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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, 2000; or

/ /      Transition Report Pursuant to Section 13 or 15 (d) of the Securities
         Exchange Act of 1934

         For the transition period from ___________ to _________________


                          COMMISSION FILE NO. 000-24547

                             ----------------------

                         SCIENTIFIC LEARNING CORPORATION
             (Exact name of registrant as specified in its charter)
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<S>                                        <C>
            DELAWARE                                   94-3234458
(State or other jurisdiction of            (IRS Employer Identification Number)
incorporation or organization)

    300 FRANK OGAWA PLAZA, SUITE 500
                OAKLAND, CA                             94612-2040
(Address of principal executive offices)                (Zip Code)
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Securities registered pursuant to Section 12 (b) of the Act:  NONE

Securities registered pursuant to Section 12 (g) of the Act:  COMMON STOCK,
                                                              PAR VALUE
                                                              $0.001 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 the Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. / /

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on February
28, 2001 as reported on the Nasdaq National Market, was approximately
$19,200,000. Shares of Common Stock held by each executive officer and director
and by certain persons who owned 5% or more of the registrant's outstanding
Common Stock on that date have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

As of Wednesday, February 28, 2001 the Registrant had outstanding 11,420,366
shares of Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant's 2001 Annual Meeting of
Stockholders to be held on May 31, 2001, at 300 Frank H. Ogawa Plaza, Suite 500,
Oakland, CA 94612-2040 are incorporated by reference in Part III.


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                                TABLE OF CONTENTS
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<S>         <C>                                                                        <C>
PART I                                                                          `      PAGE NO
                                                                                       -------
Item 1.     Business...................................................................      3
Item 2      Properties.................................................................     17
Item 3.     Legal Proceedings..........................................................     17
Item 4.     Submission of Matters to a Vote of Security Holders........................     18


PART II

Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters......     22
Item 6.     Selected Financial Data....................................................     23
Item 7.     Management's Discussion and Analysis of Financial Condition and Results
                of Operations..........................................................     24
Item 7A     Quantitative and Qualitative Disclosures about Market Risk.................     29
Item 8.     Financial Statements and Supplementary Data................................     30
Item 9.     Changes in and Disagreements with Accountants on Accounting and
                Financial Disclosure...................................................     45


PART III

Item 10.    Directors and Executive Officers of the Registrant.........................     46
Item 11.    Executive Compensation.....................................................     46
Item 12.    Security Ownership of Certain Beneficial Owners and Management.............     46
Item 13.    Certain Relationships and Related Transactions.............................     46


PART IV

Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........     47

SIGNATURES  ...........................................................................     49
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                                     PART 1

ITEM 1.   BUSINESS

We develop, market and sell products and services that are based on more than
25 years of brain and language research and are designed to increase human
learning and performance. Our goal is to become the leading provider of software
and other educational products and services based on the study of how the brain
learns. To date, our primary focus has been on training programs that build the
language and reading skills that are the foundation for learning. We have
developed and introduced a suite of software programs, the Fast ForWord(R)
Family, designed to help children, adolescents and adults with language
comprehension, learning how to read and becoming better readers.
BrainConnection.com is a comprehensive web-based information source about the
brain and learning, which provides a wide range of written, graphical, audio and
interactive content, skill assessments and targeted e-commerce resources for
educators, parents, and others interested in the learning process.

We assist educators, parents and speech and language and other professionals
with integrating our programs into existing educational programs. We provide
professional training, installation and implementation services and technical
and other support. We provide ongoing performance analysis to those supervising
training program participants.

We are a Delaware corporation. We incorporated in 1995 in California under the
name Scientific Learning Principles Corporation and reincorporated in 1997 in
Delaware under our present name, Scientific Learning Corporation.

SOFTWARE PROGRAMS

We combine more than 25 years of brain and language research with technological
advancements to create innovative learning products and information services.
Our current suite of products assess language comprehension and reading skills,
prepare individuals for reading, assist in learning to read and aid in becoming
better readers. Reading Edge(TM) is our computer-based screening and assessment
tool designed to evaluate language comprehension and early reading skills. Fast
ForWord Basics(TM) helps children learn key language and cognitive skills that
are needed for success in pre-kindergarten through grade two. Most of our family
of language and reading training programs use intensive, computer-controlled
training exercises that automatically adapt to each user's performance to modify
the manner in which the brain processes language. In addition, they provide
cross-training in key executive function skills, which are the organizational
skills necessary for thinking, such as short-term memory and determining the
sequence of events. Our initial training program, Fast ForWord Language(TM),
focuses on oral language comprehension and executive function skills critical to
learning how to read or becoming a better reader. Fast ForWord Language to
Reading(TM) trains critical reading skills as well as providing additional
training on the language comprehension skills addressed in Fast ForWord
Language. Fast ForWord Reading(TM), introduced in 2000, is designed to rapidly
and systematically build reading skills, focusing on the skills that correlate
directly to school curriculum standards. Fast ForWord Middle and High
School(TM), uses a graphical user interface designed for middle and high school
students to train language comprehension and critical reading skills.
ReWord(TM), introduced in 2000, is a flexible program designed to improve
language and organizational skills for adults

FAST FORWORD FAMILY OF PROGRAMS

The Fast ForWord family of programs helps students rapidly improve language
and reading skills. Together, they provide a sequence of programs from the
development of the oral language comprehension skills that are the foundation
for reading through basic reading skills. The programs are sold both on an
individual basis and bundled with service packages to suit schools' needs.

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FAST FORWORD LANGUAGE
Fast ForWord Language, launched in March 1997 as Fast ForWord, is an intensive,
computer-based training program, which has the look and feel of a computer game.
Fast ForWord Language is designed to keep students engaged and entertained
during the thousands of repetitions necessary to improve a student's language
skills. The words and sentences used in the Fast ForWord Language exercises have
been electronically modified to expand and enhance the rapidly changing phonetic
elements within natural speech. As a student's skill level advances, the
exercises become increasingly difficult, driving the student to continually
increase his or her rate of oral language processing. At the most difficult
level of each exercise, the student is presented with natural, unmodified
speech. The exercises also cross-train the student in other critical language
skills and executive function skills. These skills are necessary for a solid
foundation for learning to read or becoming a better reader. The program adjusts
to the student's skill level and ongoing performance so that the student is
making correct responses approximately 80% of the time. This adjustment is
designed to keep the program challenging and engaging, while allowing the
student to generate a feeling of accomplishment and to avoid failure, which can
be discouraging and detrimental to learning.

The Fast ForWord Language program is designed to be used for 100 minutes per
day, five days a week for four to eight weeks. The professional supervising the
individual's use of the program can follow and analyze the participant's data
through SLc Lesson, which uses our patented Internet and database technology.

Field studies we conducted of Fast ForWord Language with an aggregate of
approximately 900 participants show that 90% of participants identified as
having language and reading problems showed statistically significant gains in
language comprehension skills, achieving, on average, one to two years of
improvement in language and related reading skills after four to eight weeks of
Fast ForWord Language training. Recent independent and third party studies have
confirmed the positive impact of Fast ForWord Language. Based on extensive
interviews with parents and educators, students who have completed the Fast
ForWord Language program are generally reported to have shown substantial
improvements in both self-esteem and confidence as their communication skills
improved. We believe our training programs can improve the language and related
reading skills of most users.

FAST FORWORD LANGUAGE TO READING
Fast ForWord Language to Reading, formerly Step 4word, was launched in October
1998 and is a computer-based training program that trains reading and oral
language skills. Fast ForWord Language to Reading provides focused practice in
language comprehension skills for students who have basic oral language
proficiency. Building on that foundation, Fast ForWord Language to Reading also
trains reading skills such as word decoding, sound-letter recognition and visual
tracking. Word decoding enables a student to build associations between word
sounds, written representations of words and meaning. Sound-letter recognition
is the ability to translate letters into spoken words. We believe that being
able to process rapid sound-letter associations is critical to being able to
read. Fast ForWord Language to Reading also provides training exercises that
reinforce left-to-right reading patterns for students who may need to improve
their visual tracking.

The Fast ForWord Language to Reading program is designed to be used for 90
minutes per day, five days a week for four to eight weeks. As with Fast ForWord,
Fast ForWord Language to Reading results can be monitored through SLc Lesson.

FAST FORWORD MIDDLE AND HIGH SCHOOL
Fast ForWord Middle and High School, formerly 4wd, was launched in November 1999
and is a computer-based training program that is designed specifically for
middle and high school students and adults. Fast ForWord Middle and High School
offers the same benefits of Fast ForWord but with graphics, story lines and
content tailored for an older population. Fast ForWord Middle and High School
combines electronically modified speech with cross-training in critical language
and reading skills in a manner that automatically adjusts to each user's
performance. This program enables participants to track their own cumulative
progress without connecting to the Internet as well as permitting results to be
monitored through SLc Lesson.

FAST FOR WORD READING
Fast ForWord Reading, introduced in 2000, is a computer-based training program
that is designed to systematically and rapidly build reading skills, focusing on
the skills that correlate directly to school curriculum standards, including:
word recognition and fluency, advanced decoding, spelling and vocabulary, and
passage comprehension. The Fast ForWord Reading training schedule is flexible,
allowing educators to choose exercises and training times

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that match the needs of each student. The exercises adjust automatically to a
student's skill level, and the program's Progress Viewer(TM) provides regular
updates to the student and the teacher on each student's progress.

FAST FORWORD BASICS
Fast ForWord Basics, formerly Away We Go!-Professional, was introduced in 1999
and is comprised of seven interactive modules that each focus on key skills
needed for success in grades pre-K through 2, such as recognition of colors and
shapes, and provides practice in memory, using and manipulating phonemes,
letter-name association, word recognition, fine motor control, and hand-eye
coordination. Its modular format allows professionals to choose which modules a
child will play, providing customized game sessions tailored to a child's
interests or needs.

FAST FORWORD BOOKSHELF
Fast ForWord Bookshelf, formerly Away We Go! Bookshelf-Professional introduced
in 1999, is comprised of proprietary stories presented in both an interactive CD
ROM format and a four-color printed format. These stories are designed as a
companion to the Fast ForWord Basics skill-building software and provide
exposure to appropriate spoken and written language content; thereby supporting
the training related to phonemes in Fast ForWord Basics skill-building software
games. It contains four different levels of acoustically modified speech as well
as natural speech.

SLc LESSON
SLc Lesson employs our patented Internet and database technology to permit the
results from each participant's training program exercises to be conveniently
viewed and analyzed by the person overseeing the participant's training.
Training results are uploaded periodically via the Internet to our proprietary
database for analysis of the student's progress to date. SLc Lesson then
provides performance charts and templates in various discrete learning areas
which can be downloaded through the Internet, enabling the training
administrators to monitor compliance, track performance and provide students and
parents with measurable performance results.

REWORD
ReWord, introduced in 2000, is an intensive, computer-based training program
that uses adaptive and interactive technologies to cross-train the brain on
critical language and organizational skills. This new language training program
was specifically designed in conjunction with speech and language professionals
for use by them with their adult clients. These adults may desire improvement of
their language skills due to a variety of situations, including aphasia due to
stroke or traumatic brain injury, Pervasive Development Disorder (PDD)/autism,
or other cognitive impairment. ReWord was designed to use the speech and
language professional's judgment to customize the early stage exercises to the
adult's language training needs. The training program begins with exercises that
can be individualized in pace and intensity to assist each adult in preparing
for more rigorous training exercises in the program.

AWAY WE GO! AND AWAY WE GO! BOOKSHELF
Home versions of Fast ForWord Basics and Fast ForWord Bookshelf are marketed to
consumers under the brand name Away We Go!. Away We Go! Bookshelf does not use
acoustically modified speech.

READING EDGE
Reading Edge is a computer-based screening and assessment product designed to
evaluate early reading skills. Reading Edge helps identify students who may be
at risk for reading problems in grades K-2 and provides later screening of older
students who may be experiencing reading difficulties. Reading Edge's animated
games provide fast and reliable measurements for evaluating proficiency in
essential skill areas that are strong predictors of future reading success,
including phonological memory, phonological awareness, phonemic decoding and
letter identification. The educator version of Reading Edge provides a rapid
forward assessment tool. The home version incorporates the assessment
functionality with engaging games that encourage practice of important reading
skills. Reading Edge has been tested with children in grades K-2. We acquired
Reading Edge in 1999 from the successor to its developer.

CROSSTRAIN
CrossTrain, launched in November 1999, is a professional development package for
educators and speech and language and other professionals that contains all the
tools and information necessary to offer our family of language and reading
training programs. The package includes videos, CD ROMs and printed materials.
Other training materials are available on the Web. CrossTrain offers the same
comprehensive content as our professional development seminars but in a
self-paced tutorial that is more convenient.

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SERVICES

BRAINCONNECTION.COM

In 1999 we launched BrainConnection, offering an interactive Web site,
conferences for educators, and online professional development. BrainConnection
provides practical and easily understandable information about how the brain
works and how students learn. The BrainConnection.com Web site targets
decision-makers in education, policy-makers, front-line educators, clinical
professionals and parents with: (1) articles by leading authors in the area of
education and brain research, as well as interviews with well-recognized experts
in reading, education, psychology and neuroscience; (2) Web-based games and
tools that offer fun online activities as they screen for language and reading
skills; (3) audio programming related to a variety of learning and behavioral
issues; (4) a gallery of illustrations and interactives that are downloadable
for classroom or clinical use; (5) quizzes and classroom instructional tools to
illustrate how the brain works; (6) current news articles covering relevant
topics and events related to the brain, learning and education; and (7) an
online store for purchasing learning-related products. Throughout the site,
informative "side-bars" offer links to information about our products that
relate to the topics that are discussed.

The BrainConnection to Education forums for educators target educational
decision-makers who can influence the policies, curriculum decisions, and
funding that impact students. These select gatherings feature presentations by
well-known scientists and practicing educators and administrators with expertise
in the fields of education and learning. In addition, presentations made by our
customers offer attendees concrete case studies on how technology and advances
in neuroscience can impact student achievement.

In 2000, we introduced BrainConnection Professional Development courses to the
Web site. These on-line courses offer practicing educators foundational
information with courses such as "The Developing Brain", "Language and the
Brain", and "The Reading Brain".

PROFESSIONAL DEVELOPMENT SEMINARS

To assist educators, parents and speech and language and other professionals, we
provide educational seminars on the latest in brain research, the connection
between oral language comprehension and learning to read, and the practical
application of the Fast ForWord family of programs. Typically, workshops are
one-day intensive training seminars for educators and speech and language
professionals. Participants in our professional development seminars are
eligible to receive continuing education credit to support the ongoing
educational certification requirements of teachers and educators.

SUPPORT SERVICES

SUPPORT FOR EDUCATORS, PARENTS AND PROFESSIONALS. We provide a number of
support services for educators, parents and speech and language and other
professionals involved in improving reading and language skills. We have a
professional relations staff dedicated to answering questions from and providing
support to professional providers, educators, and parents. Our professional
relations staff provides support over the Internet and a toll-free telephone
information line. Our project managers provide training and support to teachers
and educators in schools.

TECHNICAL SUPPORT. We provide a variety of technical support services to our
customer base. We employ an experienced staff of technical service
representatives to answer technical questions regarding our programs, computer
hardware and networks. In addition, at large sites such as schools, we provide
on-site software installation, technical training and technical support.

SCIENTIFICLEARNING.COM. We also maintain our company web site at
ScientificLearning.com. This site provides information about our company and our
products and services as well as extensive technical and customer support
resources.

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SALES AND MARKETING

We market and sell our products through two primary channels of distribution:
public schools and speech and language professionals in private practice. We
also make some of our programs and products available directly to consumers,
through our web site, but direct-to-consumer sales to date have been minimal.

As of December 31, 2000, we had 26 sales representatives focused on the public
school market and two sales representatives focused on speech and language
professionals in private practice. Our hiring process has targeted experienced
professionals who have established relationships with prospective customers.
During 2000, our year-over-year retention rate for customers who had purchased
at least $25,000 of products and services was approximately 90%.

PUBLIC SCHOOLS. As of December 31, 2000, we have sold our programs to
approximately 900 school districts in 49 states. The majority of our public
school sales have occurred since the formation in the fall of 1998 of a
dedicated sales force focused on that market. We sell our programs, products and
services individually and in various combinations with training and installation
on a bundled basis. Depending on the program, our software may be offered for
single use, perpetual license, or on a site license basis. Our language and
reading training programs generally list for $850 per program per student, while
site license bundles list for $9,995 through $29,900 depending on what is
included. Both are typically discounted for volume sales.

SPEECH AND LANGUAGE PROFESSIONALS. Speech and language professionals as well
as other profesionals in private practice recommend the use of our products
in appropriate cases and then administer the program in connection with
providing traditional services. In such instances, Fast ForWord Language,
Fast ForWord Language to Reading, Fast ForWord Middle and High School, Fast
ForWord Reading and ReWord are typically sold directly to the student or
family for a list price of $850 per student, minimizing the administrative
burden on the private practice professional, who charges separately for
time spent supervising the student. The fees charged by the speech and
language professional generally range from $2,000 to $5,000 per student.

We began marketing our Fast ForWord Language program to speech and language
professionals in March of 1997 and have developed a proprietary database of
information regarding thousands of speech and language professionals. We contact
speech and language professionals through telesales and other direct marketing
efforts to encourage them to attend our seminars and use our training programs
in their practices. In addition, speech and language professionals learn of our
programs through our participation in trade conferences, publications in the
general press and the distribution of our informational videos and practice
kits.

TECHNOLOGY

Our programs are cross-platform, software-based programs available for a variety
of hardware and software configurations. They are designed to work with the
computer technology widely available in schools and homes, minimizing the need
for users to purchase new equipment. The programs can be used in a variety of
ways, including an on-site model where educators and speech and language and
other professionals supervise students in their offices, an off-site model where
students can train from their homes and a client/server-based model for larger
scale deployments. All of our existing training programs link to Scientific
Learning via standard Internet connections for data transfer and updates. Using
our patented Internet and database technology known as SLc Lesson, program
administrators can use any web browser to upload program results to our database
and monitor individuals under their supervision.

Products are typically delivered via a CD ROM. Our training programs can be
activated only by receiving a user access code. Some of our programs require
periodic uploads of performance data over the Internet. If users of these
products do not upload data within a required time period, access to the program
is denied.

We use an object-oriented authoring environment for all our software products.
New products and product extensions can be built off our core object model,
allowing all products to benefit from improvements in the core code and reducing
new product development time. The Scientific Learning database maintains a
performance history containing all the uploaded data from our language and
reading training programs. The database is unique and highly scalable, built on
database technology from Oracle Corporation, and capable of dynamic information
queries. Using a proprietary set of analytical tools, we automatically generate
summaries and reports for use by the educators, speech and language

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professionals, and other professionals. We can also generate custom demographic
reports from specific groups of users by defining search characteristics such as
school, classroom or common primary language. The resulting reports show exactly
how a given user is performing and what challenges remain. The program databases
at the client site are tightly integrated with our databases to provide seamless
service from professional and technical support to accounting.

RESEARCH AND DEVELOPMENT

Our research and development expenses were approximately $5.9 million, $4.5
million, and $3.2 million for the years ended December 31, 2000, 1999 and
1998, respectively. Approximately 20% of our employees are engaged in
research and development activities, which include both product development
and outcomes research. Our research and development organization includes
neuroscientists, psychologists, engineers, programmers, writers,
statisticians, graphic artists and animators.

Our research and development efforts are focused on the development of
additional language and reading programs based on the application of our
neuroscience expertise. Fast ForWord Advanced Reading is scheduled for launch in
2001. We also plan to introduce Fast ForWord Progress Tracker, a Web browser
based, java application that will meet the needs of educators for monitoring
student progress.

INTELLECTUAL PROPERTY

We have a broad intellectual property strategy addressing both product
technology and product concepts. We aggressively protect our proprietary rights
in our products and technology through a combination of patents, trademarks,
copyrights, trade secret laws, confidentiality procedures and contractual
provisions.

At December 31, 2000, we held 17 issued U.S. patents, and 44 pending U.S.
applications. Of these issued patents and pending applications, 9 are owned
jointly with the University of California, and the remaining 52 are owned solely
by us. We were the exclusive licensee under 3 issued U.S. patents, and 8 pending
U.S. applications. The licensed patents and applications are licensed from the
Regents of the University of California and Rutgers, the State University New
Jersey, and relate to the basic speech and sound modification and adaptivity
technology developed at those institutions. Fast ForWord Language, Fast ForWord
Language to Reading, Fast ForWord Middle and High School, ReWord, and Fast
ForWord Bookshelf incorporate this licensed technology; Fast ForWord Reading,
Reading Edge, Fast ForWord Basics and the Away We Go! products do not. To date,
more than 78% of our revenues have been derived from selling products that use
the licensed inventions, and loss of this license agreement would cause material
harm to our business.

Under the terms of this license, we must pay royalties and milestone payments
based upon cumulative net sales of our products, subject to certain minimum
royalty amounts. In connection with the license, we issued 114,526 shares of
Series A preferred stock, which were converted into 114,526 shares of our common
stock upon completion of our July 1999 initial public offering, to Rutgers and
made other up-front payments. In 1999 and 2000, we had approximately $612,000
and $870,000 respectively in royalty and milestone expense under the license. In
2001 and each year thereafter during the term of the license, the minimum
royalty expense necessary to maintain the license will be $150,000. We expect
royalties as a percentage of revenues to decline over time as the royalty rate
under the license steps down, and we introduce additional programs that are not
subject to license fees. However, we cannot predict our future product mix.

Unless otherwise terminated by operation of law or acts of the parties, the
license remains in effect until the later of the expiration of the
last-to-expire patent licensed or the abandonment of the last patent application
licensed. The Regents may terminate the license agreement if we fail to perform
or violate its terms without curing the violation within 60 days of receiving
written notice of the violation.

COMPETITION

The educational market in which we operate is very competitive. We believe that
the principal competitive factors in the industry are efficacy, ability to
deliver measurable results, cost, efficiency of delivery, ability to provide
training to educators, parents and speech and language and other professionals
and ability to complement and supplement public school curriculum. We believe
that we compete favorably on the basis of these factors. Particularly in the
public school market, we compete against other companies offering educational
software and other language and reading programs, as well as with providers of
traditional methods of teaching language and reading. Some of the other
companies that

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provide software and other programs are more established in the school market
than we are, offer a broader range of products to schools and have greater
technical, marketing and distribution resources than we do. In addition,
although the traditional approaches to language and reading are fundamentally
different from the approach we take, the traditional methods are more widely
known and accepted and, therefore, represent significant competition.

EMPLOYEES

As of December 31, 2000, we had 181 full-time and 5 part-time employees. We
believe our relations with employees are good. None of our employees is
represented by a union or subject to collective bargaining agreements.

RISK FACTORS

THE FOLLOWING FACTORS AS WELL AS OTHER INFORMATION CONTAINED IN THIS REPORT ON
FORM 10K SHOULD BE CONSIDERED IN MAKING ANY INVESTMENT DECISION RELATED TO OUR
COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY AND ADVERSELY
AFFECTED AND THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE.

TO DATE WE HAVE RELIED PRIMARILY ON A SINGLE FAMILY OF PRODUCTS. ANY FAILURE TO
INCREASE OUR SALES OF OUR LANGUAGE AND READING TRAINING PROGRAMS COULD CAUSE OUR
BUSINESS TO SUFFER. Since our formation, sales of licenses of our language and
reading training programs have accounted for almost 90% of our revenues. The
remaining revenues are primarily from related services, such as professional
development courses on how the brain works and how to administer our training
programs and technical services relating to implementing our programs. We
anticipate that most of our revenues will be related to our language and reading
training programs for at least the next 18 months. Our business will suffer if
we are unable to increase our sales of our language and reading training
programs.

WE HAVE ONLY A LIMITED HISTORY UPON WHICH YOU CAN GAUGE THE SUCCESS OF OUR
SOFTWARE PRODUCTS. In 1997, we introduced Fast ForWord Language. In 1998, we
introduced Fast ForWord Language to Reading. In 1999, we introduced Fast ForWord
Basics, Fast ForWord Bookshelf, Reading Edge, Cross Train, Fast ForWord Middle &
High School, Away We Go! and Away We Go! Bookshelf. In 2000, we introduced Fast
ForWord Reading, ReWord, and Brain Connection Professional Development on-line
courses. Consequently, we only have a limited history upon which you can gauge
the success of our suite of software products. We cannot assure you that new
products we may release will receive the same or greater level of commercial
acceptance as our products that are currently available.

OUR BUSINESS DEPENDS ON WHETHER WE CAN INCREASE MARKET ACCEPTANCE OF OUR CURRENT
AND POTENTIAL FUTURE PRODUCTS. Our future success depends on acceptance of our
language and reading training programs and our other products by public schools,
administrators, educators, parents and speech and language and other
professionals. Sales of our products depend on many factors, including:

-     our ability to incorporate our products into traditional school programs;

-     the willingness of educators and speech and language and other
      professionals to adopt new teaching and training methods;

-     the cost of our programs compared to other available programs;

-     the availability of government funding;

-     competitive developments;

-     our ability to continue to demonstrate the efficacy and acceptance of our
      programs;

-     our ability to adapt to evolving technology and standards; and

-     the public's ability and willingness to use the Internet.

Our business will suffer if we do not increase and maintain market acceptance
for our existing and potential new products.

ANY DIFFICULTY IN PENETRATING NECESSARY MARKETS COULD ADVERSELY AFFECT OUR
BUSINESS. Our principal target market is public schools. We also sell to and
through speech and language professionals in private practice and, to a more
limited extent, directly to parents. Any difficulty in penetrating or
maintaining our position in these markets could adversely affect our business.

We began selling Fast ForWord Language to public schools in April 1997 and
initiated our public schools sales force in the fall of 1998. During 2000, we
restructured our sales force to put more emphasis on the public school market
and

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focus our efforts on the most promising opportunities. In the first half of
2001 we intend to increase our public school sales force significantly to pursue
aggressive growth goals. We believe that our success in the public school market
will depend largely on the following factors:

-     the effectiveness of our sales force, including the new salespeople we
      expect to hire in the first half of the year;

-     our ability to continue to hire and retain experienced sales personnel;

-     continued acceptance of our site license sales approach, which offers our
      products and services to schools bundled on a site license basis as an
      alternative to per program, per user licenses;

-     convincing educators and other key public school decision-makers to use
      our products even though the learning methods required by our products
      differ from the way schools have traditionally addressed language and
      learning problems;

-     convincing schools and teachers to incorporate our programs into their
      curriculum since many of our products are generally designed to be used
      for 90 to 100 minutes per day, five days per week; and

-     availability of funding to purchase our programs and to public schools
      generally.

During 2000, our revenues from and through private speech and language
professionals fell 20%. Our ability to maintain and grow our sales to and
through the market of speech and language professionals are impacted by the
following factors:

-     our programs require use of computers and other technology; and

-     we may be unable to convince speech and language professionals that our
      programs are tools that can be used in their practice and will enable them
      to supervise multiple clients at a time.

WE EXPECT TO INCUR ADDITIONAL LOSSES THIS YEAR. While our target is to report
an operating profit in the fourth quarter of 2001, we expect to incur an
operating loss, a net loss and negative cash flow for the year as a whole. In
pursuing our revenue objectives for the year, we expect substantial increases
in sales and marketing expenses, particularly during the first half of the
year. We cannot assure you that we will meet our targets with respect to
revenues or operating results. If we do not meet our targets, we may be
forced to reduce our expenses which may negatively impact our business.

WE EXPECT TO INCUR A SIGNIFICANT AMOUNT OF DEBT IN 2001. In March 2001, we
entered into an agreement with Fleet National Bank for a revolving line of
credit of $15 million. The term of the line of credit extends to October
2002. We expect to draw down a substantial amount of the line of credit
during 2001. The line of credit is guaranteed by WPV, Inc., an affiliate of
Warburg, Pincus & Co., in exchange for which we issued WPV, Inc. a warrant to
purchase 1,375,000 shares of our Common Stock. The warrant has a seven-year
term and an exercise price of $8.00 per share. We have agreed to reimburse
WPV, Inc. for any amounts that WPV, Inc. is required to pay in connection
with the guarantee. To secure our reimbursement obligation, we granted WPV,
Inc. a security interest in substantially all of our assets. This
indebtedness and security interest could have important consequences,
including the following:

-     it may limit our ability to obtain other financing;

-     it may limit our flexibility in planning for, or reacting to, changes in
      our business, and could make us more vulnerable to a downturn in our
      business or the economy; and

-     a portion of our cash flow will be required to service the indebtedness
      and will not be available for other purposes.

The loan agreement provides that an event of default under the loan occurs in
the event of certain changes in the composition of the board of directors or
the acquisition of more than 40% of our stock by a person or group other than
Warburg, Pincus & Co. or its affiliates. Such a default could occur at a time
when we would be unable to repay the loan.

WE CANNOT GUARANTEE THAT WE WILL EVER GENERATE SUFFICIENT REVENUES TO ACHIEVE OR
SUSTAIN PROFITABILITY. We cannot guarantee that we will ever generate sufficient
revenues to achieve or sustain profitability or generate positive cash flow. As
a result, we may need to obtain additional equity or debt financing in the
future, which may not be available on acceptable terms, if at all.

OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO INTRODUCE NEW PRODUCTS AS SCHEDULED
OR IF NEW PRODUCTS ARE UNSUCCESSFUL. Our future success will significantly
depend on whether we are able to enhance our existing products and develop new
products based on our proprietary technology. In 1999 we launched seven new
products and in 2000 we launched three. We have additional products targeted for
commercial launch in the year 2001. We cannot assure you that we will be
successful in developing and marketing these or any other new products or that
we will be able to introduce new products as scheduled. We may not have
sufficient resources to make the investments to develop or acquire and market
the products necessary to maintain our competitive position.

OUR QUARTERLY OPERATING RESULTS ARE SUSCEPTIBLE TO FLUCTUATIONS, WHICH COULD
CAUSE OUR STOCK PRICE TO DECLINE. Since our formation, our quarterly operating
results have fluctuated significantly. For example, our revenues for each fiscal
quarter in the last two years have been:

                1999
                ----
                First quarter                   $1,340,000
                Second quarter                  $2,051,000
                Third quarter                   $3,901,000
                Fourth quarter                  $2,960,000

                2000
                ----
                First quarter                   $3,431,000
                Second quarter                  $3,706,000
                Third quarter                   $4,487,000
                Fourth quarter                  $3,637,000

We expect these fluctuations to continue for a number of reasons, including
factors described elsewhere in this "Risk Factors" section. One reason we expect
quarterly operating results to fluctuate is the long sales cycle for our
products, which is the result of many factors, including the following:

-     the nature of our products requires us to provide a significant level of
      education to educators, parents and speech and language and other
      professionals regarding the use and benefits of our programs and services;

-     prospective purchasers need to consider that our programs involve a
      significant commitment of time and resources;

-     sales to schools are subject to budgeting constraints, which may require
      schools to find available discretionary funds, obtain grants or wait until
      subsequent budget cycles; and

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<PAGE>

-     school-wide or district-wide sales can require multiple levels of approval
      and involve many different departments.

As a result, our sales cycle generally takes several months and in some cases
can take a year or longer.

An additional reason our quarterly operating results may fluctuate is that
demand for our programs and services may be subject to seasonal influences.
Demand for our programs from speech and language professionals in private
practice tends to be lower during the school year than in the summer, because
the intensive nature of our products may be more conducive to training during
school vacation. We also tend to experience seasonality in the public school
market due to public school calendars and budget cycles. We do not have
sufficient operating experience to predict the overall effect of various
seasonal factors and their effect on future quarterly operating results.

Any significant shortfall of revenues in relation to our expectations could
cause significant fluctuations in quarterly operating results, and our stock
price could suffer. Prediction of future revenues and expenses is difficult
because of our limited operating history and the emerging nature of our market.
Our expense levels are based on our expectations of future revenues and are
primarily fixed in the short term. We cannot guarantee that we will be able to
predict our future revenues accurately or that we will be able to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall.

WE HAVE GENERATED LIMITED REVENUES TO DATE AND HAVE A HISTORY OF LOSSES. We
started operations in February 1996 and began generating revenues in the first
quarter of 1997. Because we have generated limited revenues to date, we have
incurred significant operating losses and negative cash flow since inception.
Our net losses were approximately $10.7 million for the year ended December 31,
1998, $14.1 million for the year ended December 31, 1999 and $20.1 million for
the year ended December 31, 2000. We have an accumulated deficit of
approximately $52.5 million from inception through December 31, 2000.

OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR CURRENT
BUSINESS AND PROSPECTS. It is difficult for us to evaluate our current business
and prospects because we have a limited operating history of approximately five

                                      11

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years and limited experience penetrating our target markets and selling our
products. Companies with limited operating histories, including ours, encounter
high risks and uncertainties, particularly in new and rapidly evolving markets
such as technology-based educational products and services. These risks include,
but are not limited to: (1) uncertain demand for technology-based learning
products and our products and services in particular; (2) attracting and
retaining key personnel and managing growth; (3) failure to select an
appropriate growth strategy; (4) institutional or other barriers that hinder our
ability to penetrate our target markets; and (5) competition. To address these
risks, we must, among other things:

-     successfully gain market acceptance for our suite of software products,
      particularly in the public school market;

-     successfully introduce and gain market acceptance for related new products
      and services;

-     respond to competitive developments and execute our growth strategy;

-     attract, integrate, retain and motivate qualified personnel, particularly
      sales and marketing professionals; and

-     address new or evolving technologies and standards.

We cannot assure you that we will be successful in addressing the risks we face
and our failure to address those risks will materially and adversely affect our
business and financial condition.

OUR BUSINESS WILL SUFFER IF CUSTOMERS DELAY OR FOREGO PURCHASES OF OUR PRODUCTS
BECAUSE OF OUR PRODUCT ENHANCEMENTS OR NEW PRODUCTS OR BECAUSE OF COMPETITORS'
SUPERIOR PRODUCTS. The demand for our existing products may be reduced or
eliminated by our own enhancements or new products and any resulting loss of
revenues from our existing products may not be adequately offset by the revenues
generated from our enhancements or new products. Customers may also delay their
purchases of our products in anticipation of the release of our product
enhancements or new products. Finally, products introduced by our competitors
may be superior to the products we offer and reduce the demand for our products.

OUR REVENUES DEPEND ON GOVERNMENT FUNDING AVAILABLE TO PUBLIC SCHOOLS AND ANY
SUBSTANTIAL DELAYS OR REDUCTIONS IN GOVERNMENT BUDGETS OR FUNDING FOR
EDUCATIONAL SOFTWARE OR TECHNOLOGY WOULD HARM OUR BUSINESS. Our future revenues
will depend, in large part, on our ability to increase revenues from public
schools. This, in turn, depends largely on federal, state and local government
funding. Substantial delays or reductions in government budgets or funding for
educational software or technology would have a material adverse effect on our
business and financial condition.

WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH. We have grown from five
employees at April 1, 1996, to approximately 190 employees at December 31,
2000. Our number of employees grew rapidly from 1996 through 1999. However,
at the end of 2000, we had slightly fewer employees than at the end of 1999
because of our mid-year reduction in the sales force and a reduction in
research operations at the end of the year to focus our research on the
reading and language area. During 2001, we again expect our employee count to
grow substantially, particularly in sales and marketing. Our historical
growth has placed, and any further growth will place, a significant strain on
our managerial, operational, financial and other resources. Our future
success will depend, in part, upon whether our senior management can manage
growth effectively. This will require us to implement additional management
information systems and to develop additional operating, administrative,
financial and accounting systems and controls. We will also have to maintain
close coordination among our accounting, finance, marketing, sales, customer
support and professional service organizations. If we are unsuccessful in
managing growth, our business and financial condition will be materially and
adversely affected.

WE RELY ON OUR INTELLECTUAL PROPERTY RIGHTS AND MAY BE UNABLE TO PROTECT THESE
RIGHTS. Our ability to compete effectively will depend in part on whether we are
able to develop and maintain the proprietary aspects of our technology and to
operate without infringing on the proprietary rights of others. We rely on a
combination of patents, trademarks, copyrights, trade secret laws,
confidentiality procedures and contractual provisions to protect our proprietary
rights in our products and technology. At December 31, 2000, we held 17 issued
U.S. patents, and 44 pending U.S. applications. Of these issued patents and
pending applications, 9 are owned jointly with the University of California, and
the remaining 52 are owned solely by us. We were the exclusive licensee under 3
issued U.S. patents, and 8 pending U.S. applications. The licensed patents and
applications are licensed from the Regents of the University of California and
Rutgers, the State University New Jersey, and relate to the basic speech and
sound modification and adaptivity technology developed at those institutions. We
cannot assure you that our pending patent applications will result in the
issuance of any patents or that any issued patents will offer protection against
competitors

                                      12

<PAGE>

with similar technology. In addition, any patents issued to us or our licensors
could be challenged, invalidated or circumvented in the future.

It is possible we may become subject to patent infringement claims and
litigation or interference proceedings conducted in the United States Patent and
Trademark Office to determine the priority of inventions. Litigation may be
necessary to enforce patents issued to us, to protect trade secrets or know-how
that we own or to determine the enforceability, scope and validity of the
proprietary rights of others. Any litigation or interference proceedings will
result in substantial expense and significant diversion of effort by our
technical and management personnel. An adverse determination in litigation or
interference proceedings to which we may become a party could subject us to
significant liabilities to third parties or require us to seek licenses from
third parties, which may not be available on commercially reasonable terms or at
all.

FAILURE TO MAINTAIN OUR EXCLUSIVE LICENSE WOULD MATERIALLY HARM OUR BUSINESS BY
DELAYING OR PREVENTING NEW PRODUCT INTRODUCTIONS AND NECESSITATING PRODUCT
RECALLS. We hold the exclusive license to develop commercial products based on
technology owned by The Regents of the University of California and by Rutgers,
the State University of New Jersey, which technology is the subject of three
issued patents, covering the basic speech and sound modification and adaptivity
technology developed at those institutions, and several pending applications.

Our primary products, Fast ForWord Language, Fast ForWord Language to Reading
and Fast ForWord Middle & High School, incorporate this licensed technology.
ReWord and Fast ForWord Bookshelf also incorporate this licensed technology. To
date, more than 78% of our revenues have come from selling programs using the
licensed technology. While our professional development seminars, Fast ForWord
Reading and other products do not make use of this licensed technology, the vast
majority of our product and service revenues relate to the base products, which
do use the licensed technology, and its loss would cause material harm to our
business.

We had approximately $356,000, $612,000, and $870,000 in royalty expense under
the license in the years 1998, 1999, and 2000, respectively. The minimum annual
royalty expense necessary to maintain the license in 2001 and years following
will be $150,000. We expect royalties as a percentage of program revenues to
decline over time as additional programs are sold and, as a consequence, the
royalty rate under the license steps down. It may also decline to the extent
that our product mix becomes less reliant on licensed technology, although we
cannot predict our future product mix.

If we lose or are unable to maintain the license agreement during the term of
the underlying patents, it would materially harm our business. It could delay or
prevent the introduction of new products and would likely require the recall of
most of our products from the market. Even if we could identify and license or
develop non-infringing equivalent technology, which is far from certain, the
cost and delays from such a changeover in our base technology would cause
material harm to our business.

The Regents may terminate the license agreement if we fail to perform or violate
its terms without curing the violation within 60 days of receiving written
notice of the violation. For example, The Regents could terminate the agreement
if we fail to perform any of the following obligations:

-     make royalty and milestone payments;

-     provide periodic progress reports;

-     bear the costs to prepare, file and prosecute U.S. and foreign patent
      applications;

-     provide indemnification;

-     insure our activities in connection with work under the agreement; and

-     maintain the confidentiality of information received from The Regents
      relating to the agreement.

WE COULD LOSE REVENUES AS A RESULT OF SOFTWARE ERRORS OR DEFECTS. Software
programs frequently contain errors or defects, especially when first introduced
or when new versions are released. We could, in the future, lose revenues as a
result of software errors or defects. We cannot assure you that errors will not
be found in new products or releases, even though products are tested prior to
release. Any errors could result in loss of revenue or delay in market
introduction or acceptance, diversion of development resources, damage to our
reputation or increased service and warranty costs.

WE COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS FROM THE SALE OF OUR PRODUCTS
AND SERVICES. Because we market products to the public, we face an inherent
business risk of financial exposure to product liability claims. As a publisher

                                      13

<PAGE>

of online content, we face potential liability for defamation, negligence,
copyright, patent or trademark infringement, or other claims based on the nature
and content of materials that we publish or distribute. We currently carry
product and general liability insurance that, in general, covers product and
general liability claims up to the policy limits. We cannot assure you that we
will continue to have access to this insurance at a reasonable cost, if at all,
or that the insurance will be adequate to satisfy any liability or litigation
expenses. Any claim or claims against us, regardless of their merit or eventual
outcome, could materially and adversely affect our business.

THERE IS ACADEMIC DEBATE REGARDING THE SCIENTIFIC BASIS UNDERLYING OUR PRODUCTS,
WHICH COULD SIGNIFICANTLY AFFECT THE MARKET FOR OUR PROGRAMS AND SERVICES. Our
training programs are based on particular theories of neuroscience, the study of
how the brain functions, and theories of language acquisition. Our founders are
actively involved in academic debate about their own and opposing scientific
theories of neuroscience and language acquisition. As a result, the theories on
which our suite of software products are based have been, and are likely to be,
subject to public debate and challenges. Although we believe that our suite of
software products are based primarily upon non-controversial scientific
theories, some of the principles and methodologies underlying and associated
with our products are opposed by some academicians and educators, any of whom
could influence the market for our products and services. Consequently, academic
publications and debate challenging the theories of neuroscience and language
acquisition propounded by the founders and others could adversely affect the
market for our products and services.

OUR BUSINESS WILL SUFFER IF INTERNET USE FAILS TO DEVELOP FURTHER WITHIN SCHOOLS
AND AMONG SPEECH AND LANGUAGE PROFESSIONALS IN PRIVATE PRACTICE. One of the key
features of certain of our programs is the periodic uploading and downloading of
information to and from our proprietary database via the Internet. If the use of
the Internet, particularly within schools and among speech and language
professionals in private practice, develops to a lesser extent or more slowly
than expected, our business will suffer.

ANY DELAYS OR MALFUNCTIONS OF THE INTERNET ON WHICH WE RELY FOR THE EFFECTIVE
FUNCTIONING OF OUR PRODUCTS AND WEB SITES COULD ADVERSELY AFFECT OUR BUSINESS.
We depend on technology, particularly on the Internet, for the effective
functioning of our training programs and for implementation of our web-based
marketing strategies. One of the key features of our training programs is the
periodic uploading and downloading of information to and from our proprietary
database via the Internet. Additionally, our ability to establish
BrainConnection.com as a reputable and reliable source for information and
on-line professional development courses depends on the availability of the
Internet. If commercially available browsers fail to provide access to the
Internet due to unexpected user demand or other delays or malfunctions, access
to our web sites could be harmed, our sites could lose credibility and
professional development course revenues, if any, could suffer.

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THE EDUCATIONAL TECHNOLOGY MARKET
OR THE EDUCATION MARKET generally. The market in which we operate is very
competitive. We compete with other companies offering educational software
products or non-software-based programs to improve reading or language skills to
schools and to speech and language professionals in private practice. Existing
competitors may continue to broaden their product lines, and potential
competitors, including large software developers and educational publishers, may
enter or increase their focus on the school market. Moreover, we expect that we
will face additional competition from new entrants into the market. Many
competitors have substantially greater technical, marketing and distribution
resources than we do. We cannot assure you that we will continue to be able to
compete effectively

IF WE FAIL TO RETAIN OUR KEY PERSONNEL OR ATTRACT AND RETAIN KEY EMPLOYEES, OUR
BUSINESS WILL SUFFER. Our success depends to a significant extent upon the
continued active participation of key members of our management, including
Sheryle J. Bolton, our Chairman and Chief Executive Officer, Frank M. Mattson,
our President and Chief Operating Officer, and Jane A. Freeman, our Chief
Financial Officer, as well as others. While we do not believe that any of our
employees is irreplaceable, we recognize that we are in an extremely
competitive market for executives and the loss of one or more of these persons
could have a material adverse effect on our business, financial condition and
results of operations. We believe that our future success will depend upon our
ability to continue to attract, motivate and retain highly skilled managerial,
sales and marketing and product development personnel. Competition for such
personnel is intense. The value of equity incentives provided to our key
personnel may vary due to fluctuations in our stock price, which may make it
more difficult to retain such personnel or may require us to adopt other sorts
of incentive programs to remain competitive. Our failure in attracting or
retaining the necessary personnel could materially and adversely affect our
business.

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<PAGE>

ECONOMIC FACTORS COULD CAUSE US TO REDUCE OUR PERSONNEL LEVELS, WHICH
COULD NEGATIVELY IMPACT OUR REVENUES OR RESULTS OF OPERATIONS. We might
find it necessary to reduce our personnel levels, if our revenues fail
to grow as planned, due to general market or economic factors, or for
other reasons. Such a reduction in personnel could adversely affect our
revenues or results or operations.

A DISASTER OR MALFUNCTION THAT DISABLES OUR COMPUTER SYSTEMS COULD HARM
OUR WEB SITES AND DAMAGE OUR CREDIBILITY. Substantially all of our
computer and communications systems are located in our facilities in
Oakland, California. Our operations depend on our ability to protect
these systems against damage from fire, earthquakes, power loss, rolling
blackouts, telecommunications failures, break-ins and similar events. In
particular, the current power shortage in California may adversely
affect our operations. Presently, our web sites are redundantly hosted
at our site and at the site of a local Internet service provider. In the
next year, we plan to move most of our computer operations to a
co-location site to provide additional security, but that plan has not
yet been implemented and there can be no assurance that we will be able
to implement the plan successfully. Computer viruses, electronic
break-ins or other similar disruptive problems could also harm our web
sites. A disaster or malfunction that disables our Internet-based
services could cause an interruption in our ability to deliver
up-to-date progress reports on individuals currently using our training
programs and could also damage the credibility of our
BrainConnection.com web site. Our insurance policies may not adequately
compensate us for any losses that may occur due to any failures or
interruptions in our systems.

CONCERNS ABOUT INTERNET SECURITY COULD LIMIT THE ACCEPTANCE OF OUR
PRODUCTS AND EFFECTIVENESS OF OUR WEB-BASED MARKETING. One of the key
features of our training programs is the periodic uploading and
downloading of information to and from our proprietary database via the
Internet. Concerns about the security of transmittals of information
over the Internet have been a significant barrier to e-commerce and
other communications over the Internet. Any compromise of security over
the Internet could deter people from using our products or our websites.
We may need to expend significant resources to protect against security
breaches or to address problems caused by such breaches.

WE ARE SUBJECT TO GOVERNMENT REGULATIONS THAT COULD IMPOSE ADDITIONAL
COSTS ON THE CONDUCT OF OUR BUSINESS. Our business is potentially
subject to or affected by a variety of federal, state and local laws and
regulations. These include, without limitation, laws and regulations
relating to:

-     education;

-     licensing of speech and language professionals in private practice and
      delivery of speech and language testing and remediation services;

-     consumer protection and anti-fraud and related protections, including the
      regulation of referrals by professionals; and

-     government funding.

Compliance with these and other laws and regulations impose additional costs on
the conduct of our business, and failure to comply with these laws and
regulations, changes in these laws and regulations, or in their applicability to
our business may impose additional costs.

Although we believe our existing products are educational training tools not
subject to regulation by the U.S. Food and Drug Administration, we cannot assure
you that the U.S. Food and Drug Administration will not make a contrary
determination in the future with respect to our existing products or new
products that we may develop. Our business could suffer in the event we became
subject to such regulation.

OUR INTERNET OPERATIONS ARE SUBJECT TO GOVERNMENT REGULATION OF THE INTERNET AND
OTHER LEGAL UNCERTAINTIES WHICH COULD NEGATIVELY IMPACT OUR OPERATIONS. We are
subject to the same federal, state and local laws as other businesses on the
Internet. Today there are relatively few laws directed towards online services.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet. Changes in regulation of the Internet could affect our results of
operations. These laws and regulations could cover issues such as user privacy,
freedom of expression, pricing, fraud, content and quality of products and
services, taxation, advertising, intellectual property rights and information
security. Applicability to the Internet of existing laws governing issues such
as property ownership, copyrights and other intellectual property issues,
taxation, libel, obscenity and personal privacy is uncertain. The vast majority
of these laws were adopted prior to the advent of the Internet and related
technologies and, as a result, do not contemplate or address the unique issues
of the Internet and related technologies. The courts have not yet interpreted
many laws that reference the Internet, such as the recently passed Digital
Millennium Copyright Act, and therefore their applicability and reach are
uncertain.

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Laws and regulations directly applicable to communications or commerce over the
Internet are becoming more prevalent. The United States Congress recently
enacted Internet laws, including laws relating to children's privacy, the
transmission of sexually explicit material, taxation of Internet-based
enterprises and taxation of Internet access. In addition, the growth and
development of the market for online commerce may prompt calls for more
stringent consumer protection laws. This occurrence may impose additional
burdens on companies conducting business online by limiting how information can
flow over the Internet and the type of information that can flow over the
Internet. The adoption or modification of laws or regulations relating to the
Internet could adversely affect our business.

OUR INTERNET ACTIVITIES MAY BECOME SUBJECT TO ADDITIONAL TAXES, WHICH COULD
NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS. Tax authorities in a number of
states are currently reviewing the appropriate tax treatment of companies
engaged in e-commerce. Therefore, our products and services may become subject
to additional sales and income taxes. If consumers of our products and services
are required to pay additional sales or other taxes, they could reduce their
purchases, which would negatively affect our results of operations. Because
BrainConnection.com is available over the Internet in multiple states and
foreign countries, these jurisdictions may claim that we are required to qualify
to do business as a foreign corporation. We are qualified to do business in 20
states in the United States, and qualifying in additional states could subject
us to additional taxes. Additionally, failure by us to comply with foreign laws
or to qualify as a foreign corporation in a jurisdiction where we are required
to do so could subject us to taxes and penalties for the failure to qualify and
could result in the inability to enforce contracts in such jurisdictions.

OUR EXECUTIVE OFFICERS AND DIRECTORS AND THEIR AFFILIATES EFFECTIVELY CONTROL
THE VOTING POWER OF OUR COMPANY. At December 31, 2000, our executive officers
and directors and their respective affiliates beneficially owned more than
60% of the Company. As a result, these stockholders, by acting in concert,
will be able to exercise significant influence over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may also
delay, prevent or deter a change in control of our company. In addition, for
so long as Warburg, Pincus Ventures LP continues to hold specified
percentages of our company's stock, we are required under the terms of our
amended and restated registration rights agreement to nominate up to two
individuals affiliated with Warburg, Pincus & Co. for election to the Board
of Directors. Warburg, Pincus Ventures, LP has also agreed with LF SL Holding
LLC that so long as LF SL continues to hold at least 277,778 shares, Warburg,
Pincus Ventures will vote to elect a person nominated by LF SL to the Board.

THE MARKET PRICE OF OUR STOCK MAY BE HIGHLY VOLATILE. The market price of our
common stock has been highly volatile since our July 1999 initial public
offering and could continue to be subject to wide fluctuations for the following
reasons, among others:

-     the fluctuation of our quarterly results for reasons including the
      seasonal demand for our products and our long sales cycle;

-     the release of (or the failure to release) product enhancements or new
      products;

-     the timing of our competitors' product releases or variations in their
      quarterly financial results;

-     conditions in the economy in general or in our industry in particular,
      including conditions that affect the resources available to schools,
      speech and language professionals, and private parties to purchase our
      products;

-     publicity regarding our products or those of our competitors, including
      publicity relating to new scientific studies about how the brain
      functions;

-     general economic conditions that influence stockholder interest in stocks
      of companies with Internet or technology applications;

-     changes in applicable laws and regulations affecting us or the educational
      technology industry; and

-     changes by financial research analysts in their estimates of our future
      earnings.

-     stock market volatility for education and technology companies.

WE MAY BE SUBJECT TO LITIGATION DUE TO THE VOLATILITY OF OUR STOCK PRICE.
Broad market fluctuations or a downturn in our prospects may adversely affect
the market price of our common stock and result in class action litigation.
For example, in August 2000, a class action lawsuit was filed against us and
certain of our officers and directors. The suit alleged that we made false
and misleading statements and/or failed to disclose information concerning
our projected revenues for the second quarter of 2000. In early July, we had
reported that second quarter revenues were lower than expected. In February,
2001, the lawsuit was voluntarily dismissed without prejudice. Any securities
class action or similar litigation can result in substantial costs and divert
our management's attention and resources, which could materially and
adversely affect our business. Any adverse determination in such litigation
could also subject us to significant liabilities.

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OUR CHARTER PROVISIONS COULD HAVE THE EFFECT OF DELAYING OR PREVENTING CORPORATE
TAKEOVERS. Our certificate of incorporation authorizes our board of directors to
issue up to 1,000,000 shares of preferred stock and to determine the price,
rights, preferences and privileges, including voting rights, of those shares
without any further vote or action by the stockholders. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The authority to issue this preferred stock could enable our board of
directors to deter acquisitions of our company. Additionally, our certificate of
incorporation and bylaws also contain the following features which could have
the effect of delaying or preventing corporate takeovers:

-     a board of directors classified into three classes, which makes it more
      difficult to acquire immediate control of our board of directors because
      only one third of the directors are elected each year;

-     requiring stockholder actions to occur only at duly called meetings of the
      stockholders, thereby reducing the ability of the stockholders to act
      contrary to the interests of the board of directors;

-     disallowing cumulative voting in the election of directors, which means
      that the majority owner(s) of our voting common stock controls the
      election of all directors; and

-     requiring advance notice from stockholders for director nominations or
      other stockholder proposals.

YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT. This
Report on Form 10K contains forward-looking statements. In some cases you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. The outcome of the events described in these
forward-looking statements is subject to known and unknown risks and you should
not rely on these forward-looking statements. These risks include, among other
things, those identified in this "Risk Factors" section. Our actual results
could differ materially from those discussed in the forward-looking statements
contained in this Report. We also undertake no obligation to publicly update any
forward-looking statement and the forward-looking events discussed in this
Report on Form 10-K could change or might not occur. This section, the remainder
of this Item 1 and Item 7 ("Management's Discussion and Analysis of Financial
Condition and Results of Operations") contain a discussion of some of the
factors that could contribute to those differences.

ITEM 2.     PROPERTIES

We lease an approximately 70,000 square-foot facility in Oakland, California
under an eight-year lease that expires in March, 2009. The lease includes an
option to expand into an additional 13,000 square feet and two five-year options
to extend the term of the lease. We believe our facilities are adequate for our
operations for at least the next three years.

We also still lease our former office, a 34,257 square-foot facility in
Berkeley, California under a five-year lease that expires in September 2002. We
are negotiating with the landlord for this facility to terminate our obligations
under this lease. We cannot provide any assurance about whether or on what terms
this lease may be terminated.

ITEM 3.      LEGAL PROCEEDINGS

A class action lawsuit was filed against the Company and certain of its officers
and directors on August 22, 2000, in U.S. District Court for the Northern
District of California. The suit, Stitt v. Scientific Learning Corporation, et
al, alleged that the defendants made false and misleading statements and/or
failed to disclose information concerning the Company's projected revenues for
the second quarter of 2000, in violation of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. In early July, Scientific Learning reported
that its second quarter revenues were lower than expected. The suit was filed on
behalf of persons who acquired Company stock between May 1, 2000 and July 11,
2000 and sought damages in unspecified amounts as well as equitable or
injunctive relief.

On February 6, 2001, the parties entered into a stipulation pursuant to which
plaintiffs agreed to voluntarily dismiss the lawsuit without prejudice. By Order
dated February 8, 2001, the court approved the parties' stipulation and
dismissed the lawsuit. No consideration was exchanged in connection with the
dismissal and neither the lead plaintiffs nor their counsel will receive any
compensation or reimbursement of expenses.

                                       17

<PAGE>

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

None

                                       18

<PAGE>

EXECUTIVE OFFICERS

The following table sets forth various information concerning our executive
officers:

<TABLE>
<CAPTION>

         NAME                          AGE                                          POSITION
-------------------------             -----          -----------------------------------------------------------------------

<S>                                     <C>          <C>
Sheryle J. Bolton                       54           Chairman and Chief Executive Officer

Dr. Michael M. Merzenich                58           Chief Scientific Officer and Member of the Board of
                                                     Directors

Frank M. Mattson                        46           President and Chief Operating Officer

Jane A. Freeman                         47           Chief Financial Officer, Vice President, and Treasurer

Linda L. Carloni                        47           Vice President, General Counsel and Secretary

Diane H. Church                         54           Vice President, Sales

Jane K. Gardner                         52           Vice President, Marketing

Dr. William M. Jenkins                  50           Sr. Vice President, Product Development

Dr. Steven L. Miller                    37           Sr. Vice President, Research and Outcomes

James A. Mills                          45           Vice President, Business Development
</TABLE>

      SHERYLE J. BOLTON became Chairman of the Board of Directors in November
2000. She remains Chief Executive Officer and a director, offices she has held
since November 1996. Ms. Bolton was also President from June 1997 to November
2000. From January 1994 to July 1995, Ms. Bolton served as President and Chief
Operating Officer of Physicians' Online, Inc., a physicians' online service
provider. From June 1993 to December 1994 and from July 1995 to October 1996,
Ms. Bolton consulted for a number of international companies, including many in
the Internet, healthcare and technology sectors, specifically in the areas of
strategy, operations and finance. Ms. Bolton's experience also includes senior
management positions at Rockefeller & Co., Inc., a global investment management
firm, and Merrill Lynch Capital Markets, Investment Banking Division. Earlier in
her career, she was a teacher of English as a second language in Africa and a
language arts teacher in public schools in the State of Georgia. Ms. Bolton is a
director of the Scudder New Asia Fund, Inc. a closed-end mutual fund. Ms. Bolton
holds a B.A. in English and an M.A. in Linguistics from the University of
Georgia, and an M.B.A. from Harvard Business School.

      DR. MICHAEL M. MERZENICH is one of our founders. He has served as our
Chief Scientific Officer since November 1996 and as a director since inception.
From January 1996 to November 1996, Dr. Merzenich served as the Chief Executive
Officer and President of the Company. During 1997, Dr. Merzenich worked
full-time with us during a sabbatical from his faculty position at UCSF. In
January 1998, Dr. Merzenich returned to his faculty position at UCSF, but
continues to direct our research and development activities under a consulting
agreement. Since 1971, Dr. Merzenich has been a member of the faculty, and since
1980 a full professor, in Neuroscience, Physiology, Biomedical Engineering and
Otolaryngology at UCSF. He is currently the Francis A. Sooy Professor of
Otolaryngology at UCSF. Dr. Merzenich has more than 25 years of experience in
managing large, multidisciplinary brain science/behavior/engineering research
projects that have led to commercial products and numerous publications and
awards. In May 1999, Dr. Merzenich was elected a member of the National Academy
of Sciences for distinguished and continuing achievements in original research.
Dr. Merzenich holds a B.S. in General Science from the University of Portland
and a Ph.D. in Physiology from The Johns Hopkins University, with additional
training from the University of Wisconsin.

                                      19

<PAGE>

      FRANK M. MATTSON became our President in November 2000. In January 2000,
he became Chief Operating Officer and in March 2000 was elected Executive Vice
President. He served as our Chief Financial Officer from January 1997 to January
2000. Mr. Mattson served as our Secretary from June 1997 through March 2000.
From August 1994 to January 1997, Mr. Mattson served as Vice President of
Finance and Operations, Executive Vice President, Chief Financial Officer and as
a director of MNI Interactive, Inc., a startup entertainment marketing company.
From June 1992 to August 1994, Mr. Mattson was Vice President of Distribution
and Strategic Planning for Ingram Entertainment, Inc. ("Ingram"), a unit of the
Ingram Distribution Group, one of the world's largest distribution companies. At
Ingram, Mr. Mattson directed the post-merger integration of Ingram and Commtron
Corporation ("Commtron"), the largest distributor in the home video industry
until its acquisition by Ingram in 1992. From 1986 to 1992, Mr. Mattson served
in a variety of management positions at Commtron, a publicly traded company,
most recently as Vice President of Operations and as a director of the company.
Mr. Mattson holds a B.S. in Business from Miami University (Ohio) and an M.A. in
Economics from the University of Wisconsin in Milwaukee. Mr. Mattson has also
served on the faculty of Drake University.

      JANE A. FREEMAN joined us as Vice President, Finance and Treasurer in
August 1999 and was named Chief Financial Officer in January 2000. She also
served as our Vice President Business Development from August 1999 until June
2000. From April 1988 through December 1998, she was employed by Rockefeller &
Co., a global investment firm. Among her investment responsibilities at
Rockefeller & Co. were the leadership of the global asset allocation process and
the management of the U.S. Small Capitalization equity product. She also served
on the Management Committee of the firm. From January 1978 to March 1988, Ms.
Freeman was employed by Scudder, Stevens and Clark as an analyst and Manager of
the Scudder Development Fund. She is a director of four mutual funds managed by
Harding Loevner, LLP. Ms. Freeman holds a B.A. in Mathematics and Chemistry and
an M.B.A. (with distinction) from Cornell University and a License in Applied
Economics from the University of Louvain in Belgium.

      LINDA L. CARLONI joined the Company as General Counsel in October 1999,
became our Secretary in March 2000 and was elected Vice President in June 2000.
From April 1996 to September 1999, Ms. Carloni was a founder and Vice President
of Alere Medical Incorporated, a healthcare services start-up. From May 1994 to
April 1996, Ms. Carloni served as a senior licensing officer for the University
of California Office of Technology Transfer. From April 1992 to April 1994, Ms.
Carloni was a partner at the law firm of Cooley Godward LLP. Earlier in her
career, Ms. Carloni was the general counsel of Nellcor Incorporated, a medical
device company, and an associate and a partner at Cooley Godward. She received
her bachelor's degree in political science from Case Western Reserve University
and her law degree from Boalt Hall School of Law at the University of
California, Berkeley.

      DIANE H. CHURCH has served as our Vice President, Sales since June 1999,
having previously served as Vice President, Private Channel Sales since August
1997. From February 1997 to August 1997, Ms. Church was Georgia Account Team
Manager with Compuware Corporation, an information systems software and services
company. Ms. Church was Mid-Atlantic Regional Director and Regional Director for
Telecommunications Accounts at Candle Corporation from April 1994 to September
1995 and at Legent Corporation Regional Director for Mid-Atlantic and then
South-Eastern Regional Director from April 1990 to April 1994, both of which are
information systems software and services companies. Prior to that time, Ms.
Church held senior management positions with Wang Laboratories, a computer and
office equipment company. Ms. Church also worked as an educator in public
schools in the State of Georgia. Ms. Church holds a B.A. in English and
Education from Georgia Southwestern College and an M.B.A. from Emory University.

      JANE K. GARDNER joined the Company as Vice President, Marketing in July
2000. Prior to joining the Company, Ms. Gardner worked in positions of
increasing responsibility for more than 20 years with Foote, Cone & Belding
Worldwide, a large advertising firm. From July 1999 until April 2000, she served
as an Executive Vice President of Foote, Cone and director of their e-business
strategies group. From 1989 to 1999, Ms. Gardner was a Group Director and Senior
Vice President at Foote, Cone, leading teams creating marketing strategies and
advertising for high technology and other clients, including Novell, Nintendo,
Amazon.com and Janus Mutual Funds. Ms. Gardner holds a B.A. from Williams
College and an M.B.A. from Stanford Graduate School of Business.

      DR. WILLIAM M. JENKINS was elected Senior Vice President, Product
Development in November 2000. Dr. Jenkins is a founder and served as our Vice
President, Product Development from June 1997 until November 2000. From March
1996 to June 1997, Dr. Jenkins was our Vice President, Research and Development.
Since 1990, Dr. Jenkins has also served as an Adjunct Associate Professor at
UCSF. Dr. Jenkins has served on the editorial board in

                                      20

<PAGE>

the Systems Plasticity section of Restorative Neurology and Neuroscience. Dr.
Jenkins is the principal developer of our current training programs. Dr. Jenkins
holds a B.S. in Psychology, an M.A. in Psychobiology and a Ph.D. in
Psychobiology from Florida State University, with additional post-doctoral
training from UCSF.

      DR. STEVEN L. MILLER was elected Senior Vice President, Research and
Outcomes in November 2000. Dr. Miller is a founder and served as our Vice
President, Outcomes Research or Vice President, Research from June 1997 until
November 2000. From May 1996 to June 1997, Dr. Miller was our Vice President,
Professional Relations and Outcomes. From September 1991 to May 1996, he held
research appointments at the Center for Molecular and Behavioral Neuroscience at
Rutgers. Dr. Miller has extensive experience in organizing clinical research
studies and conducting longitudinal studies of children and adults who have
language and reading problems. Dr. Miller holds a B.A. in Psychology from
Bloomsburg University of Pennsylvania, an M.A. in Neuroscience from the
University of Hartford and a Ph.D. in Psychology from the University of North
Carolina at Greensboro. He received additional training in Clinical
Neuropsychology at the Bowman Gray School of Medicine at Wake Forest University.

      JAMES A. MILLS was elected Vice President, Business Development in March
2001. Mr. Mills served as our Vice President, Brain Connection from July 2000 to
March 2001, as Vice President, Marketing from April 1999 to July 2000, and as
Director of Marketing from August 1998 to April 1999. He joined our company in
July 1997, as Director, Business Development. Prior to joining our company, Mr.
Mills was a consultant advising California-based clients on financial and
operational issues. From 1986 to 1996, Mr. Mills was with Citibank, holding
positions with various sales and marketing responsibilities, most recently as a
Vice President responsible for domestic and overseas-based clients. Mr. Mills
previously worked in cable television marketing, promotion and public affairs
for Viacom International, Inc., as well as for a cable programming start-up
venture and a national cable marketing trade association. Mr. Mills holds a B.S.
from Stanford University and an M.B.A. from Harvard Business School.

                                      21


<PAGE>


                                     PART II

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

(a) Our common stock is traded on the Nasdaq National Market under the symbol
"SCIL." The following table sets forth, for the periods indicated, the
closing high and low sales prices per share of our common stock as reported
on the Nasdaq National Market. Trading of our common stock started on July
22, 1999, following our initial public offering. Prior to that, there was no
public market for our common stock.

<TABLE>
<CAPTION>

     1999                                               HIGH       LOW
     ----                                             --------   --------

<S>                                                   <C>        <C>
     Third quarter (from July 22, 1999)               $19.6250   $16.0000
     Fourth quarter                                   $39.8750   $16.0000

     2000
     ----

     First quarter                                    $36.5000   $16.5000
     Second quarter                                   $25.6250   $14.2500
     Third quarter                                    $23.0000   $ 4.8125
     Fourth quarter                                   $ 7.0938   $ 3.7813

     2001
     ----

     First quarter to (March 12, 2001)                $ 7.1250   $ 3.5625
</TABLE>

We have never declared or paid cash dividends on our Common Stock, and we do not
anticipate paying any cash dividends in the foreseeable future. As of March 12,
2001, the approximate number of stockholders of record of the Company's Common
Stock was 153.

(b) The use of net proceeds of $33.1 million from our July 1999 initial public
offering does not represent a material change in the use of proceeds as
described in our prospectus dated July 21, 1999, comprising part of our
Registration Statement on Form S-1, as amended, filed with the Securities and
Exchange Commission, SEC File No. 333-77133.

                                      22

<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

                                                               YEAR ENDED DECEMBER 31,
                                                     (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                          2000           1999            1998           1997           1996
                                       ---------      ---------       --------       --------       --------
<S>                                    <C>            <C>             <C>             <C>           <C>
STATEMENT OF OPERATIONS DATA:
Revenue
     Programs                          $  14,052      $   9,110       $  4,462      $   2,249              -
     Services                              1,209          1,142            704            713              -
                                       ---------      ---------       --------       --------
Total revenues                            15,261         10,252          5,166          2,962              -

Cost of revenues                                                                                           -
     Programs                              2,291          1,451            784            481              -
     Services                              1,266          1,237            614            468              -
                                       ---------      ---------       --------       --------
Total cost of revenues                     3,557          2,688          1,398            949              -

Gross profit                              11,704          7,564          3,768          2,013              -

Operating expenses
     Sale and marketing                   20,543         13,568          6,534          2,646            164
     Research and development              5,893          4,505          3,192          1,965          1,514
     General and administrative            6,463          4,454          3,960          2,537            933
                                       ---------      ---------       --------       --------       --------


Total operating expenses                  32,899         22,527         13,686          7,148          2,611
                                       ---------      ---------       --------       --------       --------

Operating loss                         $ (21,195)     $ (14,963)      $ (9,918)      $ (5,135)      $ (2,611)


Interest income (expense), net             1,077            892           (832)           162             70
Other income (expense), net                    2            (16)             2            (85)            44
                                       ---------      ---------       --------       --------       --------
Net loss                               $ (20,116)     $ (14,087)      $(10,748)      $ (5,058)      $ (2,497)
                                       =========      =========       ========       ========       ========

Basic and diluted net loss per
   share                               $   (1.80)     $   (2.24)      $  (3.87)      $  (1.90)      $  (1.02)
                                       =========      =========       ========       ========       ========

Shares used in computing basic and
   diluted net loss per share             11,148          6,279          2,777          2,657          2,453
                                       =========      =========       ========       ========       ========

BALANCE SHEET DATA:
</TABLE>

<TABLE>
<CAPTION>

                                                                As of December 31
                                                                 (In Thousands)

                                          2000           1999          1998            1997           1996
                                          ----           ----          ----            ----           ----
<S>                                    <C>            <C>             <C>             <C>           <C>
Cash and cash equivalents              $     818      $  15,662       $  6,362        $ 2,699       $  3,822
Investments in government
   securities                              7,667         13,903              -              -              -
Working capital                            7,431         27,397          3,543          1,569          3,562

Total assets                              18,953         36,324          9,121          4,456          4,306

Long-term debt, including current              -              -            417            330             35

Redeemable convertible preferred               -              -         18,940          8,002          4,002
   stock
Stockholders' equity (deficit)(1)         11,601         29,740        (14,082)        (5,064)           (85)
</TABLE>

(1)      We have paid no cash dividends since our inception

                                      23

<PAGE>

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

THE STATEMENTS CONTAINED IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS THAT ARE NOT HISTORICAL IN NATURE ARE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. THESE FORWARD-LOOKING STATEMENTS INCLUDE BUT ARE NOT LIMITED TO
STATEMENTS RELATING TO TRENDS OR PROJECTED LEVELS OF REVENUE, SALES, EXPENSES,
LOSSES OR PROFITS, AND FINANCIAL RESOURCES. FORWARD-LOOKING STATEMENTS ARE
SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE INDICATED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH ARE INDICATED.

OVERVIEW

We develop, market and sell proprietary training software and other educational
products and services. Our programs and services are based on research on how
the brain works and are designed to increase human learning and performance.
Language and reading skills are the foundation for all learning, and we have
developed products to help children, adolescents and adults learn how to read or
become better readers. Our language and reading programs, the Fast ForWord
family, are intensive, computer-based training programs that focus on improving
critical language and reading skills. These training programs are based on
scientific research and have been extensively field-tested. We also sell Reading
Edge, a language and reading assessment product, Fast ForWord Basics software
and storybooks, and CrossTrain professional development software. Our
BrainConnection.com Website provides easily accessible information on brain
research and its application to learning and everyday life as well as
professional development courses. It reaches its audience both through its web
site and BrainConnection.com conferences. We are also developing an e-commerce
business through the BrainConnection.com site. We also offer professional
development seminars in which educators, speech and language professionals and
other professionals can learn about recent developments in brain research and
the practical application of our programs as well as earn continuing education
credit. Our products are delivered through a variety of distribution channels,
including sales to public schools, referrals from speech and language
professionals in private practice and, to a very minor extent,
direct-to-consumer channels including through our web sites. In 2000, sales to
public schools represented approximately 60% of total revenues compared to
30% in 1999.

We commenced operations in February 1996, and, until April 1997, we devoted
substantially all of our efforts to developing the Fast ForWord Language
program, performing a field trial, recruiting and training personnel,
establishing relationships with, and training educators and speech and
language professionals, and raising capital. Since the commercial launch of
Fast ForWord Language in April 1997, we have also devoted substantial efforts
to sales and marketing activities. We have an accumulated deficit of $52.5
million from inception through December 31, 2000. Our goal is to report an
operating profit in the fourth quarter of 2001. We expect to incur additional
losses until that time, due primarily to substantial increases in sales and
marketing, increased personnel-related costs and expenditures for travel,
advertising, promotion, new product launches and other activities. These
losses may be substantial. In addition, we may be unable to meet our targets
for the fourth quarter of 2001 with respect to revenues or operating results
and incur substantial additional losses. If we do not meet our targets, we
may be forced to reduce our expenses which may negatively impact our business.

REVENUES
We derive revenues from the sales of licenses for our software and service fees.
The total value of software and services invoiced during a particular period is
recorded as deferred revenues until recognized.

Program and product revenues are derived from the sale of the Company's software
for limited term site licenses, individual participant licenses, and perpetual
licenses. Customers license the right to use Fast ForWord family of products and
do not acquire or otherwise gain unlimited rights to use the programs.

Revenues from the sales of software products with perpetual licenses are
recognized when the products are shipped, collectibility is probable and the
fees are fixed or determinable. Revenue from the sale of site licenses is
recognized over the life of the license, typically 3 to 12 months. Revenue
from individual participant licenses is recognized over the average period of
use, typically 6 weeks.

                                      24

<PAGE>

Service revenues are derived from the Company's conferences and training
seminars for learning facilitators and from services provided to customers.
Revenues from conferences seminars are recognized when the they are held.
Revenues from support services are recognized over the period of the licenses.

Our revenues have been derived almost exclusively from the sale of our Fast
ForWord family of programs and related seminars and services. While we are
developing additional products based upon our proprietary technology and
neuroscience expertise, there can be no assurance that we will be successful in
doing so. In addition, to date, the substantial majority of our sales of our
training programs have been through public schools and speech and language
professionals. Due to the inherent complexity of selling to schools and school
districts, our sales cycle has lengthened as we have increasingly focused on
this market. This trend may continue as a higher proportion of our business
comes from the public school market. As a result, we may have limited visibility
on our future revenues, and such revenues may fluctuate substantially.

COST OF REVENUES
Cost of revenues consists of program and service costs. Program costs consist of
costs associated with program sales, including royalties, manufacturing,
packaging, documentation, fulfillment, amortization of capitalized software
costs, Internet hosting for the upload of performance data, and technical
support costs. Service costs consist primarily of the costs of providing
training seminars and installations and services to consumers who buy directly
from us, including personnel, materials, facilities and travel. These costs of
revenues are generally recognized as incurred. We generally recognize
significantly higher gross margins on our program revenues than on our service
revenues.

OPERATING EXPENSE
Our operating expenses consist of sales and marketing, research and development
and general and administrative expenses. Sales and marketing expenses
principally consist of salaries and compensation paid to employees engaged in
sales and marketing activities, advertising and promotional materials, public
relations costs and travel. Research and development expenses principally
consist of salaries and compensation paid to employees and consultants engaged
in research and product development activities, product testing, and software
and equipment costs. We expense all software development costs associated with a
product until technological feasibility is established, after which time all
these associated costs are capitalized until the product is available for
commercial release and are amortized over the estimated lives of the related
products. Technological feasibility is deemed established upon completion of a
working version. General and administrative expenses principally consist of
salaries and compensation paid to Company executives and other employees and
consultants in accouning and administration. These expenses also include travel
expenses for these employees as well as outside legal and accounting fees.

We recorded no deferred compensation during the year ended December 31, 2000.
During the years ended December 31, 1999 and 1998, we recorded $278,000 and
$1,586,000 respectively, representing the difference between the exercise price
and the deemed fair value of certain stock options granted to employees. These
amounts are being amortized by charges to operations over the vesting periods of
the individual stock options. This amortization amounted to $429,000 for the
year ended December 31, 2000 and $776,000 for the year ended December 31, 1999.
The remaining aggregate deferred compensation of $72,000 will be amortized over
the remainder of the vesting periods of the options (generally five years).

                                      25

<PAGE>

RESULTS OF OPERATIONS

         The following table sets forth, for the periods indicated, various
financial data expressed as a percentage of revenues (unless otherwise noted)
for the years ended December 31, 2000, 1999, and 1998.

<TABLE>
<CAPTION>

                                                                       YEAR ENDED DECEMBER 31,

                                                        2000                 1999                     1998
                                                    --------------------------------------------------------
<S>                                                  <C>                   <C>                     <C>
       Revenues:
            Programs                                    92.1%                  88.9%                   86.4%
            Services                                     7.9                   11.1                    13.6
                                                       -----                  -----                   -----
       Total Revenues                                  100.0                  100.0                   100.0

       Cost of revenues:
            Programs (1)                                16.3                   15.9                    17.6
            Services (2)                               104.7                  108.3                    87.2
                                                       -----                  -----                    ----
       Total cost of revenues                           23.3                   26.2                    27.1

       Gross profit                                     76.7                   73.8                    72.9

       Operating expenses:
            Sales and marketing                        134.6                  132.3                   126.5
            Research and development                    38.6                   43.9                    61.8
            General and administrative                  42.3                   43.4                    76.7
                                                       -----                  -----                   -----
       Total operating expenses                        215.6                  219.7                   264.9
                                                       -----                  -----                   -----

       Operating loss                                 (138.9)                (146.0)                 (192.0)

       Interest income                                   7.1                    8.7                   (16.1)
       Other income                                        -                   (0.2)                      -
                                                      -------                -------                 -------

       Net loss                                       (131.8)%               (137.4)%                (208.1)%
</TABLE>

-------------------------------------
1 Program costs are expressed as a percentage of program revenues.
2 Service costs are expressed as a percentage of service revenues.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

REVENUES

Total revenues increased by $5.0 million, or 48.9%, to $15.3 million in 2000
compared to 1999. Program revenue increased by $4.9 million, or 54.2%, to
$14.1 million in 2000 compared to 1999 due to new product introductions and
increased sales to public schools. Sales through private professionals
declined 20%. Service revenues increased by $67,000, or 5.9%, to $1.2 million
due to increased number of trainings for public school customers, partially
offset by a decline in trainings for speech and language professionals in
private practice.



                                      26

<PAGE>

COST OF REVENUES

Total cost of revenues increased by $0.9 million, or 32.3%, to $3.6 million
in 2000 compared to 1999. As a percentage of revenues, cost of revenues
decreased to 23.3% from 26.2%. Cost of program revenue increased to 16.3%
from 15.9% in 2000 compared to the prior year due to the amortization of
capitalized software development costs. Cost of services revenues decreased
to 104.7% from 108.3% in the current period compared to 1999 as we have
increased our effectiveness in training and installations in public schools.

SALES AND MARKETING EXPENSES

Sales and marketing expenses increased $7.0 million, or 51.4%, to $20.5
million in 2000 compared to 1999. This increase was primarily attributable to
increased personnel, marketing and travel costs. At year-end, we had 26
quota-bearing sales personnel selling to public schools. We expect further
increases in sales and marketing expenses in the future as we increase
marketing efforts for current and future products.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses increased $1.4 million, or 30.8%, to $5.9
million in the current year compared to 1999. We expect research and
development expense to decline in 2001 because we have decreased our research
efforts outside our core language and reading area.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses increased $2.0 million, or 45.1%, to $6.5
million in 2000 compared to 1999. This increase was primarily attributable to
increased personnel, consulting, legal and travel costs.

PROVISION FOR INCOME TAXES

We have recorded no provision for income taxes as we have incurred losses
since inception. At December 31, 2000, we had net operating loss carryforwards
for federal income tax purposes of approximately $45 million. The net
operating loss carryforwards will expire in years 2011 through 2020.
Utilization of the net operating losses may be subject to a substantial
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986. Previous or contemplated equity transactions
may result in such an ownership change. The annual limitation may result in
the expiration of net operating losses before becoming available to reduce
future tax liabilities. At December 31, 2000, we had approximately $19.3
million of deferred tax assets, comprised primarily of net operating loss
carryforwards. Realization of deferred tax assets is dependent upon future
earnings, if any, the timing and amount of which are uncertain. Accordingly,
the net deferred tax assets have been fully offset by a valuation allowance.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

REVENUES

Total revenues increased by $5.1 million, or 98.5%, to $10.3 million in 1999
compared to the prior year. Program revenues increased by $4.6 million, or
104.2%, to $9.1 million in 1999 compared to 1998 due to new product
introductions and increased sales to both public schools and private
professionals. Service revenues increased by $438,000, or 62.2%, to $1.1 million
in 1999 compared to 1998 due to an increased number of professional development
seminars for both public schools and speech and language professionals in
private practice and software installations in schools.

COST OF REVENUES

Total cost of revenues increased by $1.3 million, or 92.3%, to $2.7 million in
1999 compared to 1998. As a percentage of revenues, cost of revenues decreased
to 26.2% from 27.1%. Cost of programs as a percent of revenue decreased to 15.9%
from 17.6% in 1999 compared to the prior year due to lower royalties and because
technical

                                      27

<PAGE>

support and Internet hosting costs for the upload of training data
declined as a percentage of revenues, reflecting growth in program volume. Cost
of services revenues increased to 108.3% from 87.2% in the current period
compared to 1998 due to administrator training and installation of our training
programs in public schools. To encourage schools to adopt our training programs,
we have offered discounts on administrator training and installation services.

SALES AND MARKETING EXPENSES

Sales and marketing expenses increased $7.0 million, or 107.7%, to $13.6 million
in 1999 compared to 1998. This increase was primarily attributable to increased
personnel, marketing and travel costs. We increased our quota bearing sales
force from 11 to 33 during the year.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses increased $1.3 million, or 41.1%, to $4.5
million in 1999 compared to 1998 as we increased the number of employees and
consultants to develop new products.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses increased $494,000, or 12.5%, to $4.5
million in 1999 compared to 1998. This increase was primarily attributable to
increased personnel, consulting, legal and travel costs.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $19.5 million, $13.4 million and $6.8
million in the years ended December 31, 2000, 1999 and 1998, respectively. The
increase in cash used in operating activities during this period was primarily
attributable to increased expenses associated with growing our sales and
marketing groups and funding increased research and development. We expect that
the cash required to fund operations will decline in 2001 based on our targeted
increase in sales. If we are unable to meet our sales and revenue targets, or
our expenses are higher than our current plans, our cash consumption could be
higher than that of 2000.

Net cash provided by investing activities was $3.1 million in the year ended
December 31, 2000 primarily from the sale of government securities. Net cash
used in investing activities was $15.1 million and $0.6 million in the years
ended December 31, 1999 and 1998, respectively primarily for purchases of
property and equipment and short-term investments.

Net cash provided by financing activities was $1.5 million, $37.8 million and
$11.1 million in the years ended December 31, 2000, 1999 and 1998, respectively.
Net cash provided by financing activities in 2000 was primarily due to the
exercise of stock options. Cash provided by financing activities in 1999 and
1998 were from our initial public offering in 1999 and the proceeds of the sale
of convertible preferred stock in 1999 and 1998.

 As of December 31, 2000, we had cash and cash equivalents and government
securities of $8.5 million. In March 2001, we entered into a $15.0 million
revolving credit facility with Fleet National Bank. The facility was
guaranteed by an affiliate of Warburg, Pincus Ventures, LLP, our largest
shareholder. We believe that our cash and cash equivalents and investments in
government securities combined with the proceeds of loans under the Fleet
National Bank facility will be sufficient to finance our presently
anticipated operating losses and planned capital expenditure requirements.
However, our business may fail to meet our cash flow projections and, if so,
we cannot be certain that our cash resources will be sufficient. We therefore
may need to obtain additional equity or debt financing in the future. We may
not be able to obtain the additional financing to satisfy our cash
requirements on acceptable terms or at all. To date the Company has paid no
dividends. We have no plans to initiate dividends in the next 12 months.

We currently have no significant long-term obligations, which extend beyond
12 months except in connection with the lease of our corporate office
facilities. The minimum lease payments on our new facility is approximately

                                      28

<PAGE>

$176,000 per month in 2001. The base lease payment increases at a compound
annual rate of 3%. The lease terminates in March 2009. Minimum lease payments
on our former office facility are approximately, $82,000 per month through
August 2002. See Note 8 of Notes to Financial Statements.

ITEM 7A.     QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

Our exposure to market risk for changes in interest rates relates primarily
to the rate of interest we will pay on our revolving credit facility with
Fleet National Bank (Fleet). Interest rates on loans extended under that
facility are at LIBOR (London Interbank Offered Rate) plus one percent, or at
Fleet's "Base Rate" at the Company's choice. A hypothetical increase or
decrease in market interest rates by 10% from the market interest rates at
December 31, 2000 would not have a material affect on our expenses or loss.

We also have some market risk related to interest rate changes due to the
increase or decrease in the amount of interest income we can earn on our
investment portfolio. We do not use derivative financial instruments in our
investment portfolio. We ensure the safety and preservation of our invested
principal funds by limiting default risks, market risk and reinvestment risk. We
mitigate default risk by investing in high-credit quality securities. A
hypothetical increase or decrease in market interest rates by 10% from the
market interest rates at December 31, 2000 would not cause the fair value of our
cash and cash equivalents to change by a material amount. Declines in interest
rates over time will, however, reduce our interest income.

                                      29

<PAGE>

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Stockholders
Scientific Learning Corporation

We have audited the accompanying balance sheets of Scientific Learning
Corporation (the "Company") as of December 31, 2000 and 1999, and the related
statements of operations, redeemable convertible preferred stock and
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 2000. Our audit also included the financial
statement schedule included in Item 14. These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Scientific Learning Corporation
at December 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the selected financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

                                                           /s/ ERNST & YOUNG LLP
Walnut Creek, California
February 9, 2001
except for Note 10, as to which the date is
March 9, 2001.

                                      30

<PAGE>

                         Scientific Learning Corporation

                                 Balance Sheets
               (In thousands, except share and per share amounts)

<TABLE>
<CAPTION>

                                                                         DECEMBER 31,
                                                                     2000         1999
                                                                   ---------    ---------
<S>                                                                <C>          <C>
ASSETS
Current assets:
   Cash and cash equivalents                                       $     818    $  15,662
   Investments in government securities                                7,667       13,903
   Accounts receivable, net of allowance for doubtful
      accounts of $241 and $271 at December 31, 2000 and
      1999, respectively                                               4,725        3,472
   Prepaid expenses and other current assets                           1,409          733
                                                                   ---------    ---------
Total current assets                                                  14,619       33,770

Property and equipment, net                                            2,080        1,913
Other assets                                                           2,254          641
                                                                   ---------    ---------
Total assets                                                       $  18,953    $  36,324
                                                                   =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                $   1,148    $     802
   Accrued liabilities                                                 1,477        1,366
   Deferred revenue                                                    4,563        4,205
                                                                   ---------    ---------
Total current liabilities                                              7,188        6,373

Other liabilities                                                        164          211
Total liabilities                                                      7,352        6,584

Commitments and contingencies

Stockholders' equity:
   Preferred stock, $0.001 par value:
     Authorized shares-1,000,000
     Issued and outstanding shares-none in 2000 and 1999                  --           --
   Common stock, $0.001 par value:
     Authorized shares-40,000,000
     Issued and outstanding shares-11,336,380 in 2000 and
       10,507,185 in 1999                                             64,179       62,696
   Deferred compensation                                                 (72)        (566)
   Accumulated deficit                                               (52,506)     (32,390)
                                                                   ---------    ---------
Total stockholders' equity                                            11,601       29,740
                                                                   ---------    ---------
Total liabilities and stockholders' equity                         $  18,953    $  36,324
                                                                   =========    =========
</TABLE>

SEE ACCOMPANYING NOTES.

                                      31

<PAGE>

                         Scientific Learning Corporation

                            Statements of Operations
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>

                                                           Year ended December 31,
                                                   2000              1999             1998
                                                 ---------         ---------        ---------
<S>                                              <C>               <C>              <C>
Revenues:
   Programs                                      $  14,052         $   9,110        $   4,462
   Services                                          1,209             1,142              704
                                                 ---------         ---------        ---------
Total revenues                                      15,261            10,252            5,166

Cost of revenues:
   Programs                                          2,291             1,451              784
   Services                                          1,266             1,237              614
                                                 ---------         ---------        ---------
Total cost of revenues                               3,557             2,688            1,398
                                                 ---------         ---------        ---------
Gross profit                                        11,704             7,564            3,768

Operating expenses:
   Sales and marketing                              20,543            13,568            6,534
   Research and development                          5,893             4,505            3,192
   General and administrative                        6,463             4,454            3,960
                                                 ---------         ---------        ---------
Total operating expenses                            32,899            22,527           13,686
                                                 ---------         ---------        ---------
Operating loss                                     (21,195)          (14,963)          (9,918)
Interest income (expense), net                       1,077               892             (832)
Other income (expense), net                              2               (16)               2
                                                 ---------         ---------        ---------
Net loss                                         $ (20,116)        $ (14,087)       $ (10,748)
                                                 =========         =========        =========

Basic and diluted net loss per share             $   (1.80)        $   (2.24)       $   (3.87)
                                                 =========         =========        =========
Shares used in computing basic and diluted
   net loss per share                               11,148             6,279            2,777
                                                 =========         =========        =========
</TABLE>


SEE ACCOMPANYING NOTES.

                                      32

<PAGE>

                         Scientific Learning Corporation

            Statements of Redeemable Convertible Preferred Stock and
                         Stockholders' Equity (Deficit)
                      (In thousands, except share amounts)

<TABLE>
<CAPTION>

                                                                                      STOCKHOLDER'S EQUITY (DEFICIT)
                                                                             ---------------------------------------------------
                                                    REDEEMABLE CONVERTIBLE
                                                        PREFERRED STOCK          PREFERRED STOCK            COMMON STOCK
                                                      SHARES       AMOUNT      SHARES       AMOUNT       SHARES      AMOUNT
                                                    ------------ ----------- ------------ ------------ ----------- ------------

<S>                                                  <C>         <C>            <C>       <C>           <C>        <C>
Balances at December 31, 1997                        2,452,379   $    8,002     946,435   $    2,355    2,657,788  $      520
   Issuance of common stock under stock option
     plan                                                    -            -           -            -      137,993          44
   Issuance of Series D preferred stock, net of
     issuance costs                                  1,277,777       10,938           -            -            -           -
   Issuance of common stock warrants to preferred
     stockholder in connection with guarantee of
     line of credit and loan obtained from
     stockholder                                             -            -           -            -            -         780
   Deferred compensation related to grant of
     stock options                                           -            -           -            -            -       1,586
   Amortization of deferred compensation                     -            -           -            -            -           -
   Net loss and comprehensive loss                           -            -           -            -            -           -
                                                    ------------ ----------- ------------ ------------ ----------- ------------
Balances at December 31, 1998                        3,730,156       18,940     946,435        2,355    2,795,781       2,930
   Issuance of common stock under stock option
     plan                                                    -            -           -            -      179,258         164
   Issuance of Series D preferred stock, net of
     issuance costs                                    555,555        4,896           -            -            -           -
   Issuance of common stock in initial public
     offering, net of offering costs                         -            -           -            -    2,300,000      33,133
   Conversion of preferred stock to common stock    (4,285,711)     (23,836)   (946,435)      (2,355)   5,232,146      26,191
   Deferred compensation related to grant of
     stock options                                           -            -           -            -            -         278
   Amortization of deferred compensation                     -            -           -            -            -           -
   Net loss and comprehensive loss                           -            -           -            -            -           -
                                                    ------------ ----------- ------------ ------------ ----------- ------------
Balances at December 31, 1999                                -            -           -            -   10,507,185      62,696
   Issuance of common stock under stock option
     plan                                                    -            -           -            -      734,955         706
   Issuance of stock under employee stock                     -           -           -            -       94,240         842
     purchase plan
   Reduction of deferred compensation relating to            -            -           -            -            -         (65)
     cancelled stock options
   Amortization of deferred compensation                     -            -           -            -            -           -
   Net loss and comprehensive loss                           -            -           -            -            -           -
                                                    ------------ ----------- ------------ ------------ ----------- ------------

Balances at December 31, 2000                                -   $        -           -   $        -   11,336,380  $   64,179
                                                    ============ =========== ============ ============ =========== ============
</TABLE>


<TABLE>
<CAPTION>
                                                           STOCKHOLDER'S EQUITY (DEFICIT)
                                                    ----------------------------------------------
                                                                                      TOTAL
                                                      DEFERRED     ACCUMULATED    STOCKHOLDERS'
                                                    COMPENSATION     DEFICIT     EQUITY (DEFICIT)
                                                    -------------- ------------- ----------------
<S>                                                 <C>            <C>           <C>
Balances at December 31, 1997                       $      (384)   $    (7,555)     $   (5,064)

   Issuance of common stock under stock option
     plan                                                     -            -                44
   Issuance of Series D preferred stock, net of
     issuance costs                                           -            -                 -
   Issuance of common stock warrants to preferred
     stockholder in connection with guarantee of
     line of credit and loan obtained from
     stockholder                                              -            -               780
   Deferred compensation related to grant of
     stock options                                       (1,586)             -               -
   Amortization of deferred compensation                    906              -             906
   Net loss and comprehensive loss                            -        (10,748)        (10,748)
                                                    -------------- ------------- ----------------
Balances at December 31, 1998                            (1,064)       (18,303)        (14,082)
   Issuance of common stock under stock option
     plan                                                     -              -             164
   Issuance of Series D preferred stock, net of
     issuance costs                                           -              -             -
   Issuance of common stock in initial public
     offering, net of offering costs                          -              -          33,133
   Conversion of preferred stock to common stock              -              -          23,836
   Deferred compensation related to grant of
     stock options                                         (278)             -               -
   Amortization of deferred compensation                    776              -             776
   Net loss and comprehensive loss                            -        (14,087)        (14,087)
                                                    -------------- ------------- ----------------
Balances at December 31, 1999                              (566)       (32,390)         29,740
   Issuance of common stock under stock option
     plan                                                     -              -             706
   Issuance of stock under employee stock                     -              -             842
     purchase plan
   Reduction of deferred compensation relating to            65
     cancelled stock options
   Amortization of deferred compensation                    429              -             429
   Net loss and comprehensive loss                            -        (20,116)        (20,116)
                                                    -------------- ------------- ----------------
Balances at December 31, 2000                       $      (72)    $   (52,506)     $   11,601
                                                    ============== ============= ================
</TABLE>

SEE ACCOMPANYING NOTES.

                                      34

<PAGE>

                         Scientific Learning Corporation
                            Statements of Cash Flows
                                 (In thousands)

<TABLE>
<CAPTION>

                                                                    YEAR ENDED DECEMBER 31,
                                                             2000           1999          1998
                                                         ------------   ------------   ------------

<S>                                                       <C>            <C>             <C>
OPERATING ACTIVITIES
Net loss                                                  $ (20,116)     $ (14,087)      $ (10,748)
Adjustments to reconcile net loss to net cash used in
   operating activities:
     Depreciation and amortization                            1,398            803           1,328
     Amortization of deferred compensation                      429            776             906
     Changes in operating assets and liabilities:
       Accounts receivable                                   (1,253)        (2,673)           (755)
       Prepaid expenses and other assets                       (676)          (972)           (160)
       Accounts payable                                          346            71             312
       Accrued liabilities                                       111           117             894
       Deferred revenue                                          358         2,556           1,307
       Other liabilities                                         (47)           (6)            146
                                                         ------------   -----------    ------------
Net cash used in operating activities                        (19,450)      (13,415)         (6,770)

INVESTING ACTIVITIES
Purchase of government securities                                  -      (13,903)               -
Sale of government securities                                  6,236          280               70
Purchase of property and equipment, net                       (1,181)      (1,438)            (700)
Increase in other assets                                      (1,997)           -                -
                                                         ------------   -----------    ------------
Net cash provided by (used in) investing activities            3,058      (15,061)            (630)

FINANCING ACTIVITIES
Proceeds from issuance of preferred stock, net                     -        4,896           10,938
Proceeds from issuance of common stock, net                    1,548       33,297               44
Borrowings under bank line of credit                               -            -            6,363
Repayments of borrowings under bank line of credit                 -         (399)          (6,254)
Repayments of capital lease obligations                            -          (18)             (28)
                                                         ------------   -----------    ------------
Net cash provided by financing activities                      1,548       37,776           11,063
                                                         ------------   -----------    ------------
Increase (decrease) in cash and cash equivalents             (14,844)        9,300           3,663
Cash and cash equivalents at beginning of year                15,662         6,362           2,699
                                                         ------------   -----------    ------------
Cash and cash equivalents at end of year                  $      818     $   15,662      $   6,362
                                                         ============   ===========    ============

SUPPLEMENTAL DISCLOSURES
Interest paid                                             $        -     $       29      $    142
                                                         ============   ===========    ============

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
   FINANCING ACTIVITIES
Capital lease obligations incurred                         $        -    $          -    $       6
                                                         ============   ===========    ============

Issuance of common stock warrants in connection with       $        -    $          -    $     780
   guarantee of line of credit and loan obtained from
   stockholder
                                                         ============   ===========    ============
Issuance of common stock in connection with conversion     $        -   $    26,191     $       -
   of redeemable preferred stock and convertible
   preferred stock
                                                         ============   ===========    ============
Deferred compensation                                      $        -    $       278     $    1,586
                                                         ============   ===========    ============

</TABLE>

SEE ACCOMPANYING NOTES.

                                      35

<PAGE>

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Scientific Learning Corporation (the "Company") was incorporated on November 30,
1995 in the State of California and was reincorporated on May 2, 1997 in the
State of Delaware. The Company commenced operations in February 1996. The
Company operates in one business segment, which is the development, marketing
and sales of proprietary software and other education products and services
designed to increase human learning and performance. The Company's revenues have
been derived primarily from the Fast ForWord(R) family of programs, which are
designed to improve language and reading skills. The Company's products are
delivered through a variety of distribution channels, including sales to public
schools, speech and language professionals in private practice and
direct-to-consumer channels.

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash and highly liquid short-term
investments with original maturities of three months or less.

INVESTMENTS IN GOVERNMENT SECURITIES

The Company classifies all of its investments as available-for-sale securities.
Such investments consist of United States Government and Federal Agency
securities which are carried at amounts which approximate fair value, with
unrealized gains and losses on such securities reflected, net of tax, as other
comprehensive income (loss) in stockholder's equity (deficit) until disposition.
Realized gains and losses on investments in government securities are included
in interest income. There were no realized gains or losses in the years ended
December 31, 2000 or 1999. Amortized cost approximates the fair market value of
the available-for-sale securities at December 31, 2000 and 1999.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of the Company's cash and cash equivalents, investments in
government securities, accounts receivable, and accounts payable approximate
fair value. The Company determines the fair value of its investments in
government securities based on quoted market prices.

ACCOUNTS RECEIVABLE

The Company conducts business with individuals and school districts primarily in
the United States. Ongoing credit evaluations are performed on customers and
collateral is generally not required. Allowances for uncollectible accounts are
made for potential credit issues and such allowances and issues to date have not
been material. Accounts receivable included unbilled amounts of $94,000 and
$1,138,000 at December 31, 2000 and 1999, respectively.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets that range
from three to five years.

                                      36

<PAGE>

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SOFTWARE DEVELOPMENT COSTS

The Company accounts for software development costs in accordance with Statement
of Financial Accounting Standards ("FAS") No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," under which certain
software development costs incurred subsequent to the establishment of
technological feasibility are capitalized and amortized over the estimated lives
of the related products. Technological feasibility is established upon
completion of a working model. The Company capitalized $1,452,000 and $629,000
of software development costs for the years ended December 31, 2000 and 1999,
respectively. Software costs are amortized over the estimated useful life of the
software, which is three years. Amortization was $384,000 and $80,000 for the
year ended December 31, 2000 and 1999, respectively.

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company accounts for employee stock options using the intrinsic value method
in accordance with Accounting Principles Board Opinion No. 25 ("APB 25") and
makes the pro forma disclosures required by FAS No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123") (Note 6).

LONG-LIVED ASSETS

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," the Company continually reviews long-lived assets to
assess recoverability based upon undiscounted cash flow analysis.
Impairments, if any, are recognized in operating results in the period in
which a permanent diminution in value is determined.

REVENUE RECOGNITION

We derive revenues from the sales of licenses for our software and service fees.
The total value of software and services invoiced during a particular period is
recorded as deferred revenues until recognized.

Program revenues are derived from the sale of limited term site licenses,
individual participant licenses, and perpetual licenses of the Company's
software. Customers license the right to use Fast ForWord family of products and
do not acquire or otherwise gain unlimited rights to use the programs.

Revenues from the sales of software products with perpetual licenses are
recognized when the products are shipped, collectibility is probable and the
fees are fixed or determinable. Revenue from the sale of site licenses is
recognized over the life of the license, typically 3 to 12 months. Revenue from
individual participant licenses is recognized over the average duration of the
program's use, typically 6 weeks.

Service revenues are derived from the Company's conferences and training
seminars for learning facilitators and from services provided to customers.
Revenues from conferences seminars are recognized when the event is held.
Revenues from support services are recognized over the period of the licenses.

Cancellations and refunds are allowed in limited circumstances, and such amounts
have not been significant. Provisions are made for cancellations and refunds as
revenue is recorded. Costs of revenues are recognized as such costs are
incurred. Royalty costs are recorded over the period in which the related
program revenue is recorded.

ADVERTISING

Advertising costs are expensed as incurred. Advertising expense was $1,313,000,
$357,000, and $292,000 for the years ended December 31, 2000, 1999, and 1998,
respectively.

INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the use of the liability method in
accounting for income taxes. Under SFAS No. 109, deferred tax assets and
liabilities using enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the net amounts
expected to be realized.

                                      37

<PAGE>

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NET LOSS PER SHARE

Basic and diluted net loss per share information for all periods is presented
under the requirement of FAS No. 128, "Earnings per Share" ("FAS 128"). Basic
earnings per share have been computed using the weighted-average number of
shares outstanding during the period and excludes any dilutive effects of stock
options, warrants, and convertible securities. Potentially dilutive securities
have been excluded from the computation of diluted net loss per share, as their
inclusion would be antidilutive.

If the Company had reported net income, the calculation of diluted earnings per
share would have included approximately an additional 463,000, 996,000, and
955,000 common equivalent shares (computed using the treasury stock method)
related to the outstanding options and warrants not included above for the years
ended December 31, 2000, 1999, and 1998, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Financial Instruments and Hedging Activities,"
which provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. In June 1999, the FASB issued
SFAS No. 137, which defers the effective date of SFAS No. 133 to years beginning
after June 15, 2000. The Company does not anticipate that SFAS No. 133 will have
a material impact on its consolidated financial position or results of
operations when adopted.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 101, "Revenue in Financial Statements," ("SAB 101"). SAB
101, as amended, summarizes certain of SEC's views in applying generally
accepted accounting principles to revenue recognition classification in
financial statements. The Company adopted SAB 101 in the fourth quarter of 2000.
The adoption of SAB 101 by the Company did not have a material impact on its
revenues of results of operations.

In March 2000, the FASB issued interpretation No. 44 ("FIN 44"), "Accounting
for Certain Transactions Involving Stock Compensation," an interpretation of
APB No. 25. FIN 44 clarifies guidance for certain issues that arose in the
application of APB No. 25. FIN 44 is generally effective, and to be applied
prospectively, to all new awards, modifications to outstanding awards and
changes in employee status on or after July 1, 2000. The adoption of FIN 44
did not have a material impact on the Company's financial position or results
of operations.

RECLASSIFICATIONS

Certain reclassifications have been made to the prior year balances to conform
to the current presentation.

2. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following (in
thousands):

<TABLE>
<CAPTION>

                                                             December 31,
                                                        2000            1999
                                                   --------------   ------------
<S>                                                <C>              <C>
Prepaid expenses                                   $        1,100   $        567
Inventory of product and marketing materials                  273            163
Other receivables                                              36              3
                                                   --------------   ------------
                                                   $        1,409   $        733
                                                   ==============   ============
</TABLE>

                                      38

<PAGE>

3. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>

                                                                           December 31,
                                                                      2000            1999
                                                                   ----------      ----------
<S>                                                                <C>             <C>
     Computer equipment                                            $    3,646      $    2,657
     Office furniture and equipment                                     1,071             954
     Leasehold improvements                                               109              22
                                                                   ----------      ----------
                                                                        4,826           3,633
     Less accumulated depreciation                                     (2,746)         (1,720)
                                                                   ----------      ----------
                                                                   $    2,080      $    1,913
                                                                   ==========      ==========
</TABLE>

4. OTHER ASSETS

Other assets consist of the following (in thousands):

<TABLE>
<CAPTION>

                                                                           December 31,
                                                                      2000            1999
                                                                   ----------      ----------
<S>                                                                <C>             <C>
     Software development cost                                     $    2,081      $      629
       Less accumulated amortization                                     (464)            (80)
                                                                   ----------      ----------
     Software development costs, net                                    1,617             549
     Long-term deposits                                                   637              92
                                                                   ----------      ----------
                                                                   $    2,254      $      641
                                                                   ==========      ==========
</TABLE>

5. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>

                                                                           December 31,
                                                                      2000            1999
                                                                   ----------      ----------
<S>                                                                <C>             <C>
Accrued vacation                                                   $       553     $      464
Employee stock purchase plan                                               204            320
Accrued commissions                                                        329            246
Other accrued liabilities                                                  391            336
                                                                   ----------      ----------
                                                                   $     1,477     $    1,366
                                                                   ===========     ==========
</TABLE>

                                      39

<PAGE>

6. INCOME TAXES

There has been no provision for U.S. federal, U.S. state or foreign income taxes
for any period as the Company has incurred operating losses in all periods and
for all jurisdictions.

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


<TABLE>
<CAPTION>

                                                                           December 31,
                                                                      2000            1999
                                                                   ----------      ----------
<S>                                                                <C>             <C>
Deferred tax assets:
   Net operating loss carryforwards                                $   15,588      $   10,461
   Capitalized research and development costs                             629             358
   Deferred revenue                                                     1,825               -
   Research credits carryforwards                                         445             295
   Other                                                                  783             591
                                                                   ----------      ----------
Total deferred tax assets                                              19,270          11,705
Valuation allowance                                                   (19,270)        (11,705)
                                                                   ----------      ----------
Net deferred tax assets                                                     -      $        -
                                                                   ==========      ==========
</TABLE>

Realization of deferred tax assets is dependent upon future earnings, if any,
the timing and amount of which are uncertain. Accordingly, the net deferred tax
assets have been fully offset by a valuation allowance. The valuation allowance
increased by $7,565,000, and $5,105,000 during the years ended December 31, 2000
and 1999, respectively.

As of December 31, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $42,700,000, which expire
in the years 2011 through 2020. The Company had net operating loss carryforwards
for state income tax purposes of approximately $17,600,000 expiring in the years
2001 through 2010.

Utilization of the Company's net operating loss carryforwards may be subject to
substantial annual limitation due to the ownership change limitation provided by
the Internal Revenue Code and a similar state provision. Such an annual
limitation could result in the expiration of the net operating loss
carryforwards before utilization.

7. STOCKHOLDERS' EQUITY

Effective immediately prior to the closing of the initial public offering of its
common stock, the Board of Directors authorized, and the stockholders approved
the number of authorized shares of common stock to be 40,000,000 and the number
of authorized shares of preferred stock to be 1,000,000.

INITIAL PUBLIC OFFERING

On July 22, 1999, the Company issued 2,300,000 shares of common stock in an
initial public offering at a price of $16.00 per share. The net proceeds to the
Company from that offering were approximately $33.1 million after deducting the
underwriters' discount and offering expenses. In addition, upon completion of
the initial public offering, each outstanding share of the Company's convertible
preferred stock was automatically converted into one share of common stock.

                                      40

<PAGE>

7. STOCKHOLDERS' EQUITY (CONTINUED)

COMMON STOCK

At December 31, 2000, the Company had reserved shares of common stock for future
issuance as follows:

<TABLE>

<S>                                                           <C>
   Stock Options outstanding                                  1,618,274
   Stock Options available for future grants                    696,494
   Common stock warrants                                        116,666
                                                              ---------
                                                              2,431,434
                                                              =========
</TABLE>


STOCK SPLIT

In May 1999, the Company's stockholders approved a two-for-three reverse stock
split of issued and outstanding common and preferred stock. All common and
preferred share prices, and amounts associated with rights, preferences,
dividends and privileges in the accompanying financial statements have been
retroactively adjusted to reflect the stock split.

STOCK OPTIONS

The Company's stock option plans provide for the issuance of incentive stock
options (ISO) or nonstatutory stock options (NSO) to eligible participants. The
ISOs may be granted at a price per share not less than the fair market value at
the date of grant. The NSOs may be granted at a price per share not less than
85% of the fair market value at the date of grant. Certain options previously
granted can be exercised prior to vesting, but, if so exercised, these unvested
shares are subject to repurchase by the Company. Options and unvested shares
granted generally vest over a period of four or five years. Options under the
plan have a maximum term of 10 years. In the event option holders cease to be
employed by the Company, all unvested options are forfeited and all vested
options may be exercised within a 90-day period after termination; the Company
also has the right to repurchase at the original purchase price any unvested
(but issued) shares if the holder is no longer employed by the Company. At
December 31, 2000 and December 31, 1999, there are 6,181 and 0 outstanding
shares subject to such repurchase, respectively.

In May 1999, the Company's stockholders approved the 1999 Equity Incentive Plan,
which amends and restates the Company's existing stock option plan. There are
3,292,666 shares of common stock authorized for issuance under the plan,
including shares originally authorized under predecessor plans and shares added
to the plan in 2000.

In May 1999, the Company's stockholders approved the 1999 Non-Employee
Directors' Stock Option Plan and reserved an aggregate of 75,000 shares of
common stock for grants of stock options under the plan.

                                      41

<PAGE>

7. STOCKHOLDERS' EQUITY (CONTINUED)

STOCK OPTIONS (CONTINUED)

A summary of the Company's stock option activity under the plans is as follows:

<TABLE>
<CAPTION>

                                                OUTSTANDING OPTIONS
                                      -----------------------------------------
                                                            WEIGHTED-AVERAGE
                                                           EXERCISE PRICE PER
                                       NUMBER OF SHARES          SHARE
                                      ------------------- ---------------------
<S>                                    <C>                  <C>
Outstanding at December 31, 1997            1,041,384            $0.33
  Granted                                     346,488             4.59
  Exercised                                  (137,993)            0.32
  Canceled                                    (61,923)            0.89
                                      ------------------- ---------------------
Outstanding at December 31, 1998            1,187,956             1.54
  Granted                                     814,587            12.65
  Exercised                                  (179,258)            0.59
  Canceled                                   (142,718)            5.35
------------------------------------- ------------------- ---------------------
Outstanding at December 31, 1999            1,680,567             6.72
   Granted                                    932,652            12.40
   Exercised                                 (734,955)             .97
   Canceled                                  (259,990)           14.30
Outstanding at December 31, 2000            1,618,274            11.34
                                      =================== =====================
Vested at December 31, 2000                   357,889          $ 11.79
                                      =================== =====================
</TABLE>

The following table summarizes information concerning outstanding and
exercisable stock options at December 31, 2000:

<TABLE>
<CAPTION>

                                                   OUTSTANDING                                  VESTED AND
                                                                                                EXERCISABLE
                                --------------------------------------------------    --------------------------------
                                                WEIGHTED-           WEIGHTED-                            WEIGHTED
                                                   AVERAGE           AVERAGE                              AVERAGE
                                                   EXERCISE         REMAINING                         EXERCISE PRICE
                                  NUMBER OF       PRICE PER      CONTRACTUAL LIFE        NUMBER OF       PER SHARE
         PRICE RANGE                SHARES          SHARE            (YEARS)              SHARES
------------------------------- --------------- --------------- ------------------    -------------- -----------------

<S>                             <C>               <C>                <C>              <C>              <C>
    $0.26 - $ 6.00                   397,135        $ 4.86             8.52                106,031       $ 4.79
    $6.06 - $ 6.12                   348,850         $6.11             9.77                  5,098        $6.12
    $6.25 - $11.25                   390,947        $10.71             8.29                137,982       $11.08
   $14.00 - $17.75                   311,941        $16.48             8.91                 82,548       $16.45
   $17.88 - $39.88                   169,401        $29.32             9.08                 26,230       $30.24
                                ---------------                                       --------------
                                   1,618,274                                               357,889
                                ===============                                       ==============
</TABLE>

No deferred compensation was recorded in the year ended December 31, 2000. The
Company recorded deferred compensation of $278,000 and $1,586,000 during the
years ended December 31, 1999 and 1998, respectively, representing the
difference between the exercise price and the deemed fair value of certain of
the Company's stock options granted to employees. These amounts are being
amortized by charges to operations over the vesting periods of the individual
stock options using a graded method. Such amortization amounted to $429,000,
$776,000, and $906,000 for the years ended December 31, 2000, 1999, and 1998,
respectively. The remaining aggregate deferred compensation of $72,000 will be
amortized over the remainder of the vesting periods of the options (generally
five years).

                                      42

<PAGE>

7. STOCKHOLDERS' EQUITY (CONTINUED)

COMMON STOCK WARRANTS

In 1998 the Company issued warrants to purchase 116,666 shares of the Company's
common stock at $9.00 per share. The warrants were issued to a significant
stockholder of the Company in connection with loans and loan guarantees to the
Company. The warrants expire in 2003. The Company estimated the fair value of
the warrants to be $780,000, which was amortized by charges to interest expense
during the year ended December 31, 1998.

PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION

Pro forma information regarding results of operations and net loss per share is
required by FAS 123, which also requires that the information be determined as
if the Company had accounted for its employee stock options under the fair value
method of FAS 123. The fair value for these options was estimated at the date of
grant using the minimum value method with the following weighted-average
assumptions: a risk-free interest rate of 5.8%, 6.0%, and 6.0% for the years
ended December 31, 2000, 1999, and 1998, respectively, no dividend yield, and a
weighted-average expected life of the option of five years.

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

Had compensation cost for the Company's stock-based compensation plans been
determined using the fair value at the grant dates for awards under those plans
calculated using the minimum value method of FAS 123, the Company's net loss and
pro forma basic and diluted net loss per share would have been increased to the
pro forma amounts indicated below:

<TABLE>
<CAPTION>

                                                                               YEAR ENDED DECEMBER 31,
                                                                      2000            1998            1998
                                                                  ------------    ------------    ------------
<S>                                                               <C>             <C>             <C>
Pro forma net loss (in thousands)                                 $    (23,044)   $    (14,824)   $    (10,822)
                                                                  ============    ============    ============
Pro forma basic and diluted net loss per share                    $      (2.07)   $      (2.36)   $      (3.90)
                                                                  ============    ============    ============
</TABLE>

The weighted-average fair value of options granted, which is the value assigned
to the options under FAS 123, was $10.70, $8.58, and $6.44 for options granted
during the years ended December 31, 2000, 1999, and 1998, respectively.

The pro forma impact of options on the net loss for the years ended December 31,
2000, 1999, and 1998 is not representative of the effects on net income (loss)
for future years, as future years will include the effects of additional years
of stock option grants.

1999 EMPLOYEE STOCK PURCHASE PLAN

In May 1999 the stockholders approved the 1999 Employee Stock Purchase Plan
which became effective upon the completion of the initial public offering of
the Company's common stock. The Company has reserved a total of 350,000
shares of common stock for issuance under the plan. Eligible employees may
purchase common stock at 85% of the lesser of the fair market value of the
Company's common stock on the first day of the applicable one-year offering
period or the last day of the applicable six-month purchase period. During
the year ended December 31, 2000 734,955 shares of common stock were issued
and at December 31, 2000 696,454 shares were available for issuance under the
Plan.

                                      43

<PAGE>

8. COMMITMENTS

LEASES

Beginning March 2001, the Company will lease a new corporate office facility
under a non-cancelable operating lease, with an original term of eight years. As
well, the Company has an ongoing lease obligation through September 2002, for
space in its former office facility. Future minimum payments under both leases
as of December 31, 2000 are as follows (in thousands):

<TABLE>

<S>                                                               <C>
2001                                                              $     2,656
2002                                                                    3,375
2003                                                                    2,676
2004                                                                    2,783
2005 and thereafter                                                    13,124
                                                                  -----------
Total minimum lease payments                                      $    24,614
                                                                  ===========
</TABLE>

Rent expense under all operating leases was $1,022,000, $1,068,000, $974,000 for
the years ended December 31, 2000, 1999, and 1998, respectively.

The Company has the option to extend the operating lease covering its new
corporate office facility for two five-year terms at the end of the original
lease term, provided that certain conditions of the lease agreement are met.

LICENSE AGREEMENT

In September 1996, the Company entered into a license agreement with a
university for the use of the intellectual property underlying its training
methods. In exchange for the license, the Company issued 131,192 shares of
Series A preferred stock and paid the university a license-issue fee of
$200,000. In March 1997, the number of shares of Series A preferred stock issued
under the agreement was reduced to 114,526. On completion of the initial public
offering these shares were converted to an equivalent number of common shares.

Under the agreement, additional royalties and milestone payments are payable to
the university based upon revenues from products using the licensed technology.
Royalty and milestone expenses were $870,000, $612,000, and $415,000 for the
years ended December 31, 2000, 1999, and 1998, respectively, and are included in
cost of revenues.

If the Company loses or is unable to maintain the license agreement during
the term of the underlying patents, it would materially harm its business. It
could delay or prevent the introduction of new products and would likely
require the recall of most of the Company's products from the market. Even if
the Company could identify and license or develop non-infringing equivalent
technology, which is far from certain, the cost and delays from such a
changeover in the Company's base technology would cause material harm to the
Company's business. The University may terminate the license agreement if the
Company fails to perform or violates its terms without curing the violation
within 60 days of receiving written notice of the violation.

                                      44

<PAGE>

9. EMPLOYEE RETIREMENT AND BENEFIT PLAN

The Company has a defined contribution retirement plan under Section 401(k) of
the Internal Revenue Code, which covers substantially all employees. Eligible
employees may contribute amounts to the plan, via payroll withholding, subject
to certain limitations. The Company does not match contributions by plan
participants.

10. SUBSEQUENT EVENTS

LOAN AGREEMENT
In March 2001, the Company entered into a revolving loan agreement with a bank
for an unsecured revolving credit facility in the amount of $15,000,000,
expiring October, 2002. Borrowings under the loan agreement bear interest at the
election of the Company at the rate of Libor plus one percent or the bank's
"Base Rate".

An entity affiliated with a significant stockholder of the Company has
provided an unlimited guarantee for the facility. In consideration of the
guarantee the Company has agreed to reimburse the affiliated entity for any
amounts it is required to pay under the guarantee and has granted it a
security interest in substantially all of the Company's assets. The Company
has issued a fully vested warrant to purchase 1,375,000 shares of common
stock of the Company at an exercise price of $8.00. The warrant will expire
March 9, 2008. The estimated value of the warrants is $3.6 million.

LITIGATION
A class action lawsuit was filed against the Company and certain of its officers
and directors on August 22, 2000, in U.S. District Court for the Northern
District of California. The suit, Stitt v. Scientific Learning Corporation, et
al, alleged that the defendants made false and misleading statements and/or
failed to disclose information concerning the Company's projected revenues for
the second quarter of 2000.

On February 6, 2001, the parties entered into a stipulation pursuant to which
plaintiffs agreed to voluntarily dismiss the lawsuit without prejudice. By Order
dated February 8, 2001, the court approved the parties' stipulation and
dismissed the lawsuit.. No consideration was exchanged in connection with the
dismissal and neither the lead plaintiffs nor their counsel will receive any
compensation or reimbursement of expenses.

                                      45

<PAGE>

11. INTERIM FINANCIAL INFORMATION (UNAUDITED)

Quarterly financial data (in thousands)

<TABLE>
<CAPTION>

                                                                          2000
                                 ---------------------------------------------------------------------------------------
                                  QUARTER ENDED     QUARTER ENDED    QUARTER ENDED     QUARTER ENDED
                                     MARCH 31,         JUNE 30,       SEPTEMBER 30,     DECEMBER 31,        TOTAL
                                     --------          -------        ------------      -----------         -----
<S>                                <C>                <C>              <C>               <C>               <C>
Net sales                          $       3,431      $     3,706      $   4,487         $   3,637         $   15,261

Gross Profit                               2,686            2,643          3,531             2,844             11,704

Net Loss                                  (4,818)          (6,301)        (4,162)           (4,835)           (20,116)

Net Loss per share
(basic and diluted)                         (.45)            (.56)          (.37)             (.43)             (1.80)
</TABLE>


<TABLE>
<CAPTION>
                                                                          1999
                                 ---------------------------------------------------------------------------------------
                                  QUARTER ENDED     QUARTER ENDED    QUARTER ENDED     QUARTER ENDED
                                     MARCH 31,         JUNE 30,       SEPTEMBER 30,     DECEMBER 31,        TOTAL
                                     --------          -------        ------------      -----------         -----
<S>                                <C>                <C>              <C>               <C>               <C>
Net sales                          $       1,340        $   2,051       $     3,901     $                  $10,252

Gross Profit                               1,007            1,346             2,964           2,247          7,564

Net Loss                                  (3,537)          (3,957)           (2,296)         (4,297)       (14,087)

Net Loss per share
(basic and diluted)                        (1.26)           (1.35)             (.26)           (.41)         (2.24)
</TABLE>

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

Not applicable.

                                                46
<PAGE>

                                    Part III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The information required by this item with respect to our executive officers is
contained in Part I "Executive Officers".

Information respecting our directors is set forth under the caption "Election of
Directors" in our Proxy Statement relating to our 2001 Annual Meeting of
Stockholders and is incorporated by reference into this Form 10-K Report. The
Proxy Statement will be filed with the Securities and Exchange Commission in
accordance with Rule 14a-6(c) promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). With the exception of the foregoing
information and other information specifically incorporated by reference into
this Form 10-K Report, the Proxy Statement is not being filed as a part hereof.

Information respecting compliance with Section 16(a) of the Exchange Act is set
forth under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement and is incorporated by reference into this
Form 10-K Report.


ITEM 11.   EXECUTIVE COMPENSATION

Information concerning executive compensation is set forth under the captions
"Executive Compensation", "Stock Option Grants and Exercises", "Aggregated
Option Exercises in 200, and Year-end Option Values" and "Compensation Committee
Interlocks and Insider Participation" in the Proxy Statement and is incorporated
by reference into this Form 10-K Report.


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information concerning security ownership of certain beneficial owners and
management is set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement and is incorporated by
reference into this Form 10-K Report.


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information concerning certain relationships and related transactions is set
forth under the captions "Employment Agreements" and "Certain Transactions" in
the Proxy Statement and is incorporated by reference into this Form 10-K Report.

                                      47


<PAGE>


                                    PART IV.

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEULES AND REPORTS OF FORM 8-K

(a)      Documents files as part of this report.

(1)      Financial Statements
              Independent Auditor's Report
              Balance Sheet - December 31, 2000 and 1999
              Statement of Operations - Years Ended December 31, 2000,
                 1999 and 1998
              Statements of Redeemable Convertible Preferred Stock and
                 Stockholders' Equity (Deficit) - Years Ended December 31, 2000,
              1999 and 1998 Statement of Cash Flows - Years Ended December 31,
              2000, 1999 and 1998 Notes to the Financial Statements

(2)      Financial Statement Schedules
              As required under Item 8, Financial Statements and Supplementary
              Data, the financial statement schedule of the Company is provided
              in this separate section. The financial statement schedule
              included in this section is as follows:

              Schedule II - Valuation and Qualifying Accounts
              (IN THOUSANDS)


              Valuation and Qualifying Accounts which are deducted in the
              Balance Sheet from the assets to which they apply:

              Allowance for Doubtful Accounts Years ended December 31:

<TABLE>
<CAPTION>

                                                   Charges
                                                      to
                                                  Operating         Charges to
                              Opening Balance      Expenses          Allowance         Deductions     Closing Balance
                              ---------------- ----------------- ----------------- ----------------- ----------------
<S>                               <C>                <C>              <C>                  <C>               <C>    <C>

                  2000             $271              $10               $159                 $(227)           $241
                  1999             $ 33              $40               $198                 $ -              $271
                  1998             $ 5               $28               $  -                 $ -              $ 33
</TABLE>

       (3)   Exhibits

<TABLE>
<CAPTION>

           EXHIBIT NO.                                              DESCRIPTION OF DOCUMENT________________
           -----------     --------------------------------------------------------------------------------
<S>                        <C>
           3.31              Restated Certificate of Incorporation.
           3.41              Amended and Restated Bylaws.
           4.11              Reference is made to Exhibits 3.3 and 3.4.
           4.22              Amended and Restated Registration Rights Agreement, dated as of December 31, 1998.
           4.31              Specimen Stock Certificate.
           4.43              Amendment No. 1 by and among Scientific Learning Corporation, Warburg, Pincus
                             Ventures, L.P. and WPV, Inc., effective as of March 9, 2001 to Amended and Restated
                             Registration Rights Agreement entered into as of December 30, 1998
           10.11             Form of Indemnity Agreement with each of our directors and executive officers.
           10.24             1999 Equity Incentive Plan, as amended.
           10.31             Form of Stock Option Agreement under the Incentive Plan.
           10.41             Form of Stock Option Grant Notice under the Incentive Plan.
           10.51             1999 Non-Employee Directors' Stock Option Plan.
           10.61             Form of Nonstatutory Stock Option Agreement under the Non-Employee Directors' Stock
                             Option Plan (Initial Grant).
           10.71             Form of Nonstatutory Stock Option Agreement under the Non-Employee Directors' Stock
                             Option Plan (Annual Grant).
           10.81             1999 Employee Stock Purchase Plan.
           10.91             Form of 1999 Employee Stock Purchase Plan Offering under the Employee Stock Purchase
                             Plan.
           10.101            Consulting Agreement, dated as of September 20, 1996, with Dr. Michael M. Merzenich,
                             as modified on January 19, 1998.
           10.111            Consulting Agreement, dated as of September 19, 1996, with Dr. Paula A. Tallal, as
                             modified on January 22, 1998.
           10.131[cad 217]           Exclusive License Agreement, dated September 27, 1996, with the Regents of the
                             University of California.
           10.141            Lease Agreement, dated as of July 31, 1997, with GBC-University Associates, L.P.
           10.151            Securities Purchase Agreement, dated September 24, 1996, with Warburg, Pincus
                             Ventures, L.P.
           10.164            Lease, dated as of March 20, 2000, with Rotunda Partners II.
           10.175            Revolving Loan Agreement dated as of March 9, 2001 by and between Scientific
                             Learning Corporation and Fleet National Bank
           10.186            Agreement to Issue Warrant and Grant of Security Interest dated as of March 9, 2001
                             by and between Scientific Learning Corporation and WPV, Inc
           10.197            Warrant to Purchase 1,375,000 Shares of Common Stock of Scientific Learning
                             Corporation
           23.1              Consent of Ernst & Young LLP, Independent Auditors
                             We consent to the incorporation by reference in
                             Registration Statement 9Form S-8) pertaining to the
                             1999 Equity Incentive Plan, 1999 Non-Employee
                             Director's Stock Option Plan and the 1999 Employee
                             Stock Purchase Plan; and in the registration
                             Statement (Form S-8) pertaining to 1999 Equity
                             Incentive Plan of Scientific Learning Corporation
                             of our report dated February 9, 2001, except for
                             Note 10, as to which the date is March 9, 2001 with
                             respect tot eh financial statements and schedule of
                             Scientific Learning Corporation included in this
                             Annual Report (Form 10-K0 for the year ended
                             December 31, 2000.

-----------------------------
            1       Incorporated by reference to the same numbered exhibit previously filed with the Company's
                    Registration Statement on Form S-1 (SEC File No. 333-77133).
            2       Incorporated by reference to the same numbered exhibit previously filed with the Company's
                    Form 10-K for the year ended December 31, 1999 (SEC File No. 000-24547).
            3       Incorporated by reference to the same numbered exhibit previously filed with the Company's
                    Form 8-K on March 12,2001 (SEC File No. 000-24547).
            4       Incorporated by reference to the same numbered exhibit previously filed with the Company's
                    Form 10-Q for the quarter ended June 30, 2000 (SEC File No. 000-24547).
            5       Incorporated by reference to Exhibit 99.1 previously filed with the Company's Form 8-K on
                    March 12,2001 (SEC File No. 000-24547).
            6       Incorporated by reference to Exhibit 99.2 previously filed with the Company's Form 8-K on
                    March 12,2001 (SEC File No. 000-24547).
            7       Incorporated by reference to Exhibit 99.3 previously filed with the Company's Form 8-K on
                    March 12,2001 (SEC File No. 000-24547).
            [cad 217]       Certain portions of this exhibit have been omitted based upon our request for confidential
                    treatment for portions of the referenced exhibit.
</TABLE>


(b)  The Company filed a report on Form 8-K, dated March 12, 2001, furnishing
     under Item 5 information with respect to a Revolving Loan Agreement, dated
     March 9, 2001, between the Company and Fleet National Bank and related
     agreements.


<PAGE>


                          SIGNATURES


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

SCIENTIFIC LEARNING CORPORATION


By    /s/ Sheryle J. Bolton                         March 29, 2001
   --------------------------
      Sheryle J. Bolton
      Chief Executive Officer

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

<TABLE>
<CAPTION>

           SIGNATURES                                TITLE                                  DATE
  ----------------------------   --------------------------------------------   ---------------------------
<S>                              <C>                                                   <C>

     /s/ Sheryle J. Bolton
     ---------------------
     Sheryle J. Bolton              Chairman, Chief Executive Officer                   March 29, 2001
                                    and Director (Principal Executive
                                    Officer)

     /s/ Jane A. Freeman                                                                March 29, 2001
     --------------------
     Jane A. Freeman                Chief Financial Officer, Vice President
                                    Finance and Treasurer (Principal Financial
     /s/ Dr. Michael M. Merzenich   and Accounting Officer)
     ----------------------------
     Dr. Michael M. Merzenich       Chief Scientific Officer and Director               March 23, 2001

     /s/ Dr. Paula A. Tallal
     -----------------------
     Dr. Paula A. Tallal            Director                                            March 22, 2001

     /s/ Carleton A. Holstrom
     ------------------------
     Carleton A. Holstrom           Director                                            March 29, 2001

     /s/ Rodman W. Moorhead
     -----------------------
     Rodman W. Moorhead, III        Director                                            March 29, 2001

     /s/ Ajit Dalvi
     ---------------------
     Ajit Dalvi                     Director                                            March 29, 2001

     /s/ Joseph Martin
     ---------------------
     Dr. Joseph Martin              Director                                            March 24, 2001
</TABLE>

                                      50

<PAGE>



                                                        EXHIBIT INDEX
<TABLE>
<CAPTION>

           EXHIBIT NO.                                              DESCRIPTION OF DOCUMENT
           -----------     --------------------------------------------------------------------------------
<S>                        <C>
           3.3(1)            Restated Certificate of Incorporation.
           3.4(1)            Amended and Restated Bylaws.
           4.1(1)            Reference is made to Exhibits 3.3 and 3.4.
           4.2(2)            Amended and Restated Registration Rights Agreement, dated as of December 31, 1998.
           4.3(1)            Specimen Stock Certificate.
           4.4(3)            Amendment No. 1 by and among Scientific Learning Corporation, Warburg, Pincus
                             Ventures, L.P. and WPV, Inc., effective as of March 9, 2001 to Amended and Restated
                             Registration Rights Agreement entered into as of December 30, (1)998
           10.1(1)           Form of Indemnity Agreement with each of our directors and executive officers.
           10.2(4)           1999 Equity Incentive Plan, as amended.
           10.3(1)           Form of Stock Option Agreement under the Incentive Plan.
           10.4(1)           Form of Stock Option Grant Notice under the Incentive Plan.
           10.5(1)           1999 Non-Employee Directors' Stock Option Plan.
           10.6(1)           Form of Nonstatutory Stock Option Agreement under the Non-Employee Directors' Stock
                             Option Plan (Initial Grant).
           10.7(1)           Form of Nonstatutory Stock Option Agreement under the Non-Employee Directors' Stock
                             Option Plan (Annual Grant).
           10.8(1)           1999 Employee Stock Purchase Plan.
           10.9(1)           Form of 1999 Employee Stock Purchase Plan Offering under the Employee Stock Purchase
                             Plan.
           10.10(1)          Consulting Agreement, dated as of September 20, 1996, with Dr. Michael M. Merzenich,
                             as modified on January 19, 1998.
           10.11(1)          Consulting Agreement, dated as of September 19, 1996, with Dr. Paula A. Tallal, as
                             modified on January 22, 1998.
           10.13(1)+         Exclusive License Agreement, dated September 27, 1996, with the Regents of the
                             University of California.
           10.14(1)          Lease Agreement, dated as of July 31, 1997, with GBC-University Associates, L.P.
           10.15(1)          Securities Purchase Agreement, dated September 24, 1996, with Warburg, Pincus
                             Ventures, L.P.
           10.16(4)              Lease, dated as of March 20, 2000, with Rotunda Partners II.
           10.17(5)          Revolving Loan Agreement dated as of March 9, 2001 by and between Scientific
                             Learning Corporation and Fleet National Bank
           10.18(6)          Agreement to Issue Warrant and Grant of Security Interest dated as of March 9, 2001
                             by and between Scientific Learning Corporation and WPV, Inc
           10.19(7)          Warrant to Purchase 1,375,000 Shares of Common Stock of Scientific Learning
                             Corporation
           23.1              Consent of Ernst & Young LLP, Independent Auditors

----------------------------

           (1)      Incorporated by reference to the same numbered exhibit
                    previously filed with the Company's Registration
                    Statement on Form S-1 (SEC File No. 333-77133).

           (2)      Incorporated by reference to the same numbered exhibit
                    previously filed with the Company's Form 10-K for the year
                    ended December 31, 1999 (SEC File No. 000-24547).

           (3)      Incorporated by reference to the same numbered exhibit
                    previously filed with the Company's Form 8-K on
                    March 12, 2001 (SEC File No. 000-24547).

           (4)      Incorporated by reference to the same numbered exhibit
                    previously filed with the Company's Form 10-Q for the
                    quarter ended June 30,2000 (SEC File No. 000-24547).

           (5)      Incorporated by reference to Exhibit 99.1 previously
                    filed with the Company's Form 8-K on March 12,2001
                    (SEC File No. 000-24547).

           (6)      Incorporated by reference to Exhibit 99.2 previously
                    filed with the Company's Form 8-K on March 12,2001
                    (SEC File No. 000-24547).

           (7)      Incorporated by reference to Exhibit 99.3 previously
                    filed with the Company's Form 8-K on March 12,2001
                    (SEC File No. 000-24547).

            +       Certain portions of this exhibit have been omitted based
                    upon our request for confidential treatment for portions
                    of the referenced exhibit.
</TABLE>

                                      51