |  | average  
|Exercise        |  | Number of           |           | contractual         |  | exercise |            | Number    |  | exercise 
|Prices          |  | shares              |           | life                |  | price    |            | of shares |  | prices   
|                |  |                     |           |                     |  |          |            |           |  |          
|$ 1.31 - $ 2.21 |  |                     | 1,563,292 |                     |  |          | 8.35 years |           |  | $         | 1.91  |  |  |  | 355,428   |  |  | $ | 1.59  | 
|2.40 -   3.29   |  |                     | 982,555   |                     |  |          | 9.56 years |           |  |           | 2.92  |  |  |  | 0         |  |  |   | 0.00  | 
|3.37 -   6.00   |  |                     | 1,073,039 |                     |  |          | 7.03 years |           |  |           | 4.84  |  |  |  | 854,613   |  |  |   | 5.09  | 
|6.21 -  12.56   |  |                     | 973,051   |                     |  |          | 7.64 years |           |  |           | 9.38  |  |  |  | 680,428   |  |  |   | 9.09  | 
|12.94 -  17.38  |  |                     | 962,655   |                     |  |          | 8.35 years |           |  |           | 15.06 |  |  |  | 375,045   |  |  |   | 15.15 | 
|17.56 -  19.94  |  |                     | 114,533   |                     |  |          | 8.25 years |           |  |           | 18.58 |  |  |  | 51,990    |  |  |   | 18.63 | 
|                |  |                     |           |                     |  |          |            |           |  |           |       |  |  |  |           |  |  |   |       | 
|                |  |                     | 5,669,125 |                     |  |          | 8.19 years |           |  |           | 6.49  |  |  |  | 2,317,504 |  |  |   | 7.66  | 
|                |  |                     |           |                     |  |          |            |           |  |           |       |  |  |  |           |  |  |   |       | 



| |  |                                                                                                                                                                                                                                                                          
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During 2001, Click2learn extended the maximum
	time period a member of its Board of Directors had to exercise
	vested options to purchase 255,600 shares of common stock upon
	leaving the Board. This modification resulted in compensation
	expense of $64,000 in 2001.

46



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##### Table of Contents



(13) Benefit Plans



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Click2learn has a Retirement Savings Plan to
	provide for voluntary salary deferral contributions on a pretax
	basis in accordance with Section 401(k) of the Internal
	Revenue Code of 1986, as amended. To date, Click2learn has made
	no contributions.                                                                                                                                                                                                                                                                                                                                   
|
| |  | Click2learns Employee Stock Purchase Plan
	(ESPP) authorizes the issuance of a maximum of
	450,000 shares of common stock annually for a term of ten years
	expiring 2009 and is administered by Click2learns
	Compensation Committee. All eligible employees can elect to have
	deducted from 1% to 10% of their total compensation up to
	$25,000 per year. The purchase price shall be the lesser of 85%
	of the fair value of the stock on the offering date or the
	purchase date. The number of shares under the ESPP issued were 0
	in 1999, 183,237 in 2000, and 308,086 in 2001.

(14) Litigation



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 1996, a complaint seeking unspecified damages
	was filed against Click2learn alleging that Click2learns
	ToolBook and Multimedia ToolBook products infringe a patent.
	Click2learn has received an opinion from counsel that the
	products do not infringe this patent and that the patent is
	invalid. The action is still in the discovery stage. Although
	Click2learn does not believe that the resolution of this
	litigation will have a material impact on its financial position
	and results of operations, it is possible that the outcome will
	result in a loss to Click2learn. Click2learn intends to
	vigorously defend this action. No amounts have been accrued for
	this matter.

Certain lawsuits and claims are pending against
Click2learn. Although the outcome of such lawsuits and claims
cannot be predicted with certainty, the expected disposition
thereof will not, in the opinion of management both individually
and in the aggregate, result in a material adverse effect on
Click2learns operations and financial position.

(15) Segment Information



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Click2learn reorganized its internal reporting in
	2000 and now includes the three reportable segments: Tools,
	Content Services, and Platforms. Tools include software licenses
	and technical support and training for ToolBook II product
	line. Content Services includes custom development of e-Learning
	courses, consulting, licensing and hosting fees for ReDS, and
	royalties from resales of third party content. Platforms
	includes software licenses, subscription and hosting fees,
	implementation, and training and support for the Aspen platform
	as well as Ingenium and the e-Learning Network.                                                                                                                                                                                                                                                      
|
| |  | Click2learns operating committee, which
	includes its Chief Executive Officer and Chief Financial
	Officer, has been identified as the Chief Operating Decision
	Maker (CODM) as it assesses the performance of the business
	units and decides how to allocate resources to the business
	units. Segment income is the measure of profit and loss that the
	CODM uses to assess performance and make decisions. Segment
	income represents revenues less cost of revenues incurred within
	the operating segments as presented in Click2learns
	consolidated statements of operations. Click2learn does not
	allocate operating expenses including research and development,
	sales and marketing, general and administrative, or amortization
	of goodwill to its operating segments. In addition, other income
	(expense) is also not allocated to operating segments.



| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There are no intersegment revenues.
	Click2learns CODM does not review total assets or
	depreciation and amortization by operating segment. The
	accounting policies for reported segments are the same as
	Click2learn as a whole.

47



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##### Table of Contents



Geographic
Information:

|         |               |                         |        |        |  |      |        |        |  |   |        |        | 
|-------- | ------------- | ----------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|         |               |                        
|         |               | Year Ended December 31,
|         |               |                        
|         |               | 1999                    |        | 2000   |  | 2001
|         |               |                         |        |        |  |     
|Revenue: |               |                         |        |        |  |      |        |        |  |   |        |       
|         | Domestic      |                         | $      | 29,308 |  |      | $      | 39,857 |  |   | $      | 39,418 | 
|         | International |                         |        | 5,425  |  |      |        | 2,700  |  |   |        | 5,673  | 
|         |               |                         |        |        |  |      |        |        |  |   |        |       
|         |               | $                       | 34,733 |        |  | $    | 42,557 |        |  | $ | 45,091 |       
|         |               |                         |        |        |  |      |        |        |  |   |        |       

Revenues are attributed to geographic areas
based on the location of the customers.

|                   |                                              |              |        |        |  |   |       |       | 
|------------------ | -------------------------------------------- | ------------ | ------ | ------ |  | - | ----- | ----- | 
|                   |                                              |             
|                   |                                              | December 31,
|                   |                                              |             
|                   |                                              | 2000         |        | 2001  
|                   |                                              |              |        |       
|Long-lived assets: |                                              |              |        |        |  |   |       |      
|                   | Domestic operations                          |              | $      | 12,401 |  |   | $     | 8,081 | 
|                   | International operations  primarily
	Europe |              |        | 300    |  |   |       | 230   | 
|                   |                                              |              |        |        |  |   |       |      
|                   |                                              | $            | 12,701 |        |  | $ | 8,311 |      
|                   |                                              |              |        |        |  |   |       |      



| |  |                                                                                                                                                        
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Long-lived assets represent property, plant and
	equipment and goodwill, and other intangible assets net of
	accumulated depreciation and amortization.

(16) Unaudited Quarterly Financial
Information

|                                             |  |                       |        |          |  |           |        |          |  |   |        |   |  |   |        |  
|-------------------------------------------- |  | --------------------- | ------ | -------- |  | --------- | ------ | -------- |  | - | ------ | - |  | - | ------ | -
|                                             |  |                      
|                                             |  | For the Quarter Ended
|                                             |  |                      
|                                             |  | March 31,             |        | June 30, |  | Sept. 30, |        | Dec. 31,
|                                             |  | 2000                  |        | 2000     |  | 2000      |        | 2000    
|                                             |  |                       |        |          |  |           |        |         
|Total revenue                                |  | $                     | 9,883  |          |  | $         | 10,413 |          |  | $ | 11,067 |   |  | $ | 11,194 |  
|Gross margin                                 |  |                       | 5,046  |          |  |           | 5,245  |          |  |   | 5,492  |   |  |   | 4,590  |  
|Operating loss                               |  |                       | (3,626 | )        |  |           | (3,337 | )        |  |   | (5,510 | ) |  |   | (4,787 | )
|Net loss                                     |  |                       | (3,349 | )        |  |           | (3,239 | )        |  |   | (5,440 | ) |  |   | (4,757 | )
|Net loss per common share, basic and diluted |  |                       | (.20   | )        |  |           | (.19   | )        |  |   | (.32   | ) |  |   | (.27   | )

|                                             |  |                       |        |          |  |           |        |          |  |   |        |   |  |   |        |     
|-------------------------------------------- |  | --------------------- | ------ | -------- |  | --------- | ------ | -------- |  | - | ------ | - |  | - | ------ | ----
|                                             |  |                      
|                                             |  | For the Quarter Ended
|                                             |  |                      
|                                             |  | March 31,             |        | June 30, |  | Sept. 30, |        | Dec. 31,
|                                             |  | 2001                  |        | 2001     |  | 2001      |        | 2001    
|                                             |  |                       |        |          |  |           |        |         
|Total revenue                                |  | $                     | 10,655 |          |  | $         | 11,696 |          |  | $ | 11,236 |   |  | $ | 11,504 |     
|Gross margin                                 |  |                       | 4,384  |          |  |           | 5,805  |          |  |   | 6,026  |   |  |   | 7,400  |     
|Operating loss                               |  |                       | (4,488 | )        |  |           | (3,249 | )        |  |   | (2,753 | ) |  |   | (8,891 | )(1)
|Net loss                                     |  |                       | (4,416 | )        |  |           | (3,266 | )        |  |   | (2,820 | ) |  |   | (9,079 | )   
|Net loss per common share, basic and diluted |  |                       | (.24   | )        |  |           | (.17   | )        |  |   | (.14   | ) |  |   | (.41   | )   

(1) Includes
a $7.6 million charge for goodwill impairment.

(17) Subsequent Event



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In January 2002, Click2learn sold a majority of
	its custom e-Learning content development business to NIIT
	(USA), Inc., the U.S. operation of NIIT Limited
	(NIIT), a global custom development firm. In
	addition, NIIT will partner with Click2learn to provide custom
	development services to Click2learns customers.
	Click2learn anticipates the sale will result in a loss of
	approximately $2.5 million due to employee severance and
	the costs to close excess facilities.

48



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##### Table of Contents






Item 9.     Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosures

Not applicable.




PART III




Item 10.     Directors
and Executive Officers of the Registrant

The information required by this Item is
incorporated by reference to the information in the definitive
Proxy Statement for our Annual Meeting of Stockholders scheduled
to be held on May 29, 2002.




Item 11.     Executive
Compensation

The information required by this Item is
incorporated by reference to the information in the definitive
Proxy Statement for our Annual Meeting of Stockholders scheduled
to be held on May 29, 2002.




Item 12.     Security
Ownership of Certain Beneficial Owners and Management

The information required by this Item is
incorporated by reference to the information in the definitive
Proxy Statement for our Annual Meeting of Stockholders scheduled
to be held on May 29, 2002.




Item 13.     Certain
Relationships and Related Transactions

The information required by this Item is
incorporated by reference to the information in the definitive
Proxy Statement for our Annual Meeting of Stockholders scheduled
to be held on May 29, 2002.




Item 14.     Exhibits,
Financial Statement Schedules, and Reports on
Form 8-K

(a) (1) Financial
Statements

Financial statements filed as part of this report
are listed in the index on page 29.

(2) Financial Statement
Schedules

Financial statement schedules filed as part of
this report are listed in the index on page 29.



| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All other schedules are omitted because they are
	not applicable, not required or the information required is
	shown in the consolidated financial statements or notes thereto.

(3) Exhibits

See Index to Exhibits

(b) (1) Reports on
Form 8-K



| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Reports were filed on Form 8-K dated
	November 15, 2001 and December 10, 2001 reporting the
	entry into a purchase agreement for the purchase of common stock
	and the grant of warrants to investor in the private placement
	and the related registration rights agreement. No financial
	statements were filed with the reports on Form 8-K.

49



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##### Table of Contents



(c) Index to Exhibits

The following Exhibits are attached to this
Annual Report on Form 10-K:

|        |       |               |  |                                                                                                                                                                                          
|------- | ----- | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |              
|Number  |       | Exhibit Title
|        |       |              
|        | 3.01  |               |  | Amended and Restated Certificate of Incorporation
	of Click2learn.(1)                                                                                                                    
|        | 3.02  |               |  | Certificate of Designations, Preferences and
	Rights of the Series A Convertible Preferred Stock of
	Click2learn filed on October 5, 1999.(2)                                            
|        | 3.03  |               |  | Certificate of Amendment of Amended and Restated
	Certificate of Incorporation of Click2learn filed on
	November 23, 1999.(3)                                                            
|        | 3.04  |               |  | Certificate of Amendment of Amended and Restated
	Certificate of Incorporation of Click2learn filed on
	June 11, 2001.(4)                                                                
|        | 3.05  |               |  | Bylaws of Click2learn.(1)                                                                                                                                                                
|        | 4.01  |               |  | Form of Specimen Stock Certificate for
	Click2learns Common Stock.(3)                                                                                                                   
|        | 4.02  |               |  | Securities Purchase Agreement dated as of
	August 18, 1999 by and between Click2learn and Go2Net,
	Inc.(5)                                                                               
|        | 4.03  |               |  | Common Stock Purchase Warrant dated as of
	August 16, 1999 from Click2learn to Go2Net, Inc.(4)                                                                                           
|        | 4.04  |               |  | Securities Purchase Agreement dated as of
	October 6, 1999 by and between Click2learn, Marshall
	Capital Management, Inc. and Vulcan Ventures, Inc.(2)                                   
|        | 4.05  |               |  | Registration Rights Agreement dated as of
	October 6, 1999 by and between Click2learn, Marshall
	Capital Management, Inc. and Vulcan Ventures, Inc.(2)                                   
|        | 4.06  |               |  | Form of Warrant to Purchase Common Stock dated as
	of October 6, 1999 from Click2learn to Marshall Capital
	Management, Inc., Vulcan Ventures, Inc. and Alpine Capital
	Partners, Inc.(2)
|        | 4.07  |               |  | Securities Purchase Agreement dated as of
	December 8, 2000 by and between Click2learn and Marshall
	Capital Management, Inc.(6)                                                         
|        | 4.08  |               |  | Registration Rights Agreement dated as of
	December 8, 2000 by and between Click2learn and Marshall
	Capital Management, Inc.(6)                                                         
|        | 4.09  |               |  | Series A Warrant to Purchase Common Stock
	dated as of December 12, 2000 by and between Click2learn and
	Marshall Capital Management, Inc.(6)                                            
|        | 4.10  |               |  | Series B Warrant to Purchase Common Stock
	dated as of December 12, 2000 by and between Click2learn and
	Marshall Capital Management, Inc.(6)                                            
|        | 4.11  |               |  | Purchase Agreement dated as of November 15,
	2001 by and between Click2learn and various investors.(7)                                                                                   
|        | 4.12  |               |  | Registration Rights Agreement dated as of
	November 15, 2001 by and between Click2learn and various
	investors.(7)                                                                       
|        | 4.13  |               |  | Form of Warrant to Purchase Common Stock dated as
	of November 20, 2001 from Click2learn to various
	investors.(7)                                                                       
|        | 4.14  |               |  | Addendum to Purchase Agreement and Registration
	Rights Agreement dated as of December 10, 2001 by and
	between Click2learn and various investors.                                       
|        | 10.01 |               |  | Form of Indemnification Agreement entered into by
	Click2learn with each of its directors and executive officers.(2)                                                                     
|        | 10.02 |               |  | Click2learns 1995 Combined Incentive and
	Nonqualified Stock option Plan and related documents.(2)                                                                                      
|        | 10.03 |               |  | Click2learns 1998 Directors Stock Option
	Plan and related documents.(2)                                                                                                                
|        | 10.04 |               |  | Click2learns 1998 Equity Incentive Plan and
	related documents.(2)                                                                                                                      
|        | 10.05 |               |  | Click2learns 1999 Employee Stock Purchase
	Plan and related documents.(8)                                                                                                               
|        | 10.06 |               |  | IntelliPrep Technologies, Incorporated 2001
	Equity Incentive Plan.(9)                                                                                                                   
|        | 10.07 |               |  | Lease Agreement, dated as of May 24. 1991,
	by and between Click2learn and Dean Witter Realty Income
	Partnership II, L.P. and amendments thereto.(2)(10)                                

50



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##### Table of Contents



|        |       |               |  |                                                                                                                    
|------- | ----- | ------------- |  | -------------------------------------------------------------------------------------------------------------------
|Exhibit |       |              
|Number  |       | Exhibit Title
|        |       |              
|        | 10.08 |               |  | Employment Agreement dated as of January 19,
	2000 by and between Click2learn and Kevin Oakes.(11)                 
|        | 10.09 |               |  | Loan and Security Agreement dated as of
	September 4, 2001 by and between Click2learn and Silicon
	Valley Bank.(12)
|        | 10.10 |               |  | Employment Agreement dated as of May 29,
	2001 by and between Click2learn and Sudheer Koneru.(4)                   
|        | 10.11 |               |  | Employment Agreement dated as of May 29,
	2001 by and between Click2learn and Srinivasan Chandrasekar.(4)          
|        | 10.12 |               |  | Employment Agreement dated as of October 1,
	2001 by and between Click2learn and Dennis Worsley.(12)               
|        | 21.01 |               |  | Subsidiaries of Click2learn.                                                                                       
|        | 23.01 |               |  | Consent of KPMG LLP.                                                                                               



---

Notes to Exhibit List:



|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated herein by reference to
	Click2learns Registration Statement on Form S-1
	(Registration no. 333-49037), as amended.                          
|   
|(2) | Incorporated herein by reference to
	Click2learns Registration Statement on Form S-3
	(Registration no. 333-89615).                                      
|   
|(3) | Incorporated herein by reference to
	Click2learns Annual Report on Form 10-K for the
	fiscal year ended December 31, 1999.                               
|   
|(4) | Incorporated by reference to Click2learns
	Quarterly Report on Form 10-Q for the fiscal quarter ended
	June 30, 2001.                                    
|   
|(5) | Incorporated herein by reference to
	Click2learns Registration Statement on Form S-3
	(Registration no. 333-87425).                                      
|   
|(6) | Incorporated herein by reference to
	Click2learns Current Report filed with the Securities and
	Exchange Commission on Form 8-K dated December 12,
	2000.
|   
|(7) | Incorporated herein by reference to
	Click2learns Current Report filed with the Securities and
	Exchange Commission on Form 8-K dated November 15,
	2001.
|   
|(8) | Incorporated herein by reference to
	Click2learns Registration Statement on Form S-8
	(Registration no. 333-83759).                                      
|   
|(9) | Incorporated herein by reference to
	Click2learns Registration Statement on Form S-8
	(Registration no. 333-63916).                                      



|     |                                                                                                                            
|---- | ---------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated herein by reference to
	Click2learns Annual Report on Form 10-K for the
	fiscal year ended December 31, 1998.
|    
|(11) | Incorporated by reference to Click2learns
	Quarterly Report on Form 10-Q for the fiscal quarter ended
	March 31, 2000.    
|    
|(12) | Incorporated by reference to Click2learns
	Quarterly Report on Form 10-Q for the fiscal quarter ended
	September 30, 2001.

(d)Not
applicable

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SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, Click2learn has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.

|                  |  |                                                                                                                                                                        
|----------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                  |  | CLICK2LEARN, INC.                                                                                                                                                      
|                 
|April 1, 2002Date |  | /s/ John D. AtherlyJohn D. Atherly, Chief Financial Officer
	and Vice President, Finance and Administration (Principal
	Financial Officer and Chief Accounting Officer)

POWER OF ATTORNEY

Each individual whose signature appears below
constitutes and appoints Kevin Oakes and John D. Atherly, and
each of them, his true lawful attorneys-in-fact and agents, with
full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments
to this Annual Report on Form 10-K and to file the same,
with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granted
unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or any of them, or their
substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.

In accordance with the requirements of the
Securities Exchange Act of 1934,this report has been signed by
the following persons on behalf of the Registrant in the
capacities and on the dates indicated.

|                  |  |                                                                                                                          
|----------------- |  | -------------------------------------------------------------------------------------------------------------------------
|                 
|April 1, 2002Date |  | /s/  Kevin
	OakesKevin Oakes, President, Chief Executive
	Officer and Chairman of the Board (Principal Executive Officer)
|                 
|April 1, 2002Date |  | /s/  Bert
	KoldeBert Kolde, Director                                                                                     
|                 
|April 1, 2002Date |  | /s/  Joseph
	DiNucciJoseph DiNucci, Director                                                                             
|                 
|April 1, 2002Date |  | /s/  Edward
	HarrisEdward Harris, Director                                                                               
|                 
|April 1, 2002Date |  | /s/  Shelley
	HarrisonShelley Harrison, Ph.D., Director                                                                  
|                 
|April 1, 2002Date |  | /s/  Jonathan
	D. KleinJonathan D. Klein, Director                                                                       
|                 
|April 1, 2002Date |  | /s/  Sally
	NarodickSally Narodick, Director                                                                             

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|                  |  |                                                 
|----------------- |  | ------------------------------------------------
|                 
|April 1, 2002Date |  | /s/  Ronald
	S. PosnerRonald S. Posner, Director
|                 
|April 1, 2002Date |  | /s/  Vijay
	VasheeVijay Vashee, Director        

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INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders

Click2learn, Inc.:


Under date of January 30, 2002, we reported
on the consolidated balance sheets of Click2learn, Inc. and
subsidiaries as of December 31, 2000 and 2001, and the
related consolidated statements of operations,
stockholders equity and cash flows for each of the years
in the three-year period ended December 31, 2000, which are
included in the 2001 Annual Report on Form 10-K of
Click2learn, Inc. In connection with our audits of the
aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule of
valuation and qualifying accounts. This consolidated financial
statement schedule is the responsibility of the Companys
management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.

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

KPMG LLP

Seattle, Washington

January 30, 2002


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SCHEDULE II.

CLICK2LEARN, INC. AND SUBSIDIARIES

SCHEDULE OF VALUATION AND QUALIFYING
ACCOUNTS


Years Ended December 31, 2001, 2000, and
1999


(In thousands)


|                              |                                                       |            |   |           |  |            |   |            |  |  |   |     |  |  |   |       | 
|----------------------------- | ----------------------------------------------------- | ---------- | - | --------- |  | ---------- | - | ---------- |  |  | - | --- |  |  | - | ----- | 
|                              |                                                       |            |   | Charge to |  |            |   |           
|                              |                                                       | Balance at |   | Other     |  |            |   | Balance at
|                              |                                                       | Beginning  |   | Costs and |  |            |   | End of    
|                              |                                                       | of Year    |   | Expenses  |  | Deductions |   | Year      
|                              |                                                       |            |   |           |  |            |   |           
|Year ended December 31, 2001: |                                                       |            |   |           |  |            |   |            |  |  |   |     |  |  |   |      
|                              | Valuation accounts deducted from assets:              |            |   |           |  |            |   |            |  |  |   |     |  |  |   |       | 
|                              | Allowance for doubtful receivables and sales
	returns |            | $ | 962       |  |            | $ | 1,198      |  |  | $ | 730 |  |  | $ | 1,430 | 
|Year ended December 31, 2000: |                                                       |            |   |           |  |            |   |            |  |  |   |     |  |  |   |      
|                              | Valuation accounts deducted from assets:              |            |   |           |  |            |   |            |  |  |   |     |  |  |   |       | 
|                              | Allowance for doubtful receivables and sales
	returns |            | $ | 945       |  |            | $ | 863        |  |  | $ | 846 |  |  | $ | 962   | 
|Year ended December 31, 1999: |                                                       |            |   |           |  |            |   |            |  |  |   |     |  |  |   |      
|                              | Valuation accounts deducted from assets:              |            |   |           |  |            |   |            |  |  |   |     |  |  |   |       | 
|                              | Allowance for doubtful receivables and sales
	returns |            | $ | 1,397     |  |            | $ | 275        |  |  | $ | 727 |  |  | $ | 945   | 

55