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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549
   

                                    FORM 10-K/A

     X     AMENDMENT NO. 1 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF 
   -----              THE SECURITIES  EXCHANGE ACT OF 1934
    

                   For the fiscal year ended January 3, 1998.

                        Commission file number: 1-12375

                           THE LEARNING COMPANY, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                  <C>       
                   DELAWARE                                     94-2562108
----------------------------------------------       ---------------------------------
(State or other jurisdiction of incorporation)       (IRS Employer Identification No.)

            ONE ATHENAEUM STREET        
          CAMBRIDGE, MASSACHUSETTS                                 02142
   ----------------------------------------                      ----------
   (Address of principal executive offices)                      (Zip Code)
</TABLE>

       Registrant's telephone number, including area code: (617) 494-1200
                                                           --------------

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

        TITLE OF EACH CLASS              NAME OF EXCHANGE ON WHICH REGISTERED
    ----------------------------         ------------------------------------

    Common Stock, $.01 par value                New York Stock Exchange

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

                                      None

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

                                Yes   X        No
                                    -----         -----

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

The aggregate market value of voting stock of the registrant held by
non-affiliates of the registrant as of February 2, 1998 was approximately
$779,986,631. As of February 2, 1998, 49,919,124 shares of the registrant's
common stock were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Stockholders expected
to be held in May 1998 are incorporated by reference into Part III.


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                                TABLE OF CONTENTS

                                     PART I

                                                                           Page
                                                                           ----

1.       Business                                                             3

2.       Properties                                                          12

3.       Legal Proceedings                                                   13

4.       Submission of Matters to a Vote of Security Holders                 14


                                     PART II

5.       Market for the Registrant's Common Stock

         and Related Stockholder Matters                                     16

6.       Selected Financial Data                                             17

7.       Management's Discussion and Analysis of Financial Condition

         and Results of Operations                                           18

8.       Consolidated Financial Statements and Supplementary Data            30

9.       Changes in and Disagreements with Accountants on Accounting

         and Financial Disclosure                                            55

                                    PART III

10.      Directors and Executive Officers of the Registrant                  55

11.      Executive Compensation                                              55

12.      Security Ownership of Certain Beneficial Owners and Management      55

13.      Certain Relationships and Related Transactions                      55

                                     PART IV

14.      Exhibits, Financial Statement Schedules and Reports on Form 8-K     56





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     Each of the items in this Annual Report on Form 10-K is amended in its
entirety as set forth below.
    

ITEM 1.  BUSINESS

     The Learning Company, Inc. ("TLC" or the "Company") develops and publishes
a broad range of high quality branded consumer software for personal computers
("PCs") that educate across every age category, from young children to adults.
The Company's primary emphasis is in educational and reference software, but it
also offers a selection of lifestyle, productivity and, to a lesser extent,
entertainment products, both in North America and internationally.

     The Company's educational products are principally sold under a number of
well known brands, including The Learning Company, MECC and Creative Wonders
brands. The Company develops and markets educational products for children ages
18 months to 7 years in the popular "Reader Rabbit" family, which includes both
single-subject and multi-subject titles such as Reader Rabbit's Reading 1 and
Reader Rabbit's Math 1, and Reader Rabbit's Toddler, Reader Rabbit's Pre-school,
Reader Rabbit's Kindergarten and Reader Rabbit's 1st Grade. The Company also
publishes educational products for this age group based on the popular Sesame
Street and Madeline characters, among others. For children seven years and
older, the Company develops and markets engaging educational products such as
the long-running "Trail" series, which includes Oregon Trail 3rd Edition, as
well as products based on the popular Baby-Sitter's Club books. During 1997, the
Company launched its American Girls Premiere title, which is marketed towards
girls in this age group.

     The Company develops and markets several different lines of software
designed to teach children and adults such foreign languages as French, German,
Spanish and Japanese. These lines include, among others, the Learn to Speak and
Berlitz lines of products.

     The Company's reference products include the "Compton's Home Library" line
which includes, among others, Compton's Interactive Encyclopedia and Compton's
World Atlas. In addition, the Company offers a line of medical reference
products that includes BodyWorks, Home Medical Reference Library and Mosby's
Medical Encyclopedia. The Company's productivity line is marketed under the
SoftKey and the Creative Office brands. The Company also publishes a
lower-priced line of products in box version under the Key and Classics brands
and a jewel-case only version under the SoftKey brand.

     During 1997, the Company began offering an Internet filtering product with
the introduction of the popular Cyber Patrol, which allows parents and teachers
to choose what content on the Internet is appropriate for children. Adults can
choose to block material organized into many different categories such as
violence, nudity, and explicit sexual material and hate speech. In addition to
marketing the product to homes and schools, the Company is also marketing to
corporations a version of Cyber Patrol that can block sites with content such as
sports, leisure and shopping to improve productivity in the office.

     The Company distributes its products through retail channels, including
direct sales to computer electronics stores, office superstores, mass
merchandisers, discount warehouse stores and software specialty stores which
control over 23,000 North American storefronts. The Company also sells its
products directly to consumers through the mail, telemarketing and the Internet,
and directly to schools. The Company's international sales are conducted from
subsidiaries in Germany, France, Holland, Ireland, the United Kingdom, Australia
and Japan. The Company also derives revenue from licensing its products to
original equipment manufacturers ("OEMs"), which bundle the Company's products
for sale with computer systems or components and through on-line offerings.
   

     The Company has a history of acquiring companies in order to broaden its
product lines and sales channels. During 1997, the Company completed a number of
small complementary acquisitions in the educational software segment. During the
third quarter of 1997, the Company acquired Learning Services Inc. ("Learning
Services") (a national school software catalog for teachers), Skills Bank
Corporation ("Skills Bank") (a developer of older age and remedial educational
software for schools) and Microsystems Software, Inc. ("Microsystems") (an
Internet filtering publisher and creator of Cyber Patrol). During the fourth
quarter of 1997, the Company acquired control of Creative Wonders, L.L.C.
("Creative Wonders") (a developer of branded children's educational software)
and acquired TEC Direct, Inc. ("TEC Direct") (the publisher of an educational
consumer software catalog). On March 27, 1998, the Company completed the
acquisition of Mindscape, Inc. and certain affiliated companies (collectively,
"Mindscape"). Mindscape is a leading developer and publisher of education,
productivity, reference and entertainment software.
    

     The Company was incorporated in California in October 1978 and
re-incorporated in Delaware in October 1986. In February 1994, the Company,
which was then known as WordStar International Incorporated, completed a
three-way business combination with SoftKey Software Products Inc. and Spinnaker
Software Corporation in which the Company changed its name to SoftKey
International Inc. In May 1996, the Company consummated the acquisition of
Minnesota 



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Educational Computing Corporation (MECC) ("MECC"), an educational software
publisher. That acquisition, together with the acquisitions in December 1995 of
The Learning Company ("The Former Learning Company") and Compton's NewMedia,
Inc. ("Compton's"), marked the completion of the Company's strategic initiative
to expand its educational software franchise.

     In October 1996, the Company changed its name from SoftKey International
Inc. to The Learning Company, Inc. to reflect its emphasis on educational
software. The Company's executive offices are located at One Athenaeum Street,
Cambridge, Massachusetts 02142. Its telephone number is (617) 494-1200, and its
internet web site is located at http:/www.learningco.com.

INDUSTRY BACKGROUND

     The consumer software market has grown over the past few years as a result
of several major trends, including the increasing installed base of PCs in the
home, the improved multimedia capabilities of PCs and the increasing demand for
a greater number of high quality, affordably priced software applications. In
addition, consumers are exposed to software purchase opportunities from a wide
variety of sources and with increased frequency. The Internet increased
consumers exposure to a variety of software products and technologies and
therefore increased their expectations for high quality multimedia educational
and reference software. In addition to traditional software offerings, today's
successful software companies should also be able to offer hybrid
CD-ROM/Internet titles. The Company believes the Internet has reduced barriers
to enter the market and has allowed competitors with less access to capital to
compete effectively.

     Improved product performance, expanded memory and enhanced multimedia
capabilities have been the main drivers of growth in the consumer software
market. Improvements in multimedia technology have made possible engaging,
highly interactive environments filled with rich content such as enhanced
graphics, animation and photographs, realistic sounds and music and clips of
film and video. These capabilities are particularly relevant to the education,
reference, lifestyle and entertainment categories, as specific software
purchases within these categories are largely driven by their content,
appearance and degree of interactivity.

     The demand for a large number and broad spectrum of value-priced software
products is also having significant impact on consumer software distribution.
The distribution of consumer software has expanded beyond traditional software
retailers and computer stores to include mass merchandisers, price clubs and
superstores. As demand for consumer software has grown with improvements in
multimedia technology, consumers have also grown more sophisticated in their
expectations for software, requiring increasingly easy to use, content rich
products. Furthermore, competition has continued to increase among new and
existing multimedia software publishers, increasing price pressure and
competition for limited retail shelf space. This competition is characterized by
increased emphasis on channel marketing, coupon rebate programs and advertising.
As this trend continues, it will become increasingly important for companies to
achieve greater sell-through unit volumes through brand name recognition, to
establish strong relationships with retailers and to consistently launch new
product offerings with state-of-the-art capabilities and rich content.

PRODUCTS

     The Company develops, publishes and markets software products that educate
across every age, from young children to adults. The Company strives for
recognition from retailers, parents, teachers and students as the leader in
educational and reference software. The Company's strategy is to leverage its
name brands and breadth of content by selling across a range of price points and
through multiple distribution channels. By creating software titles that parents
and teachers trust to teach children fundamental skills at all age levels, the
Company strives to create an ongoing buying relationship with its consumers that
continues as their children grow older.

   The Learning Company and Creative Wonders Educational Software

     The Company's educational brands represent a series of products tailored to
support the most fundamental learning topics taught in schools. The product
lines are organized by age and by subject area, covering everything from
learning essentials for pre-schoolers to test preparation for college-bound
students and foreign language instruction for adults. Market research and an
experienced staff of educational specialists seek to ensure that the content of
each program is educational, engaging, age-appropriate, non-violent and
effectively delivered. Highlights from the educational product line include:


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-    The Reader Rabbit series of software is designed to develop a lifelong love
     of learning in children ages 2 through 9. During 1997, the Company launched
     its early learning series of multi-subject titles including Reader Rabbit's
     Toddler, Reader Rabbit's Preschool, Reader Rabbit's Kindergarten and Reader
     Rabbit's 1st Grade. Other products in the Reader Rabbit series include
     Reader Rabbit's Reading 1, Reading 2 and Math 1. The Reader Rabbit series
     of products has been developed based on a wealth of research by educators,
     parents, children and reading specialists in order to create the most
     educational, engaging, easy-to-use reading and multi-subject software. In
     1997, the Company expanded its line of multi-subject learning titles with
     the introduction of The Cluefinders' 3rd Grade Adventures, the first of a
     new series of products designed to meet the educational needs and interest
     of older children.

-    The American Girls Premiere, which is based on The American Girls
     Collection successful line of historical fiction books, dolls and
     accessories from Pleasant Company, is a new creativity program designed for
     girls aged 7 to 12. The product allows young girls to bring American
     history to life by creating and producing their own plays featuring five of
     the American Girls Doll characters.

-    The Trail series, including Oregon Trail 3rd Edition, are interactive
     education products where children learn about history and geography while
     taking part in exciting interactive adventures.

-    The Munchers series of products for children ages 6 to 12 is used widely in
     both schools and homes to build children's skills and confidence in math,
     spelling and trivia.

-    TLC is a leader in foreign language software with its four lines of
     products covering language instruction in Spanish, French, German, Italian,
     Japanese and English. Appropriate for high school age through adult users,
     each line combines state-of-the-art technology with advanced language
     learning techniques to create highly interactive and effective products,
     that meet the abilities, interests and price sensitivities of all
     consumers. Learn To Speak, is a comprehensive and complete interactive
     course using state of the art technology to develop all-around fluency for
     the entire family. The Berlitz line, designed to help the user learn a
     language quickly, is an effective and complete interactive language course
     branded with the famous Berlitz name. The For Everyone line uses a fun,
     easy and interactive approach to learning a foreign language and is
     designed for high school students and adults who want to learn real-life
     conversation. Berlitz Think and Talk, based on the proven Berlitz teaching
     method, offers a complete introductory language study at a value price.

-    The Company markets a number of additional products for older children,
     including Success Builder - High School, Score Builder for the SAT and ACT,
     Treasure Mathstorm and Super Solvers Mission: T.H.I.N.K.

         During 1997, the Company acquired Creative Wonders, an educational
software publisher. Creative Wonders focuses on creating educational software
for children using well-known branded content. The Creative Wonders line of
products are sold by the Company under the Creative Wonders brand and includes:

-    The Sesame Street series using the well-known characters from Children's
     Television Workshop in a series of early learning titles that includes
     among others Sesame Street: Toddlers Deluxe, Sesame Street: Reading is Fun!
     (Toddler Edition), Sesame Street: Elmo's Preschool Deluxe, and Sesame
     Street: Get Set for Kindergarten Deluxe.

-    The Madeline Classroom Companion Series is a fun and comprehensive way to
     help young girls get a successful start in school. This series includes
     Madeline: Preschool & Kindergarten, Madeline: 1st and 2nd Grade as well as
     a number of titles for children ages 5 and up such as European Adventures,
     Thinking Games and The Magnificent Puppet Show.

-    The Schoolhouse Rock series reinforces essential learning skills for
     children to succeed in elementary school. The series includes Schoolhouse
     Rock 1st and 2nd Grade Essentials and Schoolhouse Rock 1st-4th Grade Math
     Essentials.

   Reference and Lifestyle Software

         The Compton's Home Library brand comprises a complete line of core
reference, lifestyle and special interest programs. The Compton's Home Library
products are designed specifically to meet consumers' home information needs.
Each product in the line provides easy access to a wealth of information for
researching, learning and exploring, with many providing direct links to the
World-Wide-Web for up-to-date information. Products in this line include
Compton's Interactive Encyclopedia-1998 Edition, Compton's World Atlas,
Compton's Deluxe Weight Watchers Light and Tasty and Compton's Interactive
Bible--NIV.


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         The Company's medical reference products are among the best-selling
titles in the industry. Strong brands and rich multimedia content enables the
Company to sell these products across all of its channels. The Company offers a
line of medical reference products that includes the popular BodyWorks, Home
Medical Reference Library and Mosby's Medical Encyclopedia.

     Internet Filtering Software

         Cyber Patrol is the Company's popular Internet filtering software
designed to help protect children in cyberspace. Cyber Patrol allows parents and
teachers to choose what content on the Internet is appropriate for children.
Adults can choose to block material organized into many different categories
such as violence, nudity, explicit sexual material and hate speech. Cyber Patrol
can be customized for use by up to 10 different children. Adults can add or
delete specific sites based on their own beliefs and judgment, so that, for
example, content blocked for a 7-year-old can remain available to a 15-year-old.
The latest version, Cyber Patrol 4.0, offers a daily update of blocked sites,
assuring even greater protection in a Web environment that changes daily. In
addition to marketing the product to homes and schools, the Company is also
marketing to corporations a version of Cyber Patrol that can block sites with
content such as sports, leisure and shopping that improves productivity in the
office.

     Productivity Software

         Productivity titles targeted at the home, small business and home
office users are the flagship titles under the SoftKey brand. The price points
and content of these programs are designed for the consumer who purchases
programs to meet very specific needs. During 1997, the Company launched the
"Creative Office" series. Included in this series are Calendar Creator 5.0,
PhotoFinish 4.1 and Resume Pro 3.0. Each of these titles has had a long history
of success in the productivity market. The "Key" line is designed to meet
productivity needs of those users who appreciate good value and quality
performance. This line includes a range of personal productivity tools, content
such as fonts and clip art, office productivity solutions and design tools.

     Value Software

         The Value lines under the Key, SoftKey and Classic brands are
recognized as top performers in the budget category of software. These lines
offer consumers brand name software at affordable prices in a jewel case only
and boxed format ranging in retail price from $9.99 to $14.95. The line covers
all software categories including reference, education, productivity, lifestyle
and games.

     Tax Software and Services

         In Canada, the Company is a supplier of income tax software products
and services through its subsidiary SoftKey Software Products Inc. ("SoftKey").
Large and small accounting firms, corporations and small businesses in Canada
rely on the Company to develop and annually update software products for all
aspects of income tax preparation. The Company also publishes personal tax
preparation software for use by individuals. The Company offers tax software
products under the TaxPrep, CanTax, Informatrix, HomeTax and L'Impot Personnel
brands.

SALES AND MARKETING

         The Company distributes its consumer software products through retail,
direct response, OEMs and school channels within North America and through
international channels throughout Europe and the Pacific Rim.

         Retail Channels. The Company has relationships with over 50 national
retailers and direct distributors controlling over 23,000 individual North
American storefronts where most of the nation's software sales occur. The
Company's retail distribution strategy is to foster strong direct relationships
with large retailers through a broad product offering, actively participating in
channel management and innovative merchandising. These direct relationships have
been the result of an established history of developing and publishing a wide
range of products and actively working with retailers to understand consumer
purchasing behavior and trends. Retailers routinely share sell-through sales
data with the Company, providing the Company with the ability to proactively
tailor its product offerings, modify distribution tactics and optimize product
marketing, merchandising, promotions and mix for specific retail channels and
stores. The Company sponsors merchandising programs and provides electronic data
interchange ("EDI") to most major accounts. The Company intends to continue to
build its relationships with the retail channels in an effort to further
strengthen these 



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strategic relationships. The Company's dealer sales channel consists of
traditional PC hardware and software retail stores, including national and
regional chains and superstores. Increasingly, the Company sells its products to
office superstores such as Office Depot, OfficeMax and Staples, electronic
superstores such as CompUSA, Circuit City and Best Buy and mass merchants such
as Wal-Mart and K-Mart. In addition, the Company sells to distributors such as
Ingram Micro Inc., GT Interactive and Navarre.

         Direct Response. The Company's database of over 7 million end-users
provides many cross-marketing opportunities. The Company mailed over 16 million
pieces of targeted direct mail in 1997. The Company typically utilizes targeted
customer mailings highlighting specific products. Prior to a full mailing, the
Company conducts test mailings at different price points and marketing
approaches in order to maximize response rates from its customers. The Company
also sells its products through direct mailings to potential end-users who are
not part of the installed user base using rented mailing lists. The Company made
approximately 4 million outbound telephone calls in 1997 to sell its products to
its customers. The Company has electronic registration of its consumer software
products that allows it to collect data from its customers that in turn provide
customer leads for the direct response business. The Company maintains an
Internet website which contains a catalog of the Company's products which
consumers can use to browse through the Company's products and submit orders
on-line or by telephone.

         Original Equipment Manufacturers. The objective of the Company's OEM
sales strategy is to assist hardware manufacturers and on-line services to
differentiate their product lines and to introduce the Company's brands to new
computer hardware buyers. The Company licenses its software products to OEMs
(including IBM, Apple, Compaq, Hewlett-Packard and America On-Line), which
typically purchase the Company's products in higher volumes and at lower prices
than retail stores and distributors. The manufacturing costs incurred by the
Company for OEM sales are typically lower than for its boxed product because in
many cases the products are duplicated by the OEMs and sold without packaging
or, in some instances, documentation. In addition, the Company receives
royalties from a number of OEMs that have no production costs, which results in
higher gross margins for the Company.

         School Channel. The Company's efforts in the school channel focus on
the unique needs of the school market through targeted and specialized marketing
and services. The Company sells products directly to schools and school
districts through field based direct sales representatives, telemarketing and
direct mail. Sales are also made through authorized resellers and distributors
including Educational Resources, Ingram Micro and Baker & Taylor. The Company
markets its school products to over 795 key school districts, 85,000 school
buildings and, in turn, to over 2.5 million classrooms across the United States.
Through its subsidiary Learning Services, the Company publishes an educational
software catalog for teachers and schools marketing products from most
educational software publishers, including the Company, under the Learning
Services brand. The Company intends to continue to leverage its established
position in the school market to expand its sales in the home market. The
Company believes that the history of acceptance of its products in schools,
coupled with its broad range of award-winning products, positions it to further
enhance its market share position and brand awareness in the home market.

         International. The Company believes that the international consumer
software markets are rapidly growing as a result of trends similar to those
driving the North American market. The Company operates subsidiaries outside of
North America in Germany, France, Holland, Japan, the United Kingdom and
Ireland. In addition, the Company has distributors in major European, Latin
American and Pacific Rim countries, as well as in Australia and South Africa.
The Company's subsidiaries in Ireland and Germany generally coordinate
manufacturing and distribution for all of the Company's sales in Europe, Latin
America and the Pacific Rim. Generally, retail stores outside of North America
are more reliant on distributors than retail stores in North America. As
distribution environments differ from country to country, the Company tailors
its distribution strategy accordingly.

PRODUCT DEVELOPMENT

         The Company develops and publishes products through internal
development as well as licensing. Approximately 83% of the Company's domestic
revenues in 1997 were derived from products that have been internally developed.
Through this dual product strategy approach, the Company is able to introduce
new products while managing its research and development costs. During 1997, the
Company launched a total of 53 new and upgraded North American premium
education, reference and productivity products, of which 46 were developed
internally.

         Internal Product Development. The Company's internal product
development efforts are designed to result in efficient and timely product
introductions by focusing on "core code" development. Where possible, the
Company specifies, develops and manages (or purchases) one base of source code
from which many products are created. Using one 



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base of source code permits the Company to maximize programming efficiency
because the investment of time and capital in developing the base source code is
shared among multiple products and additional programming time is minimized. As
a result, production schedules are more predictable and development costs are
lower since the underlying code for new programs has previously been tested and
debugged and the software already documented. Even with these "core codes" the
Company must continuously update and improve the content and the technology of
its products in order to remain competitive.

         In certain instances, the Company's internally developed products
contain components that have been developed by outside developers or authors and
are licensed by the Company. The Company generally pays these outside
developers/authors royalties based on a percentage of net sales or on a
work-for-hire basis.

         The Company maintains principal research and development facilities and
personnel in Framingham, MA; Fremont, CA; Knoxville, TN; Baltimore, MD and
Minneapolis, MN. The Company's development efforts include product development,
documentation and testing as well as the translation of certain of its products
into foreign languages.

         The Company believes that its premium educational products require
significant investments in product marketing and research and development in
order to take advantage of new technologies that benefit educational software
products and to remain competitive. In addition to expenses related to
engineering and quality assurance, the Company's research and development
expenses include costs associated with the identification and validation of
educational content and engagement features and the development and
incorporation of new technologies into new products.

         The Company's premium educational products require varying degrees of
development time, frequently depending on treatment of the subject matter, the
number of activities and the general complexity of the product. The typical
length of research and development time ranges from 6 to 24 months with the
first product in a new family generally requiring the longest period of
development. The development and introduction of new products that operate on,
and the adaptation of existing titles to new platforms or operating systems or
that incorporate emerging technologies may require greater development time and
expense and may generate less revenue per product as compared with recent
introductions of new products or product adaptations.

         Most of the Company's educational products have been designed and
developed internally by Company employees. The Company also uses third-party
designers, artists and programmers in its research and development efforts and
expects to continue to do so in the future. The Company believes that a mix of
internal and external third-party resources, as well as potential acquisitions
of products or technologies, is a cost-effective method of facilitating the
development of new educational software products. Products that are developed
using external third parties are generally owned or licensed exclusively by the
Company and are marketed under the Company's various brand names. During 1997,
the Company launched The American Girls Premier, which combined the Company's
advanced proprietary technology with the well-known American Girls brand.
Similarly, through its Creative Wonders products, including the Sesame Street
line, the Company seeks to capitalize on brands that are trusted by parents and
teachers for their educational value.

         Licensed Products. The Company supplements its development efforts by
acquiring the rights to products on either an exclusive or non-exclusive basis,
both through the purchase of products and under royalty-bearing licenses.
Generally, the Company's license agreements provide for the payment of royalties
based on a percentage of the Company's net sales of such products.

         The licensed products typically are repackaged under the Company's
proprietary labels and sold through its distribution channels. The advantage of
this distribution method to the outside software developers is that the Company
is generally able to provide a significantly greater volume of sales than the
software developer would be able to command itself. The Company leverages its
broad distribution strength and reputation for successfully publishing products
to attract outside developers/authors and further enhance its relationships with
the software development community. Retail and direct response marketers benefit
from this arrangement by having convenient access to a wide range of products
offered by the Company.

         The Company's licensing of fully developed products allows for
efficiencies because the cost of development is borne by the licensor. Licensing
also reduces the financial and market risk to the Company from a product that is
not well accepted by customers since the Company generally pays royalties based
on actual net sales.



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         Both internally developed and licensed products under development are
extensively tested by the Company's quality assurance department before being
released for production. The department tests for defects, functionality,
ease-of-use and compatibility the many of the popular PC and printer
configurations that are available to consumers.

         The process of developing software products such as those offered by
the Company is extremely complex and is becoming more complex and expensive over
time. The Company's product development expense levels are based largely on its
expectations regarding future sales, and, accordingly, operating results would
be disproportionately adversely affected by a decrease in sales or failure to
meet the Company's sales expectations due to delays in new product
introductions, or lower than expected demand. If the Company does not accurately
anticipate and successfully adapt its products to emerging platforms,
environments and technologies, or new products are not introduced when planned
or do not achieve anticipated revenues, the Company's operating results could be
materially adversely affected. In addition, the Company believes that on-line or
Internet products and services will become an increasingly important platform
and distribution media; and as such the Company's failure to timely and
successfully adapt to and utilize such technologies could materially and
adversely affect its competitive position and its financial results.

PRODUCTION

         The Company strives to minimize production costs, driving costs down as
unit volumes and the rate of new title introductions increase through process
efficiencies and economies of scale. Production of the Company's products
involves the duplication of diskettes or CD-ROM disks and the printing and
assembly of packaging, labels, user manuals and other purchased components. The
Company subcontracts all of the manufacture and fulfillment of its products to
third party vendors. In 1997, the production, assembly and distribution of the
Company's North American products, with certain exceptions (including
duplication of CD-ROM disks, school channel products and certain OEM products),
was performed by two units of Bertelsmann AG (collectively, "BMG"). The Company
believes that its existing production capacity is sufficient to handle
anticipated increases in volume and titles into the foreseeable future.
Manufacturing and assembly of the Company's international products take place
primarily at the Company's facilities in Dublin, Ireland and to a lesser extent
in Munich, Germany.

TECHNICAL SUPPORT

         The Company provides a variety of technical support services to
dealers, distributors, corporations and end-users. Users of the Company's
products generally receive free telephone support for the life of the product
(i.e. until the next version is released or manufacturing of the product is
discontinued). This support is principally provided by the Company's Technical
Support Center in Knoxville, TN.

COMPETITION

         The consumer software industry is intensely and increasingly
competitive and is characterized by rapid changes in technology and customer
requirements. The Company competes for retail shelf space and general consumer
awareness with a number of companies that market consumer software. The Company
encounters competition from both established companies, including the largest
companies in the industry and new companies that may develop comparable or
superior products. A number of the Company's competitors and potential
competitors possess significantly greater capital, marketing resources and brand
recognition than the Company. Rapid changes in technology, product obsolescence
and advances in computer software and hardware require the Company to develop or
acquire new products and to enhance its existing products on a timely basis. The
Company's marketplace has recently experienced a higher emphasis on on-line and
Internet related services and content tailored for this new distribution
channel. To the extent that demand increases for on-line products and content,
the demand for the Company's existing products may change. There can be no
assurance that the Company will be able to maintain market share or that the
market for the Company's products will not to erode, and otherwise compete
successfully in the future.

         Competitive pressures in the consumer software industry have resulted,
and the Company believes are likely to continue to result, in more innovative
channel marketing and advertising in the future. During 1997, the Company and
many of its competitors began using rebate coupons in order to induce consumers
to purchase their products. In addition, the Company uses various forms of print
and television advertising to enhance brand and product awareness. The use of
these methods of channel marketing and advertising is becoming more prevalent
among the larger consumer software publishers. To the extent that the Company
fails to match competitors' future channel marketing and advertising programs it
could risk loss of market share and corresponding revenues and operating
profits. Furthermore, during early 1997, the Company reduced the retail selling
prices of many of its core educational products in order to remain 


                                       9


<PAGE>   10

competitive in the market place. There can be no assurance that the Company's
selling prices will not decline in the future or that the Company will not
respond to such declines with additional price reductions or marketing programs.
Such price reductions or marketing programs may reduce the Company's revenues
and operating margins in the future.

         Large companies with substantial bases of intellectual property content
in the motion picture and media industries, sophisticated product marketing and
technical abilities and/or financial resources that may not need to realize an
immediate profit or return on investment have increasingly entered the consumer
software market. These competitors include: Microsoft, Disney, Mattel, Hasbro,
IBM and Cendant Corporation (formerly CUC International Inc.). For example,
technology companies have begun to acquire greater access to branded content,
and content-oriented companies have begun to acquire greater technological
capabilities. To the extent that competitors achieve a performance, price or
distribution advantage, the Company could be adversely affected. Furthermore,
increased consolidation of the consumer software market may impact future growth
potential and performance.

         In the retail distribution channel resellers typically have a limited
amount of shelf space and promotional resources. There is intense competition
for high quality and adequate levels of shelf space and promotional support from
retailers. To the extent that the number of consumer computer platforms and
products increases, competition for shelf space may also increase. Mass
merchants such as Wal-Mart are increasingly representing a larger portion of the
Company's revenues. As these retailers achieve greater market share from the
traditional software retailers, the Company may experience higher marketing
costs and increased competition for shelf space, which could impact future sales
and operating margins. Additionally, as technology evolves, the type and number
of distribution channels will further change and new types of competitors, such
as cable or telephone companies, may emerge. There can be no assurance that the
Company will compete effectively in these channels.

         The retail channels of distribution available for products are subject
to rapid changes as retailers and distributors enter and exit the consumer
software market or alter their product inventory preferences. Other types of
retail outlets and methods of product distribution may become important in the
future. These new methods may include delivery of software using on-line
services or the Internet, which will necessitate certain changes in the
Company's business and operations including addressing operational challenges
such as improving download time for pictures, images and programs, ensuring
proper regulation of content quality and developing sophisticated security for
transmitting payments. Should on-line distribution channels increase, the
Company will be required to modify its existing technology platforms in order
for its products to be compatible and remain competitive. It is critical to the
success of the Company that, as these changes occur, it maintains access to
those channels of distribution offering software in its market segments.

         In both the professional and home income tax preparation markets in
Canada, there are relatively few barriers to entry for competitors. In Canada,
there are numerous companies offering tax preparation software products for both
the professional and home user. As a result, there is significant price and
product competition in this market. Currently, the Company's tax products are
generally designed to run on DOS and Windows operating systems, with certain
professional packages running on the Macintosh system. The demand for and
ability to develop successful packages to run in the Windows operating
environment may affect the success of such products.

PROPRIETARY RIGHTS AND LICENSES

         Consistent with industry practice, the Company does not have signed
license agreements with the end-users of its products, and its products do not
contain mechanisms to inhibit unauthorized copying. Instead, the Company relies
on the copyright laws to prevent unauthorized distribution of its software. The
Company also relies on a combination of trade secret, patent, trademark and
other proprietary rights, laws and license agreements to protect its proprietary
rights. Existing copyright laws afford only limited protection. It may be
possible for unauthorized third parties to copy the Company's products or to
obtain and use information the Company regards as proprietary.

         Policing unauthorized use and distribution of the Company's products is
difficult, and while it is difficult to determine the extent to which such use
or distribution exists, software piracy can be expected to be a persistent
problem. These problems are particularly acute in certain international markets
such as South America, the Middle East, the Pacific Rim and the Far East, and
the laws of certain countries in which the Company's products are or may be
distributed provide less protection than those of the United States.

         The Company periodically receives communications alleging or suggesting
that its products may incorporate material covered by the copyrights, trademarks
or other proprietary rights of third parties. With increased use of music, video
and animation in CD-ROM products and the increased number of products on the
market generally, the Company is 


                                       10



<PAGE>   11

likely to experience an increase in the number of infringement claims asserted
against it in the future. With respect to licensed products, the Company is
generally indemnified against liability on these matters. The Company's policy
is to investigate the factual basis of such communications and to resolve such
matters promptly by enforcing its rights, negotiating licenses (if necessary) or
taking other appropriate actions.

         In certain circumstances, litigation may be necessary to enforce the
Company's proprietary rights, to protect copyrights, trademarks and trade
secrets and other intellectual property rights owned by the Company or its
licensors, to defend the Company against claimed infringements of the rights of
others and to determine the scope and validity of the proprietary rights of the
Company and others. Any such litigation, whether with or without merit, could be
costly and could result in a diversion of management's attention, which could
have an adverse effect on the Company's business, operating results or financial
condition. Adverse determinations in litigation relating to any of the Company's
products could result in the loss of the Company's proprietary rights, subject
the Company to liabilities, require the Company to seek licenses from third
parties or prevent the Company from selling particular products.

HISTORY

         Corporate Background. The Company was founded and incorporated in
California under the name MicroPro International Corporation in October 1978. In
November 1986, it changed its state of incorporation from California to
Delaware, and in May 1989, it changed its corporate name to WordStar
International Incorporated. In February 1994, WordStar changed its name to
SoftKey International Inc. in connection with a three-way business combination
including the Company, SoftKey Software Products Inc. ("Former SoftKey") and
Spinnaker Software Corporation ("Spinnaker") (the "Three-Party Combination").
The business of Former SoftKey prior to such transaction commenced in 1984 and
focused originally on vertical software applications, or software packages
designed for specific types of businesses. By 1993, Former SoftKey was generally
engaged in the computer software and services businesses, operating in three
business units: a publishing division, which acquired software application
packages from various software developers and distributed them to end users; a
tax division, which developed and distributed professional tax software products
and also engaged in the computer processing of tax data; and a consulting
division, which has been discontinued. After the Three-Party Combination, the
Former SoftKey publishing division operations were consolidated with the
operations of the Company and SoftKey continued to operate the businesses of the
tax division.

         In 1995 and 1996, the Company acquired several educational software
companies, including The Former Learning Company, Compton's, tewi Verlag GmbH,
Edusoft S.A. and MECC. In October 1996, the Company changed its name to The
Learning Company, Inc. to reflect its expanded emphasis on educational software.

         During 1997, the Company expanded its presence in education software
with the acquisitions of Creative Wonders, Skills Bank, Learning Services, TEC
Direct and Microsystems.

EMPLOYEES

         At February 2, 1998, the Company had 1,525 full time employees. The
Company believes that its success is highly dependent on its ability to attract
and retain qualified employees. As necessary, the Company supplements its
regular employees with temporary and contract personnel. No employees are
covered by a collective bargaining agreement, and there have been no work
stoppages.

FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS

         Financial Information pertaining to the Company's foreign and domestic
operations is set forth in the Consolidated Financial Statements - Note 12,
included in Part II, Item 8 and presented as a separate section of this report.

FORWARD LOOKING STATEMENTS

         Certain of the information contained in this Annual Report on Form
10-K, including without limitation statements made under this Part I, Item 1,
"Business" and Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which are not historical facts,
may include "forward-looking statements" within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company's actual results may differ materially from those set forth in such
forward-looking statements.



                                       11


<PAGE>   12

         Important factors and assumptions that could cause the Company's actual
results to differ materially from those included in the forward-looking
statements made herein include the factors which are responsible for
period-to-period fluctuations in the Company's operating results generally.
These factors include without limitation the integration of operations resulting
from acquisitions of companies, delays in customer purchases in anticipation of
upgrades to existing products or release of competitive products, currency
fluctuations, dealer and distributor order patterns and seasonality of buying
patterns of customers and the historic and recurring pattern of Company sales by
which a disproportionate percentage of a quarter's total sales occur in the last
month and weeks of each quarter, making predictions of revenues and earnings
especially difficult and resulting in substantial risk of variance of actual
results from those foregoing at any time prior to near the quarter close.
Additional factors and assumptions that could generally cause the Company's
actual results to differ materially from those included in the forward-looking
statements made herein include without limitation the Company's ability to
develop and introduce new products or new versions of existing products, the
timing of such new product introductions, expenses relating to the development
and promotion of such new product introductions, changes in pricing policies by
the Company or its competitors, projected and actual changes in platforms and
technologies, timely and successful adaptation to such platforms or
technologies, the accuracy of forecasts of consumer demand, product returns,
market seasonality, changes or disruptions in the consumer software distribution
channels, the effects of general economic conditions, the rate of growth in the
consumer software industry, the impact of competitive products and pricing in
the consumer software industry, the sufficiency of the Company's production
capacity to meet future demand for its products and the Company's ability to
continue to exploit new channels of distribution for its products. In the past
the Company has grown partially by acquisition, some of which have been
accounted for by the purchase method, resulting in large amounts of goodwill and
amortization charges. The Company may enter into similar transactions in the
future. Additional factors that may cause the Company's actual results to vary
from those set forth in forward-looking statements are described elsewhere in
the Annual Report on Form 10-K under the heading "Future Operating Results".

         Other factors and assumptions not identified above were also involved
in the derivation of these forward-looking statements and the failure of such
other assumptions to be realized, as well as other factors, may also cause
actual results to differ materially from those projected. The Company assumes no
obligation to update these forward-looking statements to reflect actual results
or changes in factors or assumptions affecting such forward-looking statements.

ITEM 2.           PROPERTIES

FACILITIES

         The Company's headquarters are currently located in approximately
71,000 square feet of leased space in an office building in Cambridge,
Massachusetts, where the Company's executive, operational, administrative and
certain sales activities are currently conducted. The lease for the Cambridge
facility expires in December 2001. The Company leases approximately 66,000
square feet of office and warehouse space in Fremont, California expiring from
October 1999 to March 2003, which is primarily used for marketing and
development of its educational products. The Company leases approximately 50,000
square feet of office space in Minneapolis, Minnesota, which is used primarily
for its school sales operation, and the development of certain of its
educational products. The Minneapolis lease expires in January 1999. The Company
leases approximately 38,000 square feet of office space in Knoxville, Tennessee,
which is primarily used for development of the Company's foreign language based
products and for its technical support activities. The Knoxville leases expire
in May 2000 and April 2001. The Company also leases various office,
manufacturing and warehouse space in Framingham, Massachusetts; Eugene, Oregon;
Baltimore, Maryland; Boulder, Colorado; and certain other states in which it
operates.

         The Company's Canadian subsidiary, SoftKey Software Products Inc., owns
land and a building with approximately 19,000 square feet of office space in
Sherbrooke, Quebec, leases approximately 35,000 square feet of office space in
Mississauga, Ontario, which expires in September 2000, and leases additional
warehouse and office space in Mississauga, Ontario, Sherbrooke, Quebec, and
Calgary, Alberta.

         The Company also leases various office, manufacturing and warehouse
space in London, England; Dublin, Ireland; Munich, Germany; Amsterdam, Holland;
Paris, France and certain other foreign countries in which it operates.

         The Company believes that its facilities, in general, are adequate for
its present and currently foreseeable needs. All properties leased or owned by
the Company are in suitable condition for the purposes for which they are used
by the Company.


                                       12


<PAGE>   13

ITEM 3.           LEGAL PROCEEDINGS

         On February 24, 1997, the Company terminated its business relationship
with Stream International Inc. ("Stream"), and, on February 26, 1997, filed suit
against Stream in Massachusetts Superior Court for Middlesex County, seeking
injunctive relief and damages resulting from Stream's delayed and defective
performance of its manufacturing and distribution obligations. Stream responded
to the complaint by denying the Company's claims and asserting counterclaims for
certain outstanding invoices and other matters. As of September 4, 1997 the
parties settled the litigation. The Company had previously accrued for the
anticipated settlement in its financial statements; accordingly, the settlement
did not have a material impact on the Company's results of operations.

         The Company is subject to various other pending claims. Management,
after review and consultation with counsel, considers that any liability from
the disposition of such lawsuits in the aggregate would not have a material
adverse effect upon the consolidated financial position or results of operations
of the Company.




                                       13
<PAGE>   14






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

(a)      The Company's 1997 Annual Meeting of Stockholders was held on 
         December 4, 1997.

(b)      The following directors were elected at the meeting, and no other
         directors' terms of office continued after the meeting: Lamar
         Alexander, Michael A. Bell, James C. Dowdle, Robert Gagnon, Kevin
         O'Leary, Charles L. Palmer, Michael J. Perik, Carolynn Reid-Wallace,
         Robert A. Rubinoff and Scott M. Sperling.

(c)      The first matter voted upon at the meeting was the election of
         Directors. Each of the nominees was elected as a director to serve
         until the Company's 1998 Annual Meeting and until his successor is
         elected and qualified. The votes for each of the nominees were reported
         as follows:


         Lamar Alexander                    For:              40,435,550
                                            Withheld:          2,742,719

         Michael A. Bell                    For:              40,434,418
                                            Withheld:          2,743,851

         James C. Dowdle                    For:              40,437,088
                                            Withheld:          2,741,181

         Robert Gagnon                      For:              40,440,973
                                            Withheld           2,737,296

         Kevin O'Leary                      For:              40,436,851
                                            Withheld:          2,741,418

         Charles L. Palmer                  For:              40,440,574
                                            Withheld:          2,737,695

         Michael J. Perik                   For:              40,434,702
                                            Withheld:          2,743,567

         Carolynn Reid-Wallace              For:              40,437,162
                                            Withheld:          2,741,107

         Robert A. Rubinoff                 For:              40,440,118
                                            Withheld:          2,738,151

         Scott M. Sperling                  For:              36,916,091
                                            Withheld:          6,262,178

The second matter voted upon at the meeting was the ratification of the Board's
appointment of Coopers & Lybrand L.L.P. as independent public accountants for
the fiscal year ended January 3, 1998. Such appointment was approved. The votes
were reported as follows:


         Coopers & Lybrand L.L.P.           For:              43,000,082
                                            Against:             100,503
                                            Abstain:              77,684



                                       14



<PAGE>   15

The third matter voted upon at the meeting was a proposal to approve the
Company's 1996 Non-Employee Director Stock Option Plan. Such proposal was
approved. The votes were reported as follows:


         Approval of the 1996 Non-          For:              23,651,379
         Employee Director Stock            Against:          10,169,890
         Option Plan                        Abstain:             149,009
                                            Non-Votes:         9,207,991

The fourth matter voted upon at the meeting was a proposal to approve the
Company's 1997 Employee Stock Purchase Plan. Such proposal was approved. The
votes were reported as follows:


        Approval of the 1997                For:              32,759,045
        Employee Stock Purchase             Against:           1,096,471
        Plan                                Abstain:             114,762
                                            Non-Votes:         9,207,991

The fifth matter voted upon at the meeting was a proposal to approve the
amendments to the Company's Long Term Equity Incentive Plan (the "LTIP"), to
increase the number of shares issuable under the LTIP from 7,000,000 to
9,000,000 and to eliminate the Company's ability to grant options at below the
fair market value of the common stock at the time of the grant. Such proposal
was approved. The votes were reported as follows:

        Approval of the LTIP                For:              21,328,251
        Amendments                          Against:          12,510,047
                                            Abstain:             131,980
                                            Non-Votes:         9,207,991

The sixth matter voted upon at the meeting was a proposal to approve the
issuance of an aggregate of 750,000 shares of Series A Convertible Participating
Preferred Stock of the Company to affiliates of Thomas H. Lee Company, Bain
Capital, Inc. and Centre Partners Management LLC. Such proposal was approved.
The votes were reported as follows:

        Approval of Issuance of             For:              30,071,671
        Shares                              Against:           3,215,432
                                            Abstain:             177,392
                                            Non-Votes:         9,713,775




                                       15
<PAGE>   16






PART II

ITEM 5.           MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED 
                  STOCKHOLDER MATTERS

         The Company's common stock is listed on the New York Stock Exchange
under the symbol "TLC." As of February 2, 1998, to the Company's knowledge,
there were approximately 1,469 holders of record of the common stock. The
Company has not paid cash dividends on its common stock and does not anticipate
doing so in the foreseeable future.

         The following sets forth the quarterly high and low sales prices for
the fiscal periods indicated.

1996                                          High             LOW
                                              ----             ---
  First Quarter                             $27.75           $13.375
  Second Quarter                             30.3125          17.25
  Third Quarter                              22.375           15.25
  Fourth Quarter                             25.75            13.375


1997                                          High             LOW
                                              ----             ---
  First Quarter                             $18.00           $ 5.75
  Second Quarter                              9.625            5.50
  Third Quarter                              15.75             8.5625
  Fourth Quarter                             20.50            13.78125


         On December 30, 1997, the Company issued 424,010 shares of the
Company's common stock to the former stockholders of TEC Direct, Inc. ("TEC
Direct") in connection with the Company's acquisition of TEC Direct. On January
21, 1998, the Company issued an additional 5,723 shares of common stock to
complete the acquisition. For such issuances the Company has relied upon the
exemption from registration under Section 4(2) of the Securities Act of 1993
(the "Securities Act"). The basis for this exemption is satisfaction of the
conditions of Rule 506 under the Securities Act in that the offers and sales
satisfied all the terms and conditions of Rules 501 and 502 under the Securities
Act, there were no more than 35 purchasers of securities from the Company, other
than accredited investors, and each purchaser, either alone or with his
purchaser representative, had such knowledge and experience in financial and
business matters that he was capable of evaluating the merits and risks of the
prospective investment.

         On December 5, 1997, the Company issued 750,000 shares of its Series A
Convertible Participating Preferred Stock (the "Preferred Stock") to certain
institutional investors in exchange for the surrender of the Company's 5-1/2%
Convertible/Exchangeable Notes due 2000 in the aggregate principal amount of
$150,000,000, which the investors purchased from Tribune Company in a private
transaction. Each share of the Preferred Stock has an initial liquidation
preference of $200 and is initially convertible into 20 shares of the Company's
common stock, subject to adjustment in certain circumstances. For the issuance
of the Preferred Stock, the Company relied on the exemption from registration
under Section 4(2) of the Securities Act. The basis for this exemption is
satisfaction of the conditions of Rule 506 of the Securities Act in that the
offers and sales satisfied all the terms and conditions of Rules 501 and 502
under the Securities Act, there were no more than 35 purchasers of securities
from the Company, other than accredited investors, and each purchaser, either
alone or with its purchaser representative, had such knowledge and experience in
financial and business matters that it was capable of evaluating the merits and
risks of the prospective investment.


                                       16
<PAGE>   17






ITEM 6.           SELECTED FINANCIAL DATA

         The selected financial data presented below for the Years Ended
December 31, 1997, 1996, 1995 and 1994, the six month period ended December 31,
1993 (the "Transition Period Ended December 31, 1993") and the Year Ended June
30, 1993 are derived from the Company's audited consolidated financial
statements. The following selected financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes thereto, included elsewhere in this report.

OPERATING INFORMATION:

<TABLE>
<CAPTION>
                                                                                                 Transition
                                                                                                Period Ended        Year Ended
                                              Years Ended December 31, 30,                       December 31,        June 30,
                             --------------------------------------------------------------     -------------      ------------
                                 1997            1996             1995             1994              1993              1993
                             -----------     -----------      ------------      -----------     -------------      ------------
                                                      (In thousands, except share and per share data)

<S>                          <C>             <C>              <C>               <C>              <C>               <C>         
Revenues                     $   392,438     $   343,321      $    167,042      $   121,287      $     41,645      $    109,704
Operating income (loss)         (393,055)       (381,312)          (60,870)          25,741           (69,057)          (56,981)
Net income (loss)               (475,667)       (405,451)          (65,960)          21,145           (73,258)          (57,250)

Net income (loss) per 
share:
Basic                        $     (9.59)    $     (9.94)     $     (2.65)      $      1.13      $     (5.01)      $     (4.36)
Diluted                      $     (9.59)    $     (9.94)     $     (2.65)      $      1.07      $     (5.01)      $     (4.36)
                                                                              
Weighted average 
number of shares 
outstanding:
Basic                         49,613,000      40,801,000       24,855,000        20,462,000       14,618,000        13,129,000
Diluted                       49,613,000      40,801,000       24,855,000        18,710,000       14,618,000        13,129,000
</TABLE>



BALANCE SHEET INFORMATION:

<TABLE>
<CAPTION>
                                                                       December 31,
                                            ---------------------------------------------------------------
                                               1997          1996          1995          1994         1993
                                            ----------     --------      --------      -------      -------
                                                                            (In thousands)

<S>                                         <C>            <C>           <C>           <C>          <C>    
Total assets                                $  416,791     $793,518      $900,413      $90,815      $79,334

Total long-term obligations                    360,221      574,928       561,101       21,859       24,687

Total stockholders' equity (deficit)         (103,786)      104,937       214,519       37,485       (8,632)
</TABLE>






                                       17

<PAGE>   18





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

The following discussion should be read in conjunction with the consolidated
financial statements and the notes thereto, and the information included
elsewhere herein. All dollar amounts presented in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are presented in
thousands, except share and per share amounts.

GENERAL

     Business Combinations

         On February 4, 1994, the Company completed a three-way business
combination (the "Three-Party Combination") among SoftKey Software Products Inc.
("Former SoftKey"), WordStar International Incorporated ("WordStar") and
Spinnaker Software Corporation ("Spinnaker"). The Three-Party Combination was
accounted for using the pooling-of-interests method of accounting. On February
4, 1994, WordStar changed its name to SoftKey International Inc. and on October
24, 1996 changed its name to The Learning Company, Inc. ("TLC" or the
"Company").

         On October 23, 1997, the Company acquired control of 100% of the equity
interest in Creative Wonders L.L.C. ("Creative Wonders"), an educational
software company that publishes among other titles, the Sesame Street line of
products. The purchase price was a total of $37,799, including the value of
employee stock options assumed by the Company and estimated transaction costs.
The purchase price included cash payments totaling $33,883. The transaction was
accounted for as a purchase.

         On September 19, 1997, the Company acquired Learning Services Inc.
("Learning Services"), a national school software catalog for teachers, in
exchange for the issuance of 709,976 shares of common stock. On September 29,
1997, the Company acquired Skills Bank Corporation ("Skills Bank"), a leader in
developing language, mathematics and reading software products for adult,
adolescent and K to 12 students in exchange for the issuance of 1,069,286 shares
of common stock. On October 2, 1997, the Company acquired Microsystems Software,
Inc. ("Microsystems"), a leading developer of Internet filtering software, in
exchange for the issuance of 955,819 shares of common stock. On December 30,
1997, the Company acquired TEC Direct, Inc. ("TEC Direct"), an educational
consumer software catalog, in exchange for the issuance of 429,733 shares of
common stock. Each of these transactions was accounted for using the
pooling-of-interests method of accounting. The consolidated financial statements
of the Company for the years prior to December 31, 1997 included in this report
do not include the results and balances of these companies as they were
determined to be immaterial to the consolidated financial statements for those
periods.

         On May 17, 1996, the Company acquired Minnesota Educational Computing
Corporation (MECC) ("MECC"), a publisher and developer of high quality
educational software for children sold to consumers and schools, in exchange for
9,214,007 shares of common stock. The total purchase price was $284,631,
including estimated transaction costs, the value of stock options assumed and
deferred income taxes related to certain identifiable intangible assets
acquired. In the transaction, approximately 1,048,000 MECC employee stock
options were converted into options to purchase approximately 1,198,000 shares
of TLC common stock. The transaction was accounted for as a purchase.

         On August 12, 1996, the Company acquired Edusoft S.A. ("Edusoft"), an
educational software company located in Paris, France, in exchange for the
issuance of 752,275 shares of common stock. The total purchase price was
$13,313, including estimated transaction costs. In addition, certain
stockholders are eligible to earn additional purchase price dependent upon
future operating results and certain other conditions. The amount may be settled
annually in shares of the Company's common stock, the number of which is to be
determined on a volume-weighted average of the closing stock price following the
close of each fiscal year. The transaction was accounted for as a purchase.

         On December 28, 1995, the Company purchased Compton's NewMedia, Inc.
and Compton's Learning Company (collectively, "Compton's"), developers and
publishers of educational and reference multimedia software titles and each a
former wholly-owned subsidiary of Tribune Company. In connection with the
acquisition, the Company issued a total of 5,052,697 shares of common stock,
which included 587,036 shares to settle $14,000 of intercompany debt to Tribune
Company and executed a promissory note to Tribune Company for $3,000 in
cancellation of certain remaining intercompany indebtedness. The total purchase
price was $104,394, including estimated transaction costs, settlement of certain
intercompany debt to Tribune Company, deferred income taxes related to certain
identifiable intangible assets 



                                       18


<PAGE>   19

acquired and assumption of the fair value of net liabilities of Compton's. The
$3,000 promissory note was repaid in 1996 by the issuance of 158,099 shares of
common stock. The transaction was accounted for as a purchase.

         On December 22, 1995, the Company acquired control of The Learning
Company ("The Former Learning Company"), a leading developer of education
software products for use at home and school. Under the terms of the merger
agreement, the Company acquired, in a two-step business combination, all of the
outstanding common stock of The Former Learning Company for total consideration
of $684,066, including estimated transaction costs, value of stock options
assumed and deferred income taxes related to certain identifiable intangible
assets acquired. Approximately $543,163 of the purchase price was settled in
cash. Approximately 1.1 million unvested Former Learning Company stock options
were assumed and converted into stock options to purchase 3,123,000 shares of
TLC common stock, based on the merger consideration of $67.50 per share, and
were vested on or before January 26, 1996. The transaction was accounted for as
a purchase.

         On August 31, 1995, the Company acquired all of the issued and
outstanding capital stock of Future Vision Holding, Inc. ("Future Vision"), a
multimedia software company, in exchange for 1,088,149 shares of common stock.
The transaction was accounted for using the pooling-of-interests method of
accounting.

         On July 21, 1995, the Company acquired tewi Verlag GmbH ("tewi"), a
German software publisher and distributor, for a combination of cash and stock.
One of the former stockholders of tewi is eligible to receive additional
consideration for the purchase up to a maximum of DM 1,080 in each of fiscal
1996 and 1997 based upon achievement of certain revenue and profitability goals.
The amount may be settled annually in shares of the Company's common stock, the
number of which to be determined based on a volume-weighted average of the
closing stock price following the closing of each fiscal year. The transaction
was accounted for as a purchase.

     Fiscal Periods

         On January 27, 1994, the Company changed its fiscal year end to the 52
or 53 weeks ending on or after December 31. For clarity of presentation herein,
all references to the Year Ended December 31, 1997 relate to the period January
5, 1997 to January 3, 1998. All references to the Year Ended December 31, 1996
relate to the period January 7, 1996 to January 4, 1997; all references to the
Year Ended December 31, 1995 relate to the period January 1, 1995 to January 6,
1996.

     Period-to-Period Comparisons

         A variety of factors may cause period-to-period fluctuations in the
Company's operating results, including the integration of operations resulting
from acquisitions of companies, revenues and expenses related to the
introduction of new products or new versions of existing products, delays in
customer purchases in anticipation of upgrades to existing products, new or
larger competitors in the marketplace, currency fluctuations, dealer and
distributor order patterns and seasonality of buying patterns of customers.
Historical operating results are not indicative of future operating results and
performance. This is particularly true of historical data presented herein,
certain of which reflects the results of TLC prior to its acquisitions of The
Former Learning Company, MECC and Compton's and the other more recent
acquisitions.




  0                                     19
<PAGE>   20

     Summary of Results

         The following table summarizes the audited results of operations of the
Company for the periods shown. Reference is made to the Consolidated Financial
Statements included in this report and on which the following table is based.

<TABLE>
<CAPTION>
                                                             Years Ended
                                                             December 31,
                                             -------------------------------------------
                                                1997             1996             1995
                                             ---------        ---------        ---------
<S>                                          <C>              <C>              <C>      
Revenues                                     $ 392,438        $ 343,321        $ 167,042
Operating loss                                (393,055)        (381,312)         (60,870)
Net loss                                      (475,667)        (405,451)         (65,960)
Net loss per share (basic and diluted)       $   (9.59)       $   (9.94)       $   (2.65)
</TABLE>


         Operating loss includes amortization, merger and other charges of
$515,016, $501,330 and $103,172 in the Years Ended December 31, 1997, 1996 and
1995, respectively.


RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED
DECEMBER 31, 1996

     Revenues

         Revenues by distribution channel for the Years Ended December 31, 1997
and 1996 are as follows:

<TABLE>
<CAPTION>
                                     Year Ended                           Year Ended
                                    December 31,         % of total      December 31,         % of total
                                        1997              revenues           1996              revenues 
                                    ------------         ----------      ------------         ----------
<S>                                   <C>                   <C>            <C>                   <C>
Distribution Channel
--------------------

Retail                                $179,255               46            $174,812               51
OEM                                     27,286                7              27,855                8
School                                  48,666               12              21,701                6
Direct response                         43,309               11              38,548               11
International                           74,179               19              57,684               17
Tax software and services               19,743                5              22,721                7
                                      --------              ---            --------              ---
                                      $392,438              100            $343,321              100
                                      ========              ===            ========              ===
</TABLE>


   
         Total revenues increased 14% in the Year Ended December 31, 1997 as
compared to the Year Ended December 31, 1996 primarily due to the introduction
of new educational software products by the Company such as Reader Rabbit's
Toddler, Reader Rabbit's Preschool, Reader Rabbit's Kindergarten and Reader
Rabbit's 1st Grade, The Clue Finders' 3rd Grade Adventures, Oregon Trail 3rd
Edition and The American Girls Premiere. In the Year Ended December 31, 1997,
returns and allowances as a percentage of gross revenues increased to 15% from
10% in the Year Ended December 31, 1996 as a result of shorter product shelf
life, changing technology and greater competition. The Company expects returns
and allowances as a percentage of revenues to remain relatively constant in the
foreseeable future.
    

         Retail sales during the Year Ended December 31, 1997 grew due to the
introduction of new and upgraded products by the Company. The Company believes
that the increasing availability of PCs at lower prices have contributed to the
increase in retail revenues. OEM sales declined due to lower demand from
hardware manufacturers but this decline was offset by the revenues derived from
the acquisition of Microsystems. School revenues increased primarily as a result
of sales from the acquisitions of Skills Bank and Learning Services and due to
the introduction of new and upgraded school software titles such as Oregon Trail
3rd Edition. Direct response sales increased due to the continued expansion of
the out-bound tele-sales channel during 1997. The increase in direct response
revenues was offset by a decline in solo direct mail revenues due to the effect
of the Internet and a shift in the Company's product strategy from productivity
and reference products to educational products, which historically have had a
lower response rate in the mail. The international business continued to expand
due to the introduction of 631 new localized and translated titles during the
Year Ended December 31, 1997, and due to the effect of a full year's results of
Edusoft in France and Domus in Holland, which were acquired in August and
September of 1996, respectively. In addition, the Company entered into several


                                       20


<PAGE>   21

international license and distribution transactions during the Year Ended
December 31, 1997 that increased revenues. Revenues from tax software and
services declined due to fluctuations in the Canadian dollar exchange rates and
the timing of delivery of certain products.

         The Company expects that its future revenue growth will depend on,
among other things, its ability to introduce new and upgraded products to the
marketplace, the extent of competition, unit pricing trends, the rate of
proliferation of personal computers into the home market and the demand for its
consumer software products along with the Company's respective share in the
consumer software market. Unit pricing will be affected by the extent of
competition in the consumer software industry, which is expected to increase. In
addition, the Company's ability to develop products for new platforms and
introduce titles into new distribution channels will impact future revenues and
growth rates. The consumer software industry has experienced continued
consolidation of formerly independent companies. To the extent that these
companies gain greater market share than the Company, future results will be
affected negatively. During 1997, the Company and many of its competitors began
using rebate coupons as an incentive to consumers to purchase products and
expand revenues. In addition, the Company uses various forms of print and
television media advertising to enhance brand and product awareness. The use of
these methods of channel marketing and advertising is becoming more prevalent
among the larger consumer software companies. To the extent that the Company
competes with companies larger than itself having more financial resources, it
may not be able to adequately match future channel marketing and advertising
programs, which may in turn result in loss of market share and corresponding
revenues and operating profits.

     Costs and Expenses

         The Company's costs and expenses and the respective percentages of
revenues for the Year Ended December 31, 1997 as compared to the Year Ended
December 31, 1996 are as follows:

<TABLE>
<CAPTION>
                                     Year Ended                           Year Ended
                                    December 31,         % of total      December 31,         % of total
                                        1997              revenues           1996              revenues 
                                    ------------         ----------      ------------         ----------
<S>                                   <C>                   <C>            <C>                   <C>
Costs of production                   $111,703               28            $ 91,045               27
Sales and marketing                     86,621               22              67,690               20
General and administrative              31,135                8              28,550                8
Development and software costs          41,018               10              36,018               10
Amortization, merger and

      other charges                    515,016              131             501,330              146
                                      --------              ---            --------              ---
                                      $785,493              199            $724,633              211
                                      ========              ===            ========              ===
</TABLE>

         Total costs and expenses decreased as a percentage of revenues to 199%
in the Year Ended December 31, 1997 as compared with 211% in the Year Ended
December 31, 1996. The negative percentage of revenues was caused primarily by
the effect of the amortization, merger and other charges.

         Costs of production includes the cost of manuals, packaging, diskettes
and CD-ROM discs, duplication, assembly and fulfillment charges. In addition,
costs of production includes royalties paid to third party developers and
inventory obsolescence reserves. Costs of production, as a percentage of
revenues, increased to 28% in the Year Ended December 31, 1997 as compared to
27% in the Year Ended December 31, 1996. The increase in costs of production as
a percentage of revenues was caused by a reduction in the retail selling prices
of certain of the Company's products during the year. The Company expects that
costs of production as a percentage of revenues may continue to increase in the
foreseeable future.

         Sales and marketing costs increased to 22% of revenues in the Year
Ended December 31, 1997 as compared to 20% of revenues in the Year Ended
December 31, 1996. The increase as a percentage of revenues was a result of
increased spending on coupon rebate programs in the retail channel, higher
channel marketing costs and increased spending for print and television media
advertising.

         General and administrative costs as a percentage of revenues were
constant between years. The increase in expenses was due to the 1997
acquisitions.



                                       21



<PAGE>   22

         Development and software costs were constant as a percentage of
revenues. Overall dollars spent increased in the Year Ended December 31, 1997 as
compared to the Year Ended December 31, 1996 as a result of the higher cost to
develop titles in the Reader Rabbit multi-subject series as well as The Clue
Finders' Adventures and Compton's Interactive Encyclopedia, which each have a
higher proportion of animation, graphics and online content than products
developed in prior years. In addition, the Company has begun to develop MMX, DVD
and Internet Applet platform based technologies, which are more expensive to
develop than traditional software code. The Company expects that as technologies
become more complex it will spend an increasing percentage of its revenues on
research and development.

   
         Amortization, merger and other charges decreased as a percentage of
revenues to 131% in the Year Ended December 31, 1997 as compared to 146% in the
Year Ended December 31, 1996. The amortization, merger and other charges
includes, among other things, the amortization of goodwill and other acquired
intangible assets from the acquisitions of The Former Learning Company,
Compton's, Creative Wonders and MECC plus certain of the European acquisitions.
In addition, the amortization, merger and other charges for the Year Ended
December 31, 1997 include certain exit and restructuring costs related to
centralizing certain administrative functions of the acquisitions and employee
severance. The change in dollar amount in amortization of goodwill and other
intangible assets of $22,520 is also due to inclusion of a full year of
amortization of the goodwill and intangible assets resulting from the
acquisition of MECC, whereas the prior year included amortization from May 17,
1996, the acquisition date, to the end of that year. In addition, the
amortization, merger and other charges includes a charge for incomplete
technology in the Year Ended December 31, 1997 of $1,050 related to the
acquisition of Creative Wonders and in the Year Ended December 31, 1996 includes
a charge for incomplete technology of $56,688 related to the acquisition of
MECC.
    




                                       22
<PAGE>   23

         Amortization, merger and other charges are as follows:

<TABLE>
<CAPTION>
                                                                 Years Ended December 31,
                                                              ---------------------------------
                                                                1997                     1996
                                                              --------                 --------

<S>                                                           <C>                      <C>     
Amortization of goodwill and other intangible assets          $457,393                 $434,866
Exit and restructuring costs                                    48,571                    4,260
Charge for incomplete technology                                 1,050                   56,688
Provision for earn-outs                                          5,497                    2,917
Professional fees and other costs                                2,505                    2,599
                                                              --------                 --------
                                                              $515,016                 $501,330
                                                              ========                 ========
</TABLE>

         The increase in amortization of goodwill and other intangible assets in
the Year Ended December 31, 1997 as compared to the Year Ended December 31, 1996
related primarily to a full year of amortization of goodwill and other
intangible assets resulting from the acquisitions of MECC in May 1996 and a full
year of amortization of goodwill and other intangible assets resulting from the
European acquisitions of Edusoft and Domus in August and September of 1996.
During 1997, the amortization of the goodwill and other intangible assets
related to the acquisitions of The Former Learning Company and Compton's was
completed.

   
         Exit and restructuring costs related to charges for employee severance,
discontinued products, termination of certain supplier relationships and other
charges related to the acquisitions. The plan was consummated during the year. 
The charge increased in the Year Ended December 31, 1997 as compared to the Year
Ended December 31, 1996 as a result of the 1997 acquisitions and related changes
in strategy related to the school channel and discontinued product. The Company
does not expect that annual cost savings or liquidity improvements resulting
from these actions to be material.
    

   
         The charge for incomplete technology for the Year Ended December 31,
1997 related to products being developed by Creative Wonders and for the Year
Ended December 31, 1996 related to products being developed by MECC, in each
case which the Company believes had not yet reached technological feasibility
and had no future alternative use at the date of acquisition and for which
additional development was required to complete the software technology and
products. In order to develop the acquired incomplete technology into
commercially viable products, the Company was required to complete development
of proprietary code, development of the artistic and graphic works and design
of the remaining storyboards. The in-process development associated with
acquisitions completed in fiscal 1996 and 1995 was generally completed
approximately 16 months from the respective acquisition date in each of the
transactions. In order to complete the development of the incomplete
technology, the Company spent approximately $6,000 (incurred in fiscal 1996
and fiscal 1997) for the acquisition completed in fiscal 1996, and $12,000
(incurred in fiscal 1996 and fiscal 1997) for the acquisitions completed in
fiscal 1995. The Company expects to spend approximately $500 in fiscal 1998
to complete the development of incomplete technology for the acquisition
completed in fiscal 1997.
    

         The provision for earn-outs related to additional payments which were
earned by the former owners of certain acquisitions completed in 1996 and 1995.
The earn-out requirements are based upon meeting certain financial and other
goals and are recorded when those conditions are met. The amounts due are
payable in shares of the Company's common stock and are due prior to December
31, 1998.

         Professional fees related to the investment banking, legal and
accounting costs for the acquisitions.

     Interest Expense

         Interest expense decreased to a net expense of $21,378 in the Year
Ended December 31, 1997 as compared to a net expense of $24,139 in the Year
Ended December 31, 1996 as a result of the repurchase of certain of the Senior
Convertible Notes, offset by the interest costs associated with the sale of
certain trade accounts receivable and by borrowings throughout the year under
the bank line of credit.



                                       23
<PAGE>   24





RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED
DECEMBER 31, 1995

     Revenues

         Revenues by distribution channel for the Years Ended December 31, 1996
and 1995 are as follows:

<TABLE>
<CAPTION>
                                     Year Ended                           Year Ended
                                    December 31,         % of total      December 31,         % of total
                                        1996              revenues           1995              revenues 
                                    ------------         ----------      ------------         ----------
<S>                                   <C>                   <C>            <C>                   <C>
Distribution Channel
--------------------

Retail                                $174,812               51            $ 75,734               45
OEM                                     27,855                8              20,021               12
School                                  21,701                6                  --               --
Direct response                         38,548               11              26,203               16
International                           57,684               17              25,631               15
Tax software and services               22,721                7              19,453               12
                                      --------              ---            --------              ---
                                      $343,321              100            $167,042              100
                                      ========              ===            ========              ===
</TABLE>
   

         Total revenues increased 106% in the Year Ended December 31, 1996 as
compared to the Year Ended December 31, 1995 due to several factors, including
the effect of revenues from the acquisitions of The Former Learning Company,
Compton's and MECC of approximately $130,000 and the remainder due to an
increase in sales of new and upgraded products launched by the Company during
the year. Retail revenues increased by approximately $80,000 as a result of the
acquisitions of The Former Learning Company, Compton's and MECC plus a general
increase in sales of consumer software products through retailers such as
Wal-Mart, Office Depot, Kmart and OfficeMax and sales from new and upgraded
products. International sales increased primarily as a result of the acquisition
of Edusoft in 1996, a full year of sales from tewi which was acquired in July
1995 and an increase in the number of translated foreign language versions of
the Company's products available for sale in the international markets. Original
equipment manufacturer ("OEM") revenues increased due to the availability of new
product offerings for this channel and an increased demand for multi-language
titles. Direct response revenues increased on a dollar basis but decreased as a
percentage of revenues due to the overall increase in revenues resulting from
product sales of the acquired companies, which did not formerly participate in
the direct response channel. Direct response revenues also increased as a result
of the introduction of an outbound telephone sales program during 1996. Prior to
the acquisitions of The Former Learning Company and MECC, the Company did not
participate in the school channel. Revenues from tax software and services
increased for the Year Ended December 31, 1996 as compared to the Year Ended
December 31, 1995 as a result of earlier delivery of product to the Company's
customers.
    

     Costs and Expenses

         The Company's costs and expenses and the respective percentages of
revenues for the Year Ended December 31, 1996 as compared to the Year Ended
December 31, 1995 are as follows:

<TABLE>
<CAPTION>
                                     Year Ended                           Year Ended
                                    December 31,         % of total      December 31,         % of total
                                        1996              revenues           1995              revenues 
                                    ------------         ----------      ------------         ----------
<S>                                   <C>                   <C>            <C>                   <C>
Costs of production                   $ 91,045               27            $ 53,070               32
Sales and marketing                     67,690               20              38,370               23
General and administrative              28,550                8              20,813               12
Development and software costs          36,018               10              12,487                7
Amortization,  merger
      and other charges                501,330              146             103,172               62
                                      --------              ---            --------              ---
                                      $724,633              211            $227,912              136
                                      ========              ===            ========              ===
</TABLE>

         Total costs and expenses increased as a percentage of revenues to 211%
in the Year Ended December 31, 1996, as compared with 136% in the Year Ended
December 31, 1995. This increase as a percentage of revenues was caused
primarily by the charges for incomplete technology, the amortization of goodwill
and acquired technology resulting from the acquisitions of The Former Learning
Company, Compton's and MECC, offset by the reduction in general and



                                       24


<PAGE>   25

administrative costs, sales and marketing costs and costs of production as a
percentage of revenues as a result of the integration and centralization of the
operations of the acquired companies.

         Costs of production includes the cost of manuals, packaging, diskettes
and CD-ROM discs, duplication, assembly and fulfillment charges. In addition,
costs of production includes royalties paid to third party developers and
inventory obsolescence reserves. Costs of production, as a percentage of
revenues, decreased to 27% in the Year Ended December 31, 1996 as compared to
32% in the Year Ended December 31, 1995. The decrease in costs of production as
a percentage of revenues was caused by reduced prices on the cost to manufacture
product due to increased unit volumes, changes in the production components, the
impact from The Former Learning Company and MECC having historically higher
gross margin selling products than the Company prior to the acquisitions. In
addition, during 1996 the Company experienced an increase in revenues in the
OEM, school and direct response channels, all of which typically experience
higher gross margins than the Company's traditional retail box product sales
channel. As well, the Company has seen an increase in sales of its Value line of
products, which, due to the nature of the low cost packaging in a jewel case,
also generate higher gross margins.

         Sales and marketing expenses decreased to 20% of revenues in the Year
Ended December 31, 1996 as compared to 23% of revenues in the Year Ended
December 31, 1995. The percentage decrease was a result of the Company reducing
both fixed costs and employee headcount of its combined operations following the
acquisitions in late 1995 and May 1996.

         General and administrative expenses decreased to 8% of revenues in the
Year Ended December 31, 1996 as compared to 12% in the Year Ended December 31,
1995. This is primarily the result of a general reduction in overhead costs and
employee headcount following the acquisitions in 1995 and 1996.

         Development and software costs increased to 10% of revenues for the
Year Ended December 31, 1996 as compared to 7% in the Year Ended December 31,
1995. The increase is a result of a higher proportion of internally developed
products from The Former Learning Company, Compton's and MECC than developed by
the Company prior to these acquisitions.

         Amortization, merger and other charges increased to 146% of revenues in
the Year Ended December 31, 1996 as compared to 62% in the Year Ended December
31, 1995. The increase results from the amortization of the goodwill and other
intangible assets arising on the acquisitions of The Former Learning Company and
Compton's for a full year in the Year Ended December 31, 1996 as compared to
less than a month in the Year Ended December 31, 1995, and from the amortization
of goodwill and other intangible assets and the charge for incomplete technology
arising from the acquisition of MECC in May 1996.

         Amortization, merger and other charges are as follows:

<TABLE>
<CAPTION>
                                                           Years Ended December 31,
                                                           ------------------------
                                                             1996            1995
                                                           --------        --------
                                                                        
<S>                                                        <C>             <C>     
Amortization of goodwill and other intangible assets       $434,866        $ 31,968
Charge for incomplete technology                             56,688          60,483
Employee severance costs                                      4,260           1,304
Provision for earn-outs                                       2,917              --
Professional fees and other costs                             2,599           6,784
Provision for litigation                                         --           2,633
                                                           --------        --------
                                                           $501,330        $103,172
                                                           ========        ========
</TABLE>

         The increase in amortization of goodwill and other intangible assets in
the Year Ended December 31, 1996 as compared to the Year Ended December 31, 1995
relates primarily to the amortization resulting from acquisitions of MECC in May
1996 and a full year of amortization of goodwill arising from The Former
Learning Company and Compton's, which were acquired in December 1995. Goodwill
and other intangible assets are primarily being amortized on a straight-line
basis over two years.

         The charge for incomplete technology for the Year Ended December 31,
1996 relates to products being developed by MECC and in the Year Ended December
31, 1995 for products developed by The Former Learning Company and 



                                       25


<PAGE>   26

Compton's which the Company believes had not yet reached technological
feasibility at the date of acquisition and for which additional development was
required to complete the software technology and products.

         Employee severance costs in each year related to severance paid to
employees of the Company terminated in connection with the acquisitions.

         The provision for earn-outs relates to additional payments which may be
earned by the former owners of certain international acquisitions purchased in
1996 and 1995. The earn-out requirements are based upon meeting certain
financial and other goals and will be recorded when those conditions are met.

         Professional fees and other costs decreased in the Year Ended December
31, 1996 as compared to the Year Ended December 31, 1995 due to decreased
charges related to the investment banking, legal and accounting costs.

     Interest Income (Expense)

         Interest income (expense) increased to a net expense of $24,139 in the
Year Ended December 31, 1996 as compared to interest income of $705 in 1995 as a
result of increased interest expense arising from the Senior Convertible Notes
issued by the Company in 1995.

LIQUIDITY AND CAPITAL RESOURCES

         Cash and cash equivalents decreased from $110,120 at December 31, 1996
to $95,137 at December 31, 1997. This decrease was attributable to the
repurchase of $28,000 of 5-1/2% Senior Convertible Notes due 2000 (the "Senior
Convertible Notes") offset by cash generated from operations of $90,074. The
Company also paid $33,500 during the year to acquire control of Creative
Wonders, which was offset by the net proceeds of $57,462 from the issue of the
special warrants in Canada. Included as a use of cash from operating activities
is $25,115 of interest related to the Senior Convertible Notes and the 5-1/2%
Senior Convertible/Exchangeable Notes due 2000 formerly held by Tribune Company
(the "Private Notes").

         On August 1, 1996, the Company announced that its Board of Directors
authorized the repurchase by the Company over the next twelve months of up to
$50,000 principal amount of its Senior Convertible Notes from time to time in
the open market and privately negotiated transactions. Any purchases would
depend on price, market conditions and other factors. During the Year Ended
December 31, 1997, the Company repurchased $28,000 of Senior Convertible Notes.

         As of February 2, 1998, the Company has outstanding $293,650 long-term
principal amount Senior Convertible Notes. The Senior Convertible Notes will be
redeemable by the Company on or after November 2, 1998 at declining redemption
prices and are due on November 2, 2000. Should the Senior Convertible Notes not
convert under their terms into common stock, there can be no assurances that the
Company will have sufficient cash flows from future operations to meet payment
requirements under the debt or be able to refinance the notes under favorable
terms or at all.

         On December 5, 1997, the Company issued an aggregate of 750,000 shares
of Series A Convertible Participating Preferred Stock (the "Preferred Stock") to
an investor group. The Preferred Stock was issued in exchange for $150,000
principal amount of the Private Notes, which the investor group purchased from
Tribune Company in a private transaction. Each share of the Preferred Stock has
an initial liquidation preference of $200 and is initially convertible into 20
shares of common stock, subject to adjustment. The Preferred Stock is
non-redeemable, bears no dividend, is subject to restrictions on resale for a
period of at least eighteen months and is manditorily convertible into common
stock upon satisfaction of certain conditions. The retirement of the Private
Notes will reduce the Company's future annual interest expense by $8,250.

         On November 6, 1997, the Company's Canadian subsidiary, SoftKey
Software Products Inc. ("SoftKey"), issued 4,072,000 special warrants in a
private placement in Canada for net proceeds of $57,462 . Each special warrant
is exercisable without additional payment for one exchangeable non-voting share
of SoftKey (an "Exchangeable Share"). The Exchangeable Shares are exchangeable
at the option of the holder on a one-for-one basis for common stock of the
Company. The proceeds of the private placement were used to acquire a 100%
equity interest in Creative Wonders for $33,500 and the remainder was used for
general corporate purposes.


                                       26


<PAGE>   27

         The Company has in place a revolving line of credit (the "Line") with
Fleet Bank to provide for a maximum availability of $50,000, of which $35,000 is
outstanding at December 31, 1997. Borrowings under the Line become due on July
1, 1999 and bear interest at the prime rate (8 1/2% at December 31, 1997). The
Line is subject to certain financial covenants, is secured by a general security
interest in certain operating subsidiaries of the Company and by a pledge of the
stock of certain of its subsidiaries. The Line is guaranteed by the Company.

         The Company, through its wholly owned subsidiary The Learning Company
Funding, Inc. (a separate special purpose corporation), is party to a
receivables purchase agreement whereby it can sell without recourse undivided
interests in eligible pools of trade accounts receivable up to $75,000 on a
revolving basis during a five year period ending September 30, 2002. The Company
acts as servicing agent for the sold receivables in the collection and
administration of the accounts.
   

         On October 23, 1997, the Company acquired control of Creative
Wonders for a total purchase price of approximately $37,799, which included
$33,883 of cash ($33,500 of which had been paid at year end), the value of
employee stock options assumed by the Company and estimated transaction costs.
    

         Income generated by the Company's subsidiaries in certain foreign
countries cannot be repatriated to the Company in the United States without
payment of additional taxes since the Company does not currently receive a U.S.
tax credit with respect to income taxes paid by the Company (including its
subsidiaries) in those foreign countries. The Company also conducts its tax
software business in Canada, which has experienced foreign currency exchange
rate fluctuation relative to the U.S. dollar.

         The Company conducts portions of its business in currencies other than
U.S. dollar. The Company does not expect that it will incur any significant risk
of currency translation loss due to fluctuations in those other currencies as
the amounts are not material.

         The Company has expensed all costs incurred in connection with Year
2000 system conversions. The amounts incurred and expected to be incurred are
not material.
   

         In the Year Ended December 31, 1997, revenues derived for the school
and international channels increased by $43,460, each of which has a slower
customer collection cycle and also requires a higher level of inventory on-hand
due to the higher number of title offerings and smaller production size
requirements. In addition, in the Year Ended December 31, 1997, the Company
completed a number of acquisitions, some of which involve catalog operations.
Such operations, relative to the Company's operations, require a greater number
of software title offerings and also have a slower accounts receivable
collection pattern. Management believes these changes in channel mix have caused
an increase in the accounts receivable aging and a decrease in inventory
turnover as compared to the prior year. The Company expects that as revenues
derived from these channels and from catalogs represent a greater proportion of
its overall business, accounts receivable aging may increase and inventory turns
may decrease correspondingly.
    

         At the present time, the Company expects that its cash and cash
equivalents and cash flows from operations will be sufficient to finance the
Company's operations for at least the next twelve months. Longer-term cash
requirements are dictated by a number of external factors, which include the
Company's ability to launch new and competitive products, the strength of
competition in the consumer software industry and the growth of the home
computer market. In addition, the Company's remaining long-term portion of the
Senior Convertible Notes totaling $293,650, mature in November 2000. If not
converted to common stock, the Company may be required to secure alternative
financing sources. There can be no assurance that alternative financing sources
will be available on terms acceptable to the Company in the future or at all.
The Company continuously evaluates products and technologies for acquisitions,
however no estimation of short-term or long-term cash requirements for such
acquisitions can be made at this time.



                                       27
<PAGE>   28





FUTURE OPERATING RESULTS

         The Company operates in a rapidly changing environment that is subject
to many risks and uncertainties. Some of the important risks and uncertainties
which may cause the Company's operating results to differ materially or
adversely are discussed below and elsewhere in this Annual Report on Form 10-K.

INTENSE COMPETITIVE ENVIRONMENT

         The consumer software industry is intensely and increasingly
competitive and is characterized by rapid changes in technology and customer
requirements. The Company competes for retail shelf space and general consumer
awareness with a number of companies that market consumer software. The Company
encounters competition from both established companies, including the largest
companies in the industry, and new companies that may develop comparable or
superior products. A number of the Company's competitors and potential
competitors possess significantly greater capital, marketing resources and brand
recognition than the Company. Rapid changes in technology, product obsolescence
and advances in computer software and hardware require the Company to develop or
acquire new products and to enhance its existing products on a timely basis. The
Company's marketplace has recently experienced a higher emphasis on online and
Internet related services and content tailored for this new delivery vehicle. To
the extent that demand increases for online products and content, the demand for
the Company's existing products change. There can be no assurance that the
Company will be able to successfully maintain market share and otherwise compete
successfully in the future.

         Competitive pressures in the software industry have resulted, and the
Company believes may continue to result, in pressure to reduce the prices of its
products or risk loss of market share. In response to such competitive pressures
during early 1997 the Company reduced the retail selling price of certain of its
educational products. There can be no assurance that Company's product selling
prices will not continue to decline in the future or that the Company will not
respond to such declines with additional price reductions. Such price reductions
may reduce the Company's revenues and operating margins in the future. During
1997, the Company and many of its competitors began using rebate coupons in
order to induce consumers to purchase their products. In addition, the Company
uses various forms of prints and television advertising to enhance brand and
product awareness. The use of these methods of channel marketing and advertising
is becoming more prevalent among the larger consumer software publishers. To the
extent that the Company fails to match competitors' future channel marketing and
advertising programs, it could risk loss of market share and corresponding
revenues and operating profits.

         Large companies with substantial bases of intellectual property content
in the motion picture and media industries, sophisticated product marketing and
technical abilities and/or financial resources that may not need to realize an
immediate profit or return on investment have increasingly entered or announced
their intention to enter the consumer software market. These competitors include
Microsoft, Disney, Mattel, Hasbro and Cendant Corporation (formerly CUC
International Inc.). For example, technology companies have begun to acquire
greater access to content, and content-oriented companies have begun to acquire
greater technological capabilities. To the extent that competitors achieve a
performance, price or distribution advantage, the Company could be adversely
affected. Furthermore, increased consolidation of the consumer software market
may impact future growth potential and performance.

         In the retail distribution channel resellers typically have available a
limited amount of shelf space and promotional resources. There is intense
competition for high quality and adequate levels of shelf space and promotional
support from retailers. To the extent that the number of consumer computer
platforms and products increases, this competition for shelf space may also
increase. The Company also competes for shelf space against non-educational and
reference category publishers such as games. To the extent that these vendors
acquire greater shelf space, the Company's position may be reduced. Mass
merchants such as Wal-Mart and Kmart are increasingly becoming a larger portion
of the Company's sales. As these retailers achieve greater market share from the
traditional software retailers, the Company may experience higher marketing
costs and increased competition for shelf space, which could impact future sales
and operating margins. Additionally, as technology changes, the type and number
of distribution channels will further change and new types of competitors, such
as cable or telephone companies, are likely to emerge. There can be no assurance
that the Company will compete effectively in these channels in the future.

         The retail channels of distribution available for products are subject
to rapid changes as retailers and distributors enter and exit the consumer
software market or alter their product inventory preferences. Other types of
retail outlets and methods of product distribution may become important in the
future. These new methods may include delivery of software using online services
or the Internet which will necessitate certain changes in the Company's business
and 


                                       28


<PAGE>   29

operations including addressing operational challenges such as improving
download time for pictures, images and programs, ensuring proper regulation of
content quality and developing sophisticated security for transmitting payments.
Should on-line distribution channels increase, the Company will be required to
modify its existing technology platforms in order for its products to be
compatible and remain competitive. It is critical to the success of the Company
that, as these changes occur, it maintain access to those channels of
distribution offering software in its market segments.

NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE

         The Company operates in a highly competitive and technology driven
environment. The consumer software industry is undergoing substantial change and
is subject to a high level of uncertainty. Software companies must continue to
develop or acquire new products or upgrade existing products on a timely basis
to sustain revenues and profitable operations. Factors contributing to the short
life span of PC software have included rapid technological change and an
expanded demand for content-rich products. Software companies must continue to
create or acquire innovative new products reflecting technological changes in
hardware and software and translate current products into newly accepted
hardware and software formats, in order to gain and maintain a viable market for
their products. PC hardware, in particular, is steadily advancing in power and
function, expanding the market for increasingly complex and flexible software
products. This has also resulted in longer periods necessary for research and
development of new products and a greater degree of unpredictability in the time
necessary to develop products. Furthermore, the rapid changes in the market and
the increasing number of new products available to consumers have increased the
degree of consumer acceptance risk with respect to any specific title that the
Company may publish. It is expected that this trend will continue and may become
more pronounced in the future.

         Similarly, the Company's product-content focus and enhanced presence in
the educational and reference software market have required and will continue to
require the Company to evaluate and adopt appropriate development and marketing
strategies and methods, which may differ from those historically employed by the
Company and subject the Company to the risks and competitive pressures
associated with those new strategies.

         The Company's rights to license many of its software products are
non-exclusive and, generally, of limited duration, and there is no assurance the
Company will be able to continue to obtain new products from developers or to
maintain or expand its market share in the event that a competitor offers the
same or similar software products. If the Company is unable to develop or
acquire new products in a timely manner as revenues decrease from products
reaching the end of their natural life cycle, the Company's results of
operations will be adversely affected.

         Certain of the Company's products, such as The American Girls Premiere
and the Sesame Street line of products, among others, include branded content
licensed from third parties. This content is licensed pursuant to agreements
with terms of finite duration and which may contain restrictions on the
Company's ability to develop future products without the consent of the
applicable licensor. If the Company is not able to develop future products under
these agreements or enter into alternative arrangements with the same or
additional licensors, the Company's operating results could be adversely
affected.

DEPENDENCE ON MAJOR SUPPLIER

         In 1997, the production, assembly and distribution of the Company's
North American line of products was performed by two units of Bertelsmann AG
(collectively, "BMG"), (with the exception of school channel products and
certain OEM products). The Company believes that its existing production
capacity is sufficient to handle anticipated increases in volume and titles into
the foreseeable future. Although the Company believes that suitable alternative
suppliers exist, there can be no assurance that any termination or modification
of its arrangement with BMG would not result in a short-term business
interruption for the Company.

   
YEAR 2000 COMPLIANCE

         The Company has initiated an internal study to ensure that its
computer systems and related applications are Year 2000 compliant. The Company
has been taking, and will continue to take, actions intended to resolve Year
2000 issues through planned replacement or upgrades of its software systems.
During the execution of this project the Company has incurred, and may continue
to incur, internal staff costs as well as consulting and other expenses related
to enhancements necessary to prepare systems for the year 2000. Based on
information currently available to it, the Company believes it will be able to
modify or replace any affected systems in time to minimize any detrimental
effects on operations, and that any additional associated costs will not be
material to the financial condition or results of operations of the Company.
The Company is in the process of determining the effect of this issue on its
vendors' and customers' systems. There can be no assurance that the systems of
such third parties will be Year 2000 compliant on a timely basis, or that the
Company's results of operations will not be adversely affected by the failure
of systems operated by third parties to properly operate in the year 2000.
    

EFFECT OF NEW ACCOUNTING PRONOUNCEMENT

         For the Year Ended December 31, 1997, the Company adopted Statement of
Accounting Standards No. 128 ("FAS 128"), which requires the presentation of
basic and diluted earnings per share, which replaces primary and fully diluted
earnings per share. Earnings per share have been restated for all periods
presented to reflect the adoption of FAS 128. Basic net loss per share is
computed using the weighted average number of common shares outstanding during
the period. Diluted net loss per share is computed using the weighted average
number of common shares outstanding during the period, plus the diluted effect
of common stock equivalents. Common stock equivalent shares consist of
convertible 



                                       29


<PAGE>   30

debentures, preferred stock, stock options and warrants. The dilutive
computations do not include potential common stock equivalents for the years
ended December 31, 1997, 1996 and 1995 as their inclusion would be antidilutive.

         The Financial Accounting Standards Board recently issued Statement of
Position ("SOP") No. 97-2, Software Revenue Recognition, which supersedes SOP
No. 91-1, the existing pronouncement on this subject, in its final form. The
most significant changes to SOP No. 91-1, relate to multiple deliverables and
"when and if available" products. The adoption of this new standard is not
expected to have a material effect on the Company's financial statements. The
SOP is effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Company will adopt the new standards for its fiscal year
ending December 31, 1998.

         In June 1997, the FASB issued SFAS No. 130 Reporting Comprehensive
Income which establishes standards for reporting and display of comprehensive
income and its components (revenue expenses, gains and losses) in a full set of
general purpose financial statements. Management has not yet evaluated the
effects of this change on its reporting of income. The Company will adopt SFAS
No. 130 for its fiscal year ending December 31, 1998.

         In June 1997, the FASB issued SFAS No. 131 Disclosure about Segments of
an Enterprise and Related Information which changes the way public companies
report information about operating segments. SFAS No. 131 which is based on the
management approach to segment reporting establishes requirements to report
selected segment information quarterly and to report entity wide disclosures
about products and services major customers and the material countries in which
the entity holds assets and reports revenue. Management is currently evaluating
the effects of this change on its reporting of segment information. The Company
will adopt SFAS No. 131 for its fiscal year ending December 31, 1998.

   
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(a)  See Index to Consolidated Financial Statements set forth on page 33 hereof.

(b)  See Supplementary Data set forth below:
    

QUARTERLY RESULTS OF OPERATIONS

   

     The following table sets forth unaudited statement of operations data for
each quarterly period of the Company's last two fiscal years. The unaudited
quarterly financial information has been prepared on the same basis as the
annual information presented elsewhere in this report and in management's
opinion, reflects all adjustments (consisting of normal recurring entries)
necessary for a fair presentation of the information provided. The results of
the quarters ended March 31, 1997 and June 30, 1997 have been restated to
reflect the acquisitions of Skills Bank Corporation, Learning Services, Inc.
and Microsystems Software, Inc. which were accounted for using the
pooling-of-interest method of accounting. The operating results for any quarter
are not necessarily indicative of results for any future period.
    
   

<TABLE>
<CAPTION>
                                                                Quarters Ended
                                                  (in thousands, except per share amounts)
                                           -----------------------------------------------------
                                             March 31,   June 30,   September 30,   December 31,
                                               1997        1997         1997           1997
                                           -----------  ---------   -------------   ------------
<S>                                        <C>          <C>           <C>           <C>
Revenues                                   $  86,881    $  89,305     $ 96,051      $ 120,201
Operating expenses:      
  Costs of production                         24,020       25,819       25,573         36,291
  Sales and marketing                         20,859       20,366       19,425         25,971
  General and administrative                   8,577        8,368        6,892          7,298
  Development and software costs              10,751       10,094        9,189         10,984
  Amortization, merger and other      
    charges                                  124,721      122,468      126,930        140,897
                                           ---------    ---------     --------      ---------

Operating loss                              (102,047)     (97,810)     (91,958)      (101,240)

Interest expense, net                          5,521        4,995        5,847          5,015
                                           ---------    ---------     --------      ---------

Loss before taxes                           (107,568)    (102,805)     (97,805)      (106,255)

Provision for income taxes                      (250)        (250)          --         61,734
                                           ---------    ---------     --------      ---------

Net loss                                   $(107,318)   $(102,555)    $(97,805)     $(167,989)
                                           =========    =========     ========      =========

Weighted average number of shares
  outstanding                                 48,742       48,982       49,315         50,141

Net loss per share -- basic and diluted    $   (2.20)   $   (2.09)    $  (1.98)     $   (3.35)
                                           =========    =========     ========      =========
</TABLE>
    


<TABLE>
<CAPTION>
   

                                                                Quarters Ended
                                                  (in thousands, except per share amounts)
                                           -----------------------------------------------------
                                             March 31,   June 30,   September 30,   December 31,
                                               1996        1996         1996           1996
                                           -----------  ---------   -------------   ------------
<S>                                         <C>         <C>           <C>            <C>
Revenues                                    $ 71,133    $  76,120     $ 90,055       $106,013
Operating expenses:      
  Costs of production                         20,455       20,249       23,095         27,246
  Sales and marketing                         15,380       15,870       17,061         19,379
  General and administrative                   6,862        6,888        7,044          7,756
  Development and software costs               7,897        8,850        9,710          9,561
  Amortization, merger and other      
    charges                                   90,512      162,077      120,818        127,923
                                            --------    ---------     --------       --------

Operating loss                               (69,973)    (137,814)     (87,673)       (85,852)

Interest expense, net                          6,348        6,371        5,506          5,914
                                            --------    ---------     --------       --------

Loss before taxes                            (76,321)    (144,185)     (93,179)       (91,766)

Provision for income taxes                        --           --           --             --
                                            --------    ---------     --------       --------

Net loss                                    $(76,321)   $(144,185)    $(93,179)      $(91,766)
                                            ========    =========     ========       ========

Weighted average number of shares
  outstanding                                 32,874       39,687       44,798         45,751

Net loss per share -- basic and diluted     $  (2.32)   $   (3.63)    $  (2.08)      $  (2.01)
                                            ========    =========     ========       ========
</TABLE>
    



                                       30
<PAGE>   31






                           THE LEARNING COMPANY, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----

Report of Independent Accountants.............................................32

Consolidated Balance Sheets as of December 31, 1997 and 1996 ................ 33

Consolidated Statements of Operations for the Years Ended
     December 31, 1997, 1996 and 1995.........................................34

Consolidated Statements of Stockholders' Equity (Deficit) for the
     Years Ended December 31, 1997, 1996 and 1995.............................35

Consolidated Statements of Cash Flows for the Years Ended
     December 31, 1997, 1996 and 1995.........................................36

Notes to Consolidated Financial Statements....................................38

Financial Statement Schedule of Valuation and Qualifying Accounts
     for the Years Ended December 31, 1997, 1996 and 1995.....................55





                                       31
<PAGE>   32







                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
     The Learning Company, Inc.:

         We have audited the accompanying consolidated balance sheets of The
Learning Company, Inc. as of January 3, 1998 and January 4, 1997 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three fiscal years in the period ended January 3, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Learning Company, Inc. as of January 3, 1998 and January 4, 1997 and the related
consolidated results of its operations and its cash flows for each of the three
fiscal years in the period ended January 3, 1998 in conformity with generally
accepted accounting principles.

         In connection with our audits of the financial statements referred to
above, we have also audited the related financial statement schedule of
valuation and qualifying accounts. In our opinion, this financial statement
schedule for each of the three fiscal years in the period ended January 3, 1998,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.




                                                        COOPERS & LYBRAND L.L.P.

Boston, Massachusetts
February 9, 1998
(except as to Note 12 which is
as of March 6, 1998)




                                       32
<PAGE>   33






                           THE LEARNING COMPANY, INC.
                           CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
   

<TABLE>
<CAPTION>
                                                                              December 31,            December 31, 
                                                                                  1997                    1996
                                                                              ------------            -----------
<S>                                                                           <C>                      <C>      
ASSETS

CURRENT ASSETS:
    Cash and cash equivalents                                                 $    95,137              $ 110,120
    Accounts receivable, less allowances of $29,226
      and $15,191, respectively                                                    99,677                 79,610
    Inventories                                                                    29,600                 15,894
    Other current assets                                                           32,590                 20,349
                                                                              -----------              ---------
                                                                                  257,004                225,973
                                                                              -----------              ---------
Fixed assets and other, net                                                        32,306                 22,975
Goodwill and other intangible assets, net                                         127,481                544,570
                                                                              -----------              ---------
                                                                              $   416,791              $ 793,518
                                                                              ===========              =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
    Trade accounts payable and accrued expenses                               $    41,209              $  49,723
    Other current liabilities                                                      52,851                 16,935
    Merger related accruals                                                        12,533                 10,667
    Current portion of long-term obligations                                       10,717                  8,083
    Purchase price payable                                                          7,896                  3,245
                                                                              -----------              ---------
                                                                                  160,356                113,653
                                                                              -----------              ---------

LONG-TERM OBLIGATIONS:
    Long-term debt                                                                294,356                332,930
    Related party debt                                                                 --                150,000
    Accrued and deferred income taxes                                              59,746                 86,920
    Other                                                                           6,119                  5,078
                                                                              -----------              ---------
                                                                                  360,221                574,928
                                                                              -----------              ---------

COMMITMENTS AND CONTINGENCIES (NOTE  7)

STOCKHOLDERS' EQUITY (DEFICIT):
    Series A Preferred Stock, $.01 par value - Authorized 750,000
         shares, issued and outstanding 750,000 shares at December
         31, 1997 (liquidation value of $150,000)                                       8                     --
    Common stock, $0.01 par value - Authorized - 120,000,000
         shares; issued and outstanding 48,868,659 and 44,379,781
         shares at December 31, 1997 and 1996, respectively                           489                    444
    Special voting stock - Authorized and issued - one share
         representing the voting rights of 1,478,929 and 1,551,428
         outstanding Exchangeable Shares (for common stock) at
         December 31, 1997 and 1996,  respectively                                     --                     --
    Additional paid-in-capital                                                  1,012,273                733,229
    Accumulated deficit                                                        (1,099,907)              (618,047)
    Cumulative translation adjustment                                             (16,649)               (10,689)
                                                                              -----------              ---------
                                                                                 (103,786)               104,937
                                                                              -----------              ---------
                                                                              $   416,791              $ 793,518
                                                                              ===========              =========
</TABLE>
    




   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
                                   STATEMENTS

                                       33
<PAGE>   34





                           THE LEARNING COMPANY, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                      Years Ended December 31,
                                                     -----------------------------------------------------------
                                                         1997                    1996                    1995
                                                     -----------             -----------             -----------

<S>                                                  <C>                     <C>                     <C>        
REVENUES                                             $   392,438             $   343,321             $   167,042

COSTS AND EXPENSES:

   Costs of production                                   111,703                  91,045                  53,070
   Sales and marketing                                    86,621                  67,690                  38,370
   General and administrative                             31,135                  28,550                  20,813
   Development and software costs                         41,018                  36,018                  12,487
   Amortization, merger and other charges                515,016                 501,330                 103,172
                                                     -----------             -----------             -----------
        Total operating expenses                         785,493                 724,633                 227,912
                                                     -----------             -----------             -----------

OPERATING LOSS                                          (393,055)               (381,312)                (60,870)
                                                     -----------             -----------             -----------

INTEREST INCOME (EXPENSE):

    Interest income                                        1,104                   2,564                   6,020
    Interest expense                                     (22,482)                (26,703)                 (5,315)
                                                     -----------             -----------             -----------
        Total interest income (expense)                  (21,378)                (24,139)                    705
                                                     -----------             -----------             -----------

LOSS BEFORE TAXES                                       (414,433)               (405,451)                (60,165)

PROVISION FOR INCOME TAXES                                61,234                      --                   5,795
                                                     -----------             -----------             -----------
NET LOSS                                             $  (475,667)            $  (405,451)            $   (65,960)
                                                     ===========             ===========             ===========

NET LOSS PER SHARE:
        Basic and Diluted                            $     (9.59)            $     (9.94)            $     (2.65)

WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
        Basic and Diluted                             49,613,000              40,801,000              24,855,000
</TABLE>




   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
                                   STATEMENTS

                                       34


<PAGE>   35


                           THE LEARNING COMPANY, INC.
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                 (IN THOUSANDS)

                                                                
<TABLE>
<CAPTION>
                                  Series A                                                                              Total    
                                  Preferred      Common Stock     Additional                Cumulative              Stockholders'
                               --------------   ---------------    Paid-In    Accumulated  Translation   Treasury      Equity    
                               Shares  Amount   Shares   Amount    Capital      Deficit     Adjustment     Stock      (Deficit)
                               ------  ------   ------   ------  -----------  -----------  -----------   --------   -------------
<S>                             <C>     <C>     <C>       <C>    <C>          <C>            <C>           <C>        <C>       
BALANCE, DECEMBER 31, 1994       --     $--     16,697    $167   $  191,390   $  (142,792)   $ (9,651)   $(1,629)     $  37,485
Acquisition of Future Vision     --      --      1,135      11        8,455        (3,608)         --         --          4,858
Acquisition of tewi              --      --         99       1        3,639            --          --         --          3,640
Acquisition of  The Former                   
  Learning Company               --      --         --      --       43,369            --          --         --         43,369
Acquisition of Compton's         --      --      5,053      51       86,634            --          --         --         86,685
Other acquisitions               --      --        262       3        2,673          (236)         --         --          2,440
Sale of common stock             --      --      2,713      27       73,584            --          --         --         73,611
Stock issued under exercise                                                                                       
  of options and warrants        --      --      1,898      19       28,171            --          --         --         28,190
Treasury stock retirement        --      --         --      --       (1,629)           --          --      1,629             --
Conversion of Exchangeable                   
  Shares to common stock         --      --      2,508      25          (25)           --          --         --             --
Translation adjustments          --      --         --      --           --            --         201         --            201
Net loss                         --      --         --      --           --       (65,960)         --         --        (65,960)
                                ---     ---     ------    ----   ----------   -----------    --------      -----      ---------
BALANCE, DECEMBER 31, 1995       --      --     30,365     304      436,261      (212,596)     (9,450)        --        214,519
Acquisition of MECC              --      --      9,214      92      240,670            --          --         --        240,762
Other acquisitions               --      --        899       9       15,247            --          --         --         15,256
Conversion of debt to common                                                                                          
  stock                          --      --        158       2        3,051            --          --         --          3,053
Stock issued under exercise                  
  of options                     --      --      3,198      32       24,985            --          --         --         25,017
Conversion of Exchangeable                   
  Shares to common stock         --      --         45      --           --            --          --         --             --
Stock issued for settlement                  
  of expenses                    --      --        500       5       13,015            --          --         --         13,020
Translation adjustments          --      --         --      --           --            --      (1,239)        --         (1,239)
Net loss                         --      --         --      --           --      (405,451)         --         --       (405,451)
                                ---     ---     ------    ----   ----------   -----------    --------      -----      ---------
BALANCE, DECEMBER 31, 1996       --      --     44,379     444      733,229      (618,047)    (10,689)        --        104,937
Issuance of Series A                                                                                                   
  Preferred Stock               750       8         --      --      202,025            --          --         --        202,033
Issuance of special warrants     --      --         --      --       57,462            --          --         --         57,462
Conversion of Exchangeable                                                                                         
  Shares to common stock         --      --         73      --           --            --          --         --             --
Stock issued under exercise                  
  of stock options               --      --      1,116      11        8,959            --          --         --          8,970
Stock issued to settle                       
  earn-outs                      --      --        135       2        2,021            --          --         --          2,023
Other acquisitions               --      --      3,165      32        8,577        (6,193)         --         --          2,416
Translation adjustments          --      --         --      --           --            --      (5,960)        --         (5,960)
Net loss                         --      --         --      --           --      (475,667)         --         --       (475,667)
                                ---     ---     ------    ----   ----------   -----------    --------      -----      --------- 
BALANCE, DECEMBER 31, 1997      750       8     48,868    $489   $1,012,273   $(1,099,907)   $(16,649)     $  --      $(103,786)
                                ===     ===     ======    ====   ==========   ===========    ========      =====      ========= 
</TABLE>

   The accompanying notes are an integral part of these consolidated financial
                                   statements

                                       35
<PAGE>   36



                           THE LEARNING COMPANY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                                      -------------------------------------------------
                                                                         1997                1996                1995
                                                                      ---------           ---------           ---------
<S>                                                                   <C>                 <C>                 <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                              $(475,667)          $(405,451)          $ (65,960)
Adjustments to reconcile net loss to net cash provided
  by operating activities:
    Depreciation and amortization                                       531,206             451,133              29,802
    Charge for incomplete technology                                      1,050              56,688              60,483
    Provision for returns and doubtful accounts                          67,773              38,112              22,358
    Provision for income taxes                                           61,234                  --                  --
Change in assets and liabilities (net of acquired assets and
  liabilities):
    Accounts receivable                                                 (89,396)            (91,413)            (39,811)
    Inventories                                                         (10,954)              3,332              (4,441)
    Other current assets                                                 (2,035)              4,203               8,865
    Other long-term assets                                               (8,625)             (4,308)             11,990
    Accounts payable and accrued expenses                                15,488              13,359               9,942
    Other long-term obligations                                              --                  --              (2,294)
                                                                      ---------           ---------           ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                90,074              65,655              30,934
                                                                      ---------           ---------           ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Businesses acquired, net of cash on-hand                              (55,592)             21,518            (547,889)
  Purchases of property and equipment, net                               (4,685)             (4,939)             (7,811)
  Software development costs                                            (27,299)            (12,344)             (2,410)
  Merger related accruals                                               (53,021)            (38,091)             (7,341)
  Payments to stockholders of The Former Learning Company                    --             (25,025)                 --
                                                                      ---------           ---------           ---------
NET CASH USED FOR INVESTING ACTIVITIES                                 (140,597)            (58,881)           (565,451)
                                                                      ---------           ---------           ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from sale of stock, options and warrants                   8,970              27,905             106,616
  Borrowings under line of credit                                        10,150              25,000               3,150
  Payments on term notes                                                     --              (4,832)             (8,815)
  Payments on capital lease obligations                                  (2,676)             (1,874)             (1,008)
  Sale (repurchase) of senior  notes                                    (28,000)            (18,350)            500,000
  Costs incurred to issue Series A Preferred Stock                      (10,701)                 --                  --
  Proceeds from issue of  special warrants                               57,462                  --                  --
  Other                                                                   1,821              (1,092)                 --
                                                                      ---------           ---------           ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                37,026              26,757             599,943
                                                                      ---------           ---------           ---------

EFFECT OF EXCHANGE RATE CHANGES ON NET CASH                              (1,486)             (1,243)                201
                                                                      ---------           ---------           ---------

NET CHANGE IN CASH AND CASH EQUIVALENTS                                 (14,983)             32,288              65,627

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                        110,120              77,832              12,205
                                                                      ---------           ---------           ---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                            $  95,137           $ 110,120           $  77,832
                                                                      =========           =========           =========
</TABLE>



   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
                                   STATEMENTS

                                       36
<PAGE>   37






                           THE LEARNING COMPANY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (CONTINUED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                  YEARS ENDED DECEMBER 31,
                                                                        ----------------------------------------------
                                                                          1997               1996                1995
                                                                        --------           --------            -------
<S>                                                                     <C>                <C>                 <C>    
SUPPLEMENTAL SCHEDULING OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of Series A Preferred Stock to retire debt                     $202,033           $     --            $    --
Common stock issued to settle earn-out agreements                          2,023                 --                 --
Common stock issued to acquire MECC                                           --            221,319                 --
Increase in APIC due to value of in-the-money employee
   stock options acquired in connection with acquisitions                  2,969             19,444             43,369
Common stock issued for acquisitions                                          --             15,255             95,292
Conversion of debt to equity                                                  --              3,053              3,471
Common stock issued for settlement of expenses                                --             10,132                111
Equipment acquired under capital leases                                       --              1,262                627

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (refunded) during period for:

Interest paid                                                           $ 29,876           $ 28,466            $   524
Income taxes paid  (refunded)                                              1,583             (7,886)               (12)
</TABLE>


   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
                                   STATEMENTS

                                       37
<PAGE>   38





                           THE LEARNING COMPANY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(1)  DESCRIPTION  OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The Business

         The Learning Company, Inc. ("TLC" or the "Company") develops, publishes
and markets consumer software in the education and reference category and, to a
lesser extent, productivity, lifestyle and entertainment categories. The Company
sells its products in the retail channel through mass merchants, consumer
electronic stores, price clubs, office supply stores, software specialty stores
and distributors; to original equipment manufacturers ("OEMs"); to schools and
to end-users through direct response methods. The Company also develops and
distributes income tax software products and offers computerized processing of
income tax returns in Canada. The Company's principal market is in the United
States and Canada. The Company has international operations in Germany, Ireland,
France, Holland, the United Kingdom, Japan and Australia. On October 24, 1996,
SoftKey International Inc. changed its name to The Learning Company, Inc.

         The Company's fiscal year is the 52 or 53 weeks ending on or after
December 31. For clarity of presentation herein, all references to December 31,
1997 relate to balances as of January 3, 1998, references to December 31, 1996
relate to balances as of January 4, 1997, the period from January 5, 1997 to
January 3, 1998 is referred to as the "Year Ended December 31, 1997", the period
from January 7, 1996 to January 4, 1997 is referred to as the "Year Ended
December 31, 1996" and the period from January 1, 1995 to January 6, 1996 is
referred to as the "Year Ended December 31, 1995".

     Basis of Presentation

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions regarding
items such as return reserves and allowances, net realizable value of intangible
assets and valuation allowances for deferred tax assets that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates in
these financial statements include: return reserves, inventory reserves,
valuation of deferred tax assets and valuation and useful lives of intangible
assets. Actual results could differ from these estimates.

         The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant intercompany
amounts and transactions have been eliminated.

         Certain prior period amounts have been reclassified to conform with the
current year presentation.

     Revenue Recognition

         Revenues are primarily derived from the sale of software products and
from software licensing and royalty arrangements. The Company recognizes revenue
in accordance with the Statement of Position ("SOP") No. 91-1, Software Revenue
Recognition. The Financial Accounting Standards Board recently issued SOP No.
97-2, Software Revenue Recognition. The most significant changes to SOP No.
91-1, relate to multiple deliverables and "when and if available" products. The
new SOP No. 97-2 is effective for transactions entered into in fiscal years
beginning after December 15, 1997 and will be adopted by the Company for the
fiscal year ending December 31, 1998. The adoption of this new standard is not
expected to have a material effect on the Company's financial statements.
   

         Revenues from the sale of software products are recognized upon
shipment, provided that no significant obligations remain outstanding and
collection of the receivable is probable. Costs related to insignificant post
shipment obligations are accrued when revenue is recognized for the sale of the
related products. Allowances for estimated returns are provided at the time of
sale and allowances for price protection are provided at the time of commitment
and charged against revenues. The Company evaluates the adequacy of allowances
for returns and doubtful accounts primarily based upon its evaluation of
historical and expected sales experience and by channel of distribution. The
estimates determined for reserves for returns and allowances are based upon
information available at the reporting date. To the extent the future market,
sell-through experience, customer mix, channels of 
    


                                       38


<PAGE>   39


distribution, product pricing and general economic conditions change, the
estimated reserves required for returns and allowances may also change. Revenues
from royalty and license arrangements are recognized as earned based upon
performance or product shipments.
   

     Advertising and Marketing Costs

         The Company charges direct response advertising costs to sales and
marketing expense as incurred. Direct response costs eligible for capitalization
are not material at December 31, 1997 or 1996. Co-operative advertising and
other channel marketing programs are expensed in the period the programs are run
or over the period of specific contract for services and are included in sales
and marketing expense. The Company offers various coupon rebate programs to its
end-user customers. The Company provides for the expected cost of the coupon
redemption at the time of sale under sales and marketing expense. The cost is
estimated based upon the expected coupon redemption rate on a product-by-product
basis and is adjusted at each reporting period for actual results. Fees for
preferred shelf space are expensed as incurred as sales and marketing expense.
    

     Cash Equivalents
   

         Cash equivalents are valued at cost, which approximates market value,
and consist principally of commercial paper, bankers' acceptances, short-term
government securities and money market accounts. The Company considers all such
investments having maturities at purchase of less than 90 days to be cash
equivalents. At year end the Company  has approximately $20,000 of cash on
deposit under compensating balances that are not legally restricted with the
Company's bank to provide for credit enhancement under the receivables purchase
agreement. The amount of the compensating balances varies based upon the amount
of eligible accounts receivable under the agreement and the credit rating of
each account receivable.
    
 

     Accounting for Transfers and Servicing Financial Assets

         The Company follows Statement of Financial Accounting Standards No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities ("FAS 125"). FAS 125 applies a control-oriented,
financial-components approach to financial asset transfer transactions whereby
the Company (1) recognizes the financial and servicing assets it controls and
the liabilities it has incurred, (2) derecognizes financial assets when control
has been surrendered, and (3) derecognizes liabilities once they are
extinguished. The Company, through its wholly owned subsidiary The Learning
Company Funding, Inc. (a separate special purpose corporation), is party to a
receivables purchase agreement whereby it can sell without recourse undivided
interests in eligible pools of trade accounts receivable of up to $75,000 on a
revolving basis during a five year period ending September 30, 2002. The Company
acts as servicing agent for the sold receivables in the collection and
administration of the accounts.

     Inventories

         Inventories are stated at the lower of weighted average cost or net
realizable value and include third-party assembly costs, CD-ROM discs, manuals
and an allocation of fixed overhead.


                                              December 31,
                                         ---------------------
                                           1997          1996
                                         -------       -------
                  Components             $ 4,243       $ 1,213
                  Finished goods          25,357        14,681
                                         -------       -------
                                         $29,600       $15,894
                                         =======       =======



     Property and Equipment

         Property and equipment are stated at the lower of cost, net of
accumulated depreciation or net realizable value. Depreciation is calculated
using accelerated and straight-line methods over the following useful lives:


                  Building                      40 years
                  Computer equipment            3-5 years
                  Furniture and fixtures        3-5 years
                  Leasehold improvements        Shorter of the life of the lease
                                                or the estimated useful life



         Betterments and major renewals are capitalized and included in
property, plant, and equipment accounts while expenditures for maintenance and
repairs and minor renewals are charged to expense. When assets are retired or
otherwise disposed of, the assets and related allowances for depreciation and
amortization are eliminated from the accounts and any resulting gain or loss is
reflected in income.

     Goodwill and Intangible Assets

         The excess cost over the fair value of net assets acquired, goodwill,
is amortized on a straight-line basis over 2 years, except for the goodwill
associated with the Company's Canadian income tax software business, which is
being 


                                       39

<PAGE>   40

amortized on a straight-line basis over its estimated useful life of 40 years
(balance of $22,341 at the end of fiscal 1997 and $23,352 at the end of fiscal
1996). The cost of identified intangible assets is generally amortized on a
straight-line basis over their estimated useful lives of 2 to 10 years. Deferred
financing costs are being amortized on a straight-line basis over the term of
the related debt financing.

         The carrying value of goodwill and intangible assets is reviewed on a
quarterly and annual basis for the existence of facts or circumstances both
internally and externally that may suggest impairment. To date no such
impairment has occurred. The Company determines whether an impairment has
occurred based on gross expected future cash flows and measures the amount of
the impairment based on the related future estimated discounted cash flows. The
cash flow estimates that are used to determine the amount of an impairment, if
any, contain management's best estimates, using appropriate and customary
assumptions and projections at the time. Goodwill and other intangible assets
have been presented net of accumulated amortization of $905,425 at the end of
fiscal 1997 and $444,967 at the end of fiscal 1996.

<TABLE>
<CAPTION>
      Description                                  Estimated
      -----------                                useful life in               Net balance
                                                     years                  at December 31,
                                                 --------------      ----------------------------
                                                                       1997                1996
                                                                     --------            --------
      <S>                                           <C>              <C>                 <C>     
      Goodwill                                      2 to 40          $ 55,199            $397,459
      Acquired technology                              2               16,662             126,763
      Brands and related content rights             7 to 10            51,453              10,061
      Deferred financing costs                         5                3,828               9,423
      Other intangible assets                          3                  339                 864
                                                                     --------            --------
                                                                     $127,481            $544,570
                                                                     ========            ========
</TABLE>

     Development and Software Costs
   

         Development and software costs are expensed as incurred. Development
costs for new software products and enhancements to existing software products
are expensed as incurred until technological feasibility has been established.
Capitalized software development costs on a product-by-product basis are being
amortized using the straight-line method over the remaining estimated economic
life of the product, which is generally twelve months beginning when launched,
which approximates the ratio that current gross revenues for a product bear to
the total of current and anticipated future gross revenues for that product. At
December 31, 1997 and 1996, the Company had capitalized software development
costs of $13,665 and $6,140, respectively which are included in other current
assets. Amortization of software development costs was $12,052, $9,904 and
$2,368 in each of the Years Ended December 31, 1997, 1996 and 1995,
respectively.
    

     Income Taxes

         Deferred tax liabilities and assets are determined based on the
differences between the financial statement basis and tax basis of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. FAS 109 also requires a valuation allowance
against net deferred tax assets if based upon the available evidence it is more
likely than not that some or all of the deferred tax assets will not be
realized.

     Foreign Currency

         The functional currency of each foreign subsidiary is the local
currency. Accordingly, assets and liabilities of foreign subsidiaries are
translated to U.S. dollars at period end exchange rates. Revenues and expenses
are translated using the average rates during the period. The effects of foreign
currency translation adjustments have been accumulated and are included as a
separate component of stockholders' equity (deficit).

     Computation of Earnings Per Share

         For the year ended December 31, 1997, the Company adopted Statement of
Accounting Standards No. 128 ("FAS 128"), which requires the presentation of
Basic and Dilutive earnings per share, which replaces primary and fully diluted
earnings per share. Earnings per share have been restated for all periods
presented to reflect the adoption of FAS 128. Basic net loss per share is
computed using the weighted average number of common shares outstanding during
the period. Dilutive net loss per share is computed using the weighted average
number of common shares outstanding during the period, plus the dilutive effect
of common stock equivalents. Common stock equivalent shares consist of
convertible debentures, preferred stock, stock options and warrants. The
dilutive computations do not include common stock equivalents for the years
ended December 31, 1997, 1996 and 1995 as their inclusion would be antidilutive.




                                       40


<PAGE>   41

(2)    BUSINESS COMBINATIONS

     Creative Wonders

         On October 23, 1997, the Company acquired control of Creative Wonders,
L.L.C. ("Creative Wonders"), an educational software company that publishes,
among other titles, the Sesame Street line of products. The purchase price was a
total of $37,799 including the value of employee stock options assumed and
estimated transaction costs. The purchase price included cash payments of
$33,883.

     Other 1997 Combinations

         On September 19, 1997, the Company acquired Learning Services Inc.
("Learning Services"), a national school software catalog for teachers, in
exchange for the issuance of 709,976 shares of common stock. On September 29,
1997, the Company acquired Skills Bank Corporation ("Skills Bank"), a developer
of educational and remedial software products for adult, adolescent and K to 12
students, in exchange for the issuance of 1,069,286 shares of common stock. On
October 2, 1997, the Company acquired Microsystems Software, Inc.
("Microsystems"), a developer of Internet filtering software, in exchange for
the issuance of 955,819 shares of common stock. On December 30, 1997, the
Company acquired TEC Direct, Inc. ("TEC Direct"), an educational consumer
software catalog, in exchange for the issuance of 429,733 shares of common
stock. Each of these transactions was accounted for using the
pooling-of-interests method of accounting. The consolidated financial statements
of the Company for the years prior to December 31, 1997 do not include the
results and balances of these companies as they were deemed to be immaterial to
the consolidated financial statements for those periods.

     MECC

         On May 17, 1996, the Company acquired Minnesota Educational Computing
Corporation (MECC) ("MECC"), a publisher and developer of high quality
children's educational software sold to consumers and schools, in exchange for
9,214,007 shares of the Company's common stock. The total purchase price was
$284,631, including estimated transaction costs, value of stock options assumed
and deferred income taxes related to certain identifiable intangible assets
acquired. Approximately 1,048,000 MECC employee stock options were converted
into stock options to purchase approximately 1,198,000 shares of TLC common
stock. This transaction was accounted for as a purchase.

     Compton's

         On December 28, 1995, the Company acquired Compton's New Media, Inc.
and Compton's Learning Company (collectively, "Compton's"), developers and
publishers of multimedia software titles. In and in connection with the
acquisition, the Company issued a total of 5,052,697 shares of the Company's
common stock, which included 587,036 shares of common stock to settle $14,000 of
intercompany debt due to Tribune Company and executed a promissory note for
$3,000 in cancellation of the remaining intercompany debt. The total purchase
price was $104,394, including estimated transaction costs, deferred income taxes
related to certain identifiable intangible assets acquired, settlement of
certain intercompany debt to Tribune Company and the fair value of net
liabilities assumed. The promissory note was repaid in 1996. This transaction
was accounted for as a purchase.

     The Learning Company

         On December 22, 1995, the Company acquired control of The Learning
Company (the "The Former Learning Company"), a leading developer of educational
software products for use at home and school. Under the terms of the merger
agreement, the Company acquired, in a two-step business combination, all of the
outstanding shares of The Former Learning Company for total consideration of
approximately $684,066, including the value of stock options assumed, estimated
transaction related costs and deferred income taxes related to certain
identifiable intangible assets acquired. Approximately 1.1 million unvested
employee stock options of The Former Learning Company were converted into
options to purchase 3,123,000 shares of the Company's common stock, based on the
merger consideration of $67.50 per share and were vested on or before January
26, 1996. Approximately $543,163 of the purchase price was settled in cash. This
transaction was accounted for as a purchase.


                                       41



<PAGE>   42

     tewi Verlag GmbH

         On July 21, 1995, the Company acquired tewi Verlag GmbH ("tewi"), a
publisher and distributor of CD-ROM software and computer-related books, located
in Munich, Germany. The purchase price was settled by a combination of cash and
issuance of common stock. The Company issued 99,045 shares of common stock
valued at $3,640 and may issue additional shares of common stock to a former
shareholder of tewi pursuant to an earn-out agreement. The Company paid cash
consideration of $12,688 for tewi. The additional shares issuable under the
earn-out agreement have been treated as contingent consideration and will be
recorded if and when certain future conditions are met. During 1997 and 1996,
$498 and $540, respectively, of consideration related to the contingent
consideration was earned and recorded as expense by the Company. This
transaction was accounted for as a purchase.


         The purchase price for the 1997 acquisition of Creative Wonders has
been allocated based on fair values as follows:

Purchase price                                                         $ 37,799
Less: fair value of net liabilities assumed                              (7,257)
                                                                       --------
Excess to allocate                                                       45,056
Less: excess allocated to
      Incomplete technology                                               1,050
      Brands and related content rights                                  44,006
                                                                       --------
Goodwill                                                               $     --
                                                                       ========



         The purchase price for the 1996 acquisitions has been allocated based
on fair values as follows:

<TABLE>
<CAPTION>
                                                 MECC           Others           Total
                                              ---------       ---------        ---------
<S>                                           <C>             <C>              <C>      
Purchase Price                                $ 284,631       $  15,681        $ 300,312
Less: fair value of net tangible assets
    (liabilities)                                13,990         (15,424)          (1,434)
                                              ---------       ---------        ---------
                                                270,641          31,105          301,746
Excess to allocate to:
Less: excess to allocate
    Incomplete technology                        56,688              --           56,688
    Completed technology                         88,501             285           88,786
    Brands and related content rights               894              --              894
                                              ---------       ---------        ---------
                                                146,083             285          146,368
                                              ---------       ---------        ---------
Goodwill                                      $ 124,558       $  30,820        $ 155,378
                                              =========       =========        =========
</TABLE>







                                       42
<PAGE>   43






         The Company engaged a nationally recognized independent appraiser to
express an opinion with respect to the estimated fair value of a substantial
portion of the assets acquired, to serve as a basis for the allocation of the
purchase price for Creative Wonders and MECC. The Company primarily used the
income approach to determine the fair value of the identified intangible assets
acquired. The debt-free cash flows, net of provision for operating expenses,
were discounted to a net present value. The value of certain completed
technology was based upon comparable fair values in the open market. The value
of software technology and products under development not considered to have
reached technological feasibility and having no future alternative use was
expensed on acquisition.

         Unaudited pro forma results of operations for the transactions
accounted for using the purchase method of accounting as though the acquisitions
had occurred at the beginning of the Years Ended December 31, 1996 and 1995 are
below. The pro forma adjustments detailed below include the effect of
amortization of intangible assets and goodwill related to the acquisitions over
their estimated useful lives of two years and the interest expense related to
the issue of the $500,000 of debt for the period prior to 1995 and 1996
acquisitions or issuance, net of any related income tax effects. Pro forma
results for the 1997 acquisitions were immaterial.

<TABLE>
<CAPTION>
                                                                     The Former  
        Year Ended                                                    Learning                   Pro forma         Pro forma 
    December 31, 1996          TLC           tewi        Compton's    Company        MECC        Adjustment        Combined
------------------------    -------------------------------------------------------------------------------------------------
<S>                         <C>            <C>           <C>          <C>           <C>          <C>               <C>      
Revenues                    $343,321       $     --      $     --     $    --       $ 7,800      $      --         $ 351,121
Operating loss              (381,312)            --            --          --        (9,212)       (41,128)         (431,652)
Net loss                    (405,451)            --            --          --        (7,021)       (34,009)         (446,481)
Net loss per share             (9.94)            --            --          --            --             --            (10.12)


<CAPTION>
        Year Ended
    December 31, 1995
------------------------
<S>                         <C>            <C>           <C>          <C>           <C>          <C>               <C>      
Revenues                    $167,042       $ 3,720       $ 23,204     $60,698       $33,815      $      --         $ 288,479
Operating loss               (60,870)       (3,589)       (13,904)     10,874         6,079       (428,239)         (489,649)
Net loss                     (65,960)       (3,643)        (9,626)      7,398         5,070       (398,195)         (464,956)
Net loss per share             (2.65)            --             --         --            --              --           (12.01)
</TABLE>


     Future Vision Holding, Inc.

         On August 31, 1995, the Company acquired all of the issued and
outstanding capital stock of Future Vision Holding, Inc. ("Future Vision"), a
multimedia software company, in exchange for the issuance of 1,088,149 shares of
common stock of the Company. This acquisition has been accounted for using the
pooling-of-interests method of accounting. The financial statements for periods
prior to the Year Ended December 31, 1995 do not include amounts for this
acquisition as they were deemed to be immaterial to the consolidated financial
statements for those periods.


                                       43
<PAGE>   44






(3)   FIXED ASSETS AND OTHER

                                                             December 31,
                                                      -------------------------
                                                        1997             1996
                                                      --------         --------

Building, land and leasehold improvements             $  6,127         $  4,516
Computer equipment                                      30,707           26,362
Furniture and fixtures                                   7,820            9,062
                                                      --------         --------
                                                        44,654           39,940
Less:  accumulated depreciation
       and amortization                                (24,065)         (22,273)
                                                      --------         --------
                                                        20,589           17,667
Other                                                   11,717            5,308
                                                      --------         --------
                                                      $ 32,306         $ 22,975
                                                      ========         ========

         Included in computer equipment is equipment under capital lease of
$1,952 and $2,207 at December 31, 1997 and 1996, respectively. Depreciation
expense was $4,966, $6,491 and $6,767 in each of the Years Ended December 31,
1997, 1996 and 1995, respectively.

(4)   LINE OF CREDIT

         TLC Multimedia, Inc., a wholly-owned subsidiary of the Company, has a
revolving line of credit (the "Line"), to provide for a maximum availability of
$50,000, of which $35,150 was utilized at December 31, 1997. Borrowings under
the Line become due on July 1, 1999 and bear interest at the prime rate (8 1/2%
at December 31, 1997). The Line is subject to certain financial covenants, is
secured by a general security interest in the assets of The Learning Company,
Inc. and certain other subsidiaries of the Company and by a pledge of the stock
of certain of its subsidiaries. The Line is guaranteed by the Company.


(5)   LONG-TERM DEBT

                                                          December 31,
                                                   --------------------------
                                                     1997              1996
                                                   --------          --------

Senior Convertible Notes                           $303,650          $331,650
Obligations under capital leases                      1,423             2,099
                                                   --------          --------
                                                    305,073           333,749
Less: current portion                               (10,717)             (819)
                                                   --------          --------
                                                   $294,356          $332,930
                                                   ========          ========

         The Company has outstanding $303,650 principal amount 5 1/2% Senior
Convertible Notes due 2000 (the "Notes"), which are unsecured. The Notes will be
redeemable by the Company on or after November 2, 1998 at redemption prices of
102.2% on November 2, 1998, 101.1% on November 1, 1999 and 100% on or after
November 1, 2000 and are convertible into common stock at a price of $53 per
share. Interest is payable on the Notes semi-annually on May 1 and November 1
each year. The long-term principal portion of the Notes declined by a total of
$38,000 and $18,350 during the years Ended December 31, 1997 and 1996,
respectively. Current portion of long-term debt includes $10,000 of the Notes as
the Company intends to repurchase the amount before December 31, 1998.


                                       44
<PAGE>   45






(6)   RELATED PARTY TRANSACTIONS

         On December 28, 1995, Tribune Company made an investment in the Company
in the form of $150,000 principal amount 5 1/2% Senior Convertible/Exchangeable
Notes due 2000 (the "Private Notes"). The Private Notes were redeemable by the
Company on or after November 2, 1998 at redemption prices of 102.2% on November
2, 1998, 101.1% on November 1, 1999 and 100% on November 1, 2000 and were
convertible into common stock at a price of $53 per share. The Private Notes
were sold during 1997 in a private transaction to an investor group prior to
issuance by the Company of 750,000 shares of Series A Convertible Participating
Preferred Stock (the "Preferred Stock") and were surrendered by the investor
group for issue of the Preferred Stock. In connection with the issuance of the
Preferred Stock, the Company paid a transaction fee to the investor group
totaling $1,845, of which $1,125 was paid to one of the investors where a
director of the Company is an officer. The loss resulting from the exchange of
the Private Notes for the Preferred Stock, net of tax benefit, was immaterial.

(7)   COMMITMENTS AND CONTINGENCIES

     Lease Obligations

         The Company leases office facilities and equipment under operating and
capital leases. Rental expense for operating leases was approximately $4,523,
$3,234 and $2,308 and for the Years Ended December 31, 1997, 1996 and 1995,
respectively. Future annual payments under capital and operating leases are as
follows:


                                                      Capital        Operating 
                                                      Leases          Leases
                                                      -------        --------

                  1998                                 $  788        $ 7,424
                  1999                                    601          6,280
                  2000                                    142          5,467
                  2001                                      2          4,643
                  2002                                      2            909
                  Thereafter                               --          8,070
                                                       ------        -------
                                                        1,535        $32,793
                                                                     =======
                  Less:   interest                       (112)
                  Less:   current portion                (717)
                                                       ------
                                                       $  706
                                                       ======


(8)  COMMON AND PREFERRED STOCK
  
     Common Stock

         The Company has reserved 19,279,847 shares of its common stock for
issuance related to the Exchangeable Shares, employee stock options and warrants
at year end. The Exchangeable Shares are represented by the one share of Special
Voting Stock. In addition, the Company has reserved a total of 20,729,245 shares
of its common stock for issuance related to the Notes and the Preferred Stock at
year end.

     Exchangeable Shares

         On February 4, 1994, the Company completed a three-way business
combination (the "Three-Party Combination") among SoftKey Software Products Inc.
("Former SoftKey"), WordStar International Incorporated ("WordStar") and
Spinnaker Software Corporation ("Spinnaker"). In connection with the Three-Party
Combination, Former SoftKey stockholders were entitled to elect to receive
shares of the Company's common stock or Exchangeable Non-Voting Shares (the
"Exchangeable Shares") of SoftKey Software Products Inc. ("SoftKey Software"),
the successor by amalgamation to Former SoftKey. The Company also issued a
special voting share (the "Voting Share") which has a number of votes equal to
the number of Exchangeable Shares outstanding. The holder of the Voting Share is
not entitled to dividends and shall vote with the common stockholders as a
single class. The Exchangeable Shares may be exchanged 



                                       45


<PAGE>   46

for the Company's common stock on a one-for-one basis until February 4, 2005, at
which time any outstanding Exchangeable Shares automatically convert to shares
of the Company's common stock. At year end there were 1,478,929 Exchangeable
Shares outstanding and not held by the Company and its subsidiaries.

         On November 6, 1997, SoftKey Software issued in a private placement
4,072,000 special warrants for net proceeds of $57,462, each of which is
exercisable without additional payment for one Exchangeable Share.

     Preferred Stock

         On December 4, 1997, the Company issued an aggregate of 750,000 shares
of Series A Convertible Participating Preferred Stock (the "Preferred Stock") to
an investor group in exchange for the Private Notes. Each share of the Preferred
Stock has an initial liquidation preference of $200 and is initially convertible
into 20 shares of common stock, or 15,000,000 shares of common stock in the
aggregate on an as-converted basis, subject to adjustment for certain minimum
returns on investment. The Preferred Stock is non-redeemable, bears no dividend,
is subject to restrictions on resale for a period of at least eighteen months
and is manditorily convertible into common stock upon satisfaction of certain
conditions.
   

         The Company estimated the extraordinary loss for financial reporting
purposes to be approximately $61,000 as at the date the Company entered into and
announced the agreement on August 25, 1997. The Company also estimated that the
resulting benefit for income tax purposes was approximately $61,000 as at the
date of issuance of the Preferred Stock on December 5, 1997. As a result, the
extraordinary loss, net of tax, was determined to be immaterial.
    

(9)    STOCK OPTIONS AND WARRANTS

     Stock Option Plans

         1990 Long-Term Equity Incentive Plan

         The Company has a Long-Term Equity Incentive Plan (the "LTIP"). The
LTIP allows for incentive stock options, non-qualified stock options and various
other stock awards. Administration of the LTIP is conducted by the Company's
Compensation Committee of the Board of Directors. The Compensation Committee
determines the amount and type of option or award and terms and conditions and
vesting schedules (generally 3 years) of the award or option. The maximum term
of an option is 10 years. Upon a change of control, as defined, awards and
options then outstanding become fully vested, subject to certain limitations.

         On December 4, 1997, the stockholders of the Company approved an
amendment to increase the maximum number of shares of common stock issuable
under the LTIP to 9,000,000 from 7,000,000. The total number of shares of common
stock reserved for issuance under the LTIP at year end was 6,538,716 shares,
2,039,645 of which remained available for grant.

         1996 Non-Qualified Stock Option Plan

         The Company initiated a non-qualified stock option plan (the "1996
Plan") that was approved by the Company's Board of Directors on February 5,
1996. The 1996 Plan allows for non-qualified stock options and various other
stock awards. Administration of the 1996 Plan is conducted by the Company's
Compensation Committee of the Board of Directors. The administrator determines
the amount and type of option or award and terms and conditions and vesting
schedules (generally 3 years) of the award or option. The maximum term of an
option is 10 years. Upon a change of control, as defined, awards and options
then outstanding become fully vested, subject to certain limitations. The
maximum number of shares issuable under the 1996 Plan is 5,000,000. The total
number of shares of common stock reserved under the 1996 Plan at year end was
4,612,949 shares, 585,183 of which remained available for grant.

         1994 Non-Employee Director Stock Option Plans

         On April 26, 1994, the Board of Directors approved a non-employee
director stock option plan (the "1994 Non-Employee Director Plan"). The 1994
Non-Employee Director Plan provides for an initial grant of 20,000 options at
fair market value to be issued to each non-employee director who first became a
director of the Company after February 1, 1994 ("Initial Grants"). During the
Year Ended December 31, 1995, a further 100,000 options were granted to each of



                                       46



<PAGE>   47

the non-employee directors. During the Year Ended December 31, 1996, a further
26,667 options were granted to each of the non-employee directors. The maximum
number of common shares issuable under the 1994 Non-Employee Director Plan is
500,000, all of which were granted at year end. Options granted to non-employee
directors as Initial Grants were 100% exercisable at the time of grant and
options issued as subsequent grants become exercisable over a three-year period.
All such options are exercisable for a period of 10 years from date of grant.

         1996 Non-Employee Director Stock Option Plan

         On July 31, 1996, Board of Directors approved the Company's 1996
Non-Employee Director Option Plan (the "1996 Non-Employee Director Plan"), which
was approved by stockholders on December 4, 1997. Under the 1996 Non-Employee
Director Plan, certain directors who are not officers or employees of the
Company or any affiliate of the Company (the "Non-Employee Directors") are
eligible to receive stock options. The 1996 Non-Employee Director Plan provides
that each Non-Employee Director who became a director after May 16, 1996, but
prior to August 16, 1996 ( the "Effective Date") was entitled to receive a
non-statutory stock option (the "Initial Option") to purchase 50,000 shares of
common stock on the Effective Date. The 1996 Non-Employee Director Plan further
provides that each Non-Employee Director who becomes a director after the
Effective Date is entitled to receive the Initial option to purchase 50,000
shares of common stock on the date that he or she first becomes a member of the
Board of Directors. In addition, the 1996 Non-Employee Director Plan provides
that each Non-Employee Director is entitled to receive a non-statutory option to
purchase 25,000 shares of common stock upon initial appointment to a committee
of the Board of Directors (the "Committee Option"). The Board of Directors may
also grant additional non-statutory options (the "Discretionary Options") to
Non-Employee Directors in its or the Committee's sole discretion. Initial
options, Committee Options and Discretionary Options are exercisable in eight
quarterly installments, with the first of such installments becoming exercisable
three months after the date grant (provided that, for each such installment, the
optionee continues to serve as a director). The total number of shares of common
stock reserved for issuance under the 1996 Non-Employee Director Plan as of year
end was 500,000, 100,000 of which remain available for grant.


                                       47
<PAGE>   48






         The following table summarizes the stock option activity under the
LTIP, the 1996 Plan, the 1996 Non-Employee Director Plan and the 1994
Non-Employee Director Plan:

<TABLE>
<CAPTION>
                            December 31, 1997                  December 31, 1996                 December 31, 1995
                       ---------------------------        ---------------------------        --------------------------
                                          Weighted                           Weighted                          Weighted  
                                          Average                            Average                           Average   
                                          Exercise                           Exercise                          Exercise  
                         Shares            Price            Shares            Price            Shares           Price    
                       ----------         --------        ----------         --------        ----------        --------  
                                                                                             
<S>                    <C>                 <C>            <C>                 <C>            <C>                <C>   
Beginning              10,077,951          $17.22          6,663,769          $14.30          2,599,980         $11.62
Assumed in                                                                                
  acquisitions            716,856            4.78          1,197,852            8.39          3,123,938           8.10
Granted                 6,617,773           10.57          7,202,103           17.79          2,446,996          25.72
Exercised              (1,116,050)           8.03         (3,198,476)           7.73         (1,394,035)         28.76
Canceled               (5,621,075)          17.61         (1,787,297)          19.77           (113,110)         19.81
                       ----------          ------         ----------          ------         ----------         ------
Ending                 10,675,455          $12.96         10,077,951          $17.22          6,663,769         $14.30
                       ==========          ======         ==========          ======         ==========         ======
</TABLE>


         The following table summarizes information about stock options
outstanding at year end:

<TABLE>
<CAPTION>
                                      Options Outstanding                   Options Exercisable
                           ----------------------------------------     ---------------------------
                                            Weighted                                      
                                            Average        Weighted                       Weighted 
                              Number       Remaining        Average        Number          Average 
                           Outstanding    Contractual      Exercise     Exercisable       Exercise
Range of Exercise Prices   at 12/31/97        Life           Price      at 12/31/97         Price 
------------------------   -----------    -----------      --------     -----------       --------
                                                       
<S>        <C>               <C>              <C>           <C>            <C>             <C>   
$   0.05 - $ 9.8750          2,496,383        8.66          $ 7.17         769,409         $ 6.63
   10.21 -  15.8750          4,156,021        7.86           10.58       2,865,111          10.62
 16.0625 -   28.750          4,023,051        7.45           19.00       1,344,569          23.09
--------   --------         ----------        ----          ------       ---------         ------
$   0.05 - $ 28.750         10,675,455        7.89          $12.96       4,979,089         $13.37
========   ========         ==========        ====          ======       =========         ======
</TABLE>

         Options to purchase 4,979,089, 4,035,729 and 1,697,054 shares of common
stock were exercisable at December 31, 1997, 1996 and 1995, respectively.

         The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", in accounting for its plans. The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Accordingly, no compensation expense has been recognized for the stock
option plans as calculated under SFAS 123. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant date for awards in 1997, 1996 and 1995 consistent with the provisions of
SFAS 123, the Company's net loss and basic and diluted net loss per share would
have been increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                   1997                  1996                 1995
                                                ----------            ----------           ---------

<S>                                             <C>                   <C>                  <C>      
Net loss - as reported                          $(475,667)            $(405,451)           $(65,960)
Net loss - pro forma                             (511,575)             (430,765)            (80,670)
Net loss per share - as reported                    (9.59)                (9.94)              (2.65)
Net loss per share - pro forma                     (10.07)               (10.56)              (3.25)
</TABLE>


         The above compensation cost does not include the fair value of the
stock options assumed in connection with the acquisitions, as the fair value of
such options have been included in the purchase price of the acquired companies.




                                       48


<PAGE>   49

         The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                            1997                    1996                     1995
                                           ------                  ------                   ------

<S>                                       <C>                      <C>                      <C>   
Dividend yield                                --                       --                       --
Expected volatility                        .7500                    .7857                    .6827
Risk free interest rate                     6.00%                    5.47%                    5.31%
Expected lives                             4 yrs                    4 yrs                    4 yrs
Weighted average grant-date
  fair value of options granted           $10.57                   $10.79                   $15.61
</TABLE>


         The effects of applying SFAS 123 in this disclosure are not indicative
of future amounts. Additional grants in future years are anticipated.

         On March 13, 1997, in order to continue to provide a competitive
employment environment for staff retention and hiring, the Company instituted an
Option Exchange Program under which certain employees (other than employees who
are directors) with options exercisable at $10.40 per share or higher were given
the opportunity to exchange such options for options with an exercise price of
$10.40 per share. A total of 3,627,020 employee stock options were exchanged and
are included in the cancelled and re-granted employee stock options in the above
table.

     1997 Employee Stock Purchase Plan

         On December 4, 1997, the Company's stockholders approved the 1997
Employee Stock Purchase Plan, which provides for six offerings, one beginning
every six months commencing December 1, 1997 until and including November 30,
2000, that provides certain eligible employees with the opportunity to purchase
shares of the Company's common stock at a price of 85% of the price listed on
the New York Stock Exchange at various specified purchase dates. A maximum of
1,000,000 shares of common stock has been authorized for issuance under the 1997
Employee Stock Purchase Plan.

     Warrants

         On November 6, 1997, the Company's Canadian subsidiary, SoftKey
Software issued in a private placement in Canada 4,072,000 special warrants for
net proceeds of approximately $57,462. Each special warrant is exercisable
without additional payment for one Exchangeable Share and automatically was
exercised in accordance with their provisions subsequent to year end. The
Exchangeable Shares are exchangeable at the option of the holder on a
one-for-one basis for common stock of the Company without additional payment.

         On July 31, 1995, the Company announced that it would redeem all of its
2,925,000 publicly traded warrants for $0.10 per warrant on August 31, 1995 in
accordance with the terms and conditions of the warrants. Holders of such
warrants received in exchange for the warrants an aggregate of 289,959 shares of
common stock. The remaining 25,410 warrants were redeemed by the Company.




                                       49
<PAGE>   50






(10)     AMORTIZATION, MERGER AND OTHER CHARGES

During the Year Ended December 31, 1997, the Company completed the acquisition
of Creative Wonders using the purchase method of accounting and the acquisitions
of Learning Services, Skills Bank, TEC Direct and Microsystems using the
pooling-of-interests method of accounting. During the year ended December 31,
1996 the Company completed the acquisitions of MECC and Edusoft S.A. using the
purchase method. During the Year Ended December 31, 1995, the Company completed
the acquisitions of The Former Learning Company, Compton's and tewi using the
purchase method of accounting and Future Vision using the pooling-of-interest
method of accounting. Amortization, merger and other charges were expensed as
incurred or were recorded when it became probable that the transaction would
occur and the expense could be reasonably estimated. Amortization, merger and
other related charges are as follows:

<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                                              --------------------------------------------------
                                                                1997                 1996                 1995
                                                              --------             --------             --------

<S>                                                           <C>                  <C>                  <C>     
Amortization of goodwill and other intangible assets          $457,393             $434,866             $ 31,968
Exit and restructuring costs                                    48,571                4,260                1,304
Charge for incomplete technology                                 1,050               56,688               60,483
Provision for earn-outs                                          5,497                2,917                   --
Professional fees and other costs                                2,505                2,599                9,417
                                                              --------             --------             --------
                                                              $515,016             $501,330             $103,172
                                                              ========             ========             ========
</TABLE>


         The amortization of goodwill and other intangible assets in 1997, 1996
and 1995 represents primarily the amortization of the goodwill and acquired
intangible assets in connection with the acquisitions of Creative Wonders, MECC,
The Former Learning Company and Compton's.
   

         Exit and restructuring costs related to charges during the year for
employee severance of $10,936, discontinued products of $19,242, termination of
certain supplier relations of $10,229 and other charges related to the Company's
acquisition strategy and integration of the acquired Companies of $8,164. The
charge has increased in the Year Ended December 31, 1997 as compared to the Year
Ended December 31, 1996 due to the change in strategy related to the school
channel and product discontinuation due primarily to the 1997 acquisitions. A
total of 59 employees were terminated in the areas of development, marketing,
operations, sales and administration as part of the integration process. The
plan was consummated during the year. There were no separately identifiable
operations that will not be continued. Employee severance costs in the Year
Ended December 31, 1996 related to termination of employees of the Company in
connection with the acquisitions of The Former Learning Company and MECC and the
related changes in strategy. A total of 108 employees were terminated in the
areas of operations, marketing, sales, technical support and product
development. Employee severance costs in the Year Ended December 31, 1995
related to termination of employees in connection with the acquisitions of
Future Vision and certain severances related to changes in the Company's
operations related to the acquisitions and changes in strategy. A total of 63
employees were terminated in the areas of operations, product development and
administration. Accrued exit and restructuring costs at December 31, 1997 are
not material.

         The charge for incomplete technology in the Year Ended December 31,
1997 related to products being developed by Creative Wonders, in the Year Ended
December 31, 1996 related to products being developed by MECC and in the Year
Ended December 31, 1995 related to products being developed by The Former
Learning Company and Compton's. In each case the Company believes the products
in development had not reached technological feasibility at the date of
acquisition, had no alternative future use and additional development would be
required to complete the software technology.
    

         The provision for earn-outs related to the amounts earned by the former
owners of certain acquisitions based upon the achievement of certain revenue and
operating goals achieved. These amounts are expected to be paid in common stock
of the Company prior to December 31, 1998.

         Professional fees and other costs in the Year Ended December 31, 1997
related to investment banking, legal, accounting fees and other transaction
related costs incurred in connection with the acquisitions of Skills Bank,
Learning Services, TEC Direct and Microsystems. Professional fees and other
transaction related costs in the Year Ended December 31, 1996 relate to
additional legal and accounting costs incurred in connection with the
acquisition of MECC. 




                                       50



<PAGE>   51

Professional fees and other transaction related costs in the Year Ended December
31, 1995 relate to the investment banking, legal and accounting costs incurred
to such date for the proposed merger with MECC and the professional fees
associated with the acquisition of Future Vision on August 31, 1995.

         At December 31, 1997, the Company had merger related accruals of
$12,533. The accruals consisted of amounts due for legal and accounting fees,
employee severance and lease termination costs related to the acquisitions. The
Company expects to substantially pay the remaining amounts prior to December 31,
1998.

(11) INCOME TAXES

         The Company's net loss for the years ended December 31, 1997, 1996 and
1995 includes amortization, merger and other charges of $515,016, $501,330, and
$103,172, respectively, certain of which are not deductible for income tax
purposes. The Company's loss before income taxes consisted of the following:

                                            Years Ended December 31,
                              --------------------------------------------------
                                 1997                1996                1995
                              ---------           ---------           ---------

United States                 $(433,842)          $(420,905)          $ (64,987)
Foreign                          19,409              15,454               4,822
                              ---------           ---------           ---------
                              $(414,433)          $(405,451)          $ (60,165)
                              =========           =========           =========



The provision for income taxes consists of the following:

                                               Years Ended December 31,
                                       --------------------------------------
                                         1997           1996            1995
                                       -------        --------        -------
Current income taxes:
     Federal                           $37,498        $ 16,777        $ 6,000
     State                               6,687           2,868          1,500
     Foreign                             1,512           4,000            250
                                       -------        --------        -------
                                        45,697          23,645          7,750
                                       -------        --------        -------

Deferred income taxes (benefit):
     Federal                            15,537         (23,645)        (1,955)
     State                                  --              --             --
     Foreign                                --              --             --
                                       -------        --------        -------
                                        15,537         (23,645)        (1,955)
                                       -------        --------        -------
                                       $61,234        $     --        $ 5,795
                                       =======        ========        =======

         The significant components of deferred income tax expense are primarily
from changes in deferred tax liabilities related to the acquired technology,
depreciation, certain allowances and reserves not currently deductible, and
changes in the deferred tax asset valuation reserve.


                                       51
<PAGE>   52
         The Company's actual tax as compared to the 1997, 1996 and 1995
statutory tax rate reported on income is as follows:

<TABLE>
<CAPTION>
                                                                                       Years Ended December 31,
                                                                           ----------------------------------------------
                                                                             1997                1996              1995
                                                                           ---------          ---------          --------

<S>                                                                        <C>                <C>                <C>      
Tax provision (benefit) at statutory federal income tax rate (35%)         $(145,052)         $(141,908)         $(21,058)
State income tax, net of federal benefit                                       5,834              5,571             2,500
Net foreign earnings taxed at rates different than federal tax rate            1,700              2,319               700
Non deductible amortization, merger and other charges                        121,461            175,465            36,110
Effect of change in valuation allowance                                       61,234                 --                --
Utilization of prior year tax benefits                                            --            (41,447)          (12,457)
Other                                                                         16,057                 --                --
                                                                           ---------          ---------          --------
                                                                           $  61,234          $      --          $  5,795
                                                                           =========          =========          ========
</TABLE>


         The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
   

                                                      Years Ended December 31,
                                                     -------------------------
                                                        1997            1996
                                                     ---------        --------
Deferred tax assets:
          Net operating losses and credits           $ 112,196        $ 49,582
          Other reserves and accruals                   25,918           8,104
                                                     ---------        --------
                                                       138,114          57,686
Less:  valuation allowance                            (131,269)        (53,350)
                                                     ---------        --------
                                                         6,845           4,336
                                                     ---------        --------
Tax liabilities:
          Deferred intangible assets                    (8,732)        (54,429)
          Deferred foreign taxes                            --          (3,941)
          Other deferred taxes                          (7,008)             --
                                                     ---------        --------
                                                       (15,740)        (58,370)
                                                     ---------        --------
Net deferred tax liability                           $  (8,895)       $(54,034)
                                                     ---------        --------
Accrued tax liabilities                                (50,581)        (32,886)
                                                     ---------        --------
                                                     $ (59,746)       $(80,920)
                                                     =========        ========
    


         The valuation allowance relates to uncertainties surrounding the
recoverability of deferred tax assets. In assessing the realizability of
deferred assets, management considers whether it is more likely than not that
some or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during periods in which benefits from net operating loss
carryforwards are available and temporary differences become deductible. The
Company considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and other matters in making this assessment. As a result
of its evaluation of these factors at December 31, 1997 the Company recorded a
valuation reserve for deferred tax assets of $131,269 (including $16,600 for
items related to additional paid-in-capital in the Year Ended December 31,
1997). At December 31, 1997, the Company had worldwide net operating loss
carryforwards and other tax benefits of approximately $280,400 for income tax
purposes, expiring from the year 2000 through 2012. The Company expects to
reduce its deferred tax liability in proportion to the amortization taken on
certain intangible assets established in the acquisitions. The reduction of the
intangible assets and the deferred tax liability will not impact future cash
flows of the Company. The utilization of tax loss carryforwards is subject to
limitations under Section 382 of the U.S. Internal Revenue Code, the U.S.
consolidated tax return provisions, and foreign country tax regulations. Accrued
income tax liabilities relates to identified federal, state and foreign accrued
income tax liabilities that are not currently due.

(12)  SUBSEQUENT EVENTS

         On March 6, 1998, the Company announced that it had entered into an
agreement to acquire Mindscape, Inc. and its subsidiaries for a total purchase
price of $150,000,000, payable in cash and the remainder through the issuance of
shares of common stock. The transaction will be accounted for using the purchase
method of accounting. The Company 



                                       52


<PAGE>   53

has not yet completed its allocation of the purchase price related to the
transaction. The closing of the transaction is subject to certain conditions,
including expiration of applicable waiting periods under pre-merger
notification.

         On March 6, 1998, the Company also announced that its Canadian
subsidiary, SoftKey Software Products Inc., agreed to sell to certain Canadian
institutional investors approximately 6.25 million special warrants for
aggregate proceeds of approximately U.S. $104 million. Each special warrant is
exercisable without additional payment for one SoftKey Exchangeable Share.
SoftKey's Exchangeable Shares are exchangeable on a one-for-one basis for common
stock of the Company without additional payment. The private placement is
ultimately subject to certain conditions, including receipt of certain
regulatory approvals.




                                       53
<PAGE>   54

   


(13)     GEOGRAPHIC INFORMATION

         The Company operates primarily in one business segment - software for
use with microcomputers. The following table presents information concerning the
Company's United States, and International (including Canada) operations during
the Years Ended December 31, 1997, 1996 and 1995.

<TABLE>
<CAPTION>
                                United 
                                States         International      Eliminations      Consolidated
                               ---------       -------------      ------------      ------------

<S>                            <C>                 <C>               <C>               <C>                   
DECEMBER 31, 1997

Revenues:
     Customers                 $ 295,513          $ 96,925          $     --          $ 392,438
     Inter-company                    59            11,325           (11,384)                --
                               ---------          --------          --------          ---------
           Total               $ 295,572          $108,250          $(11,384)         $ 392,438
                               =========          ========          ========          =========

Loss from
       operations              $(422,432)         $ 29,377          $     --          $(393,055)
                               =========           =======          ========          =========

Identifiable  assets           $ 246,800          $169,991          $     --          $ 416,791
                               =========          ========          ========          =========

DECEMBER 31, 1996

Revenues:
     Customers                 $ 261,816          $ 81,505          $     --          $ 343,321
     Inter-company                   383             6,698            (7,081)                --
                               ---------          --------          --------          ---------
           Total               $ 262,199          $ 88,203          $ (7,081)         $ 343,321
                               =========           =======          ========          =========

Loss from
       operations              $(396,697)         $ 15,385          $     --          $(381,312)
                               =========          ========          ========          =========

Identifiable  assets           $ 708,320          $ 85,198          $     --          $ 793,518
                               =========          ========          ========          =========

DECEMBER 31, 1995

Revenues:
    Customers                  $ 121,357          $ 48,061          $ (2,376)         $ 167,042
    Inter-company                    696            (3,072)            2,376                 --
                               ---------          --------          --------          ---------
           Total               $ 122,053          $ 44,989          $     --          $ 167,042
                               =========          ========          ========          =========

 Loss from
       operations              $ (69,195)         $  8,295          $     --          $ (60,870)
                               =========          ========          ========          =========

Identifiable assets            $ 835,760          $ 64,653          $     --          $ 900,413
                               =========          ========          ========          =========
</TABLE>
    


         The Company conducts a portion of its operations outside the United
States. At December 31, 1997, $20,209 of cash and cash equivalents were subject
to foreign currency fluctuations. Sales and transfers between geographic areas
are generally priced at market less an allowance for marketing costs. No single
customer accounted for greater than 10% of revenues for any of the periods
presented.



                                       54
<PAGE>   55






                                                                     Schedule II
                                                                     -----------

                           THE LEARNING COMPANY, INC.
                        VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                         Additions
                                        ------------------------------------------
                                                          Charged
                                        Balance at        to cost         Charged                             Balance
                                        beginning           and           to other                             at end
                                        of period         expenses        accounts      Deductions(1)        of period
                                        ----------       ----------       --------      -------------        ---------

<S>                                      <C>               <C>               <C>          <C>                 <C>    
YEAR ENDED DECEMBER 31, 1997
     Allowance for returns and
      doubtful accounts                  $15,191           $67,773           --           $(53,738)           $29,226

YEAR ENDED DECEMBER 31, 1996
     Allowance for returns and
      doubtful accounts                  $ 6,851           $38,112           --           $(29,772)           $15,191

YEAR ENDED DECEMBER 31, 1995
     Allowance for returns and
      doubtful accounts                  $ 6,744           $22,358           --           $(22,251)           $ 6,851
</TABLE>





(1)  Deductions relate to credits issued for returns and allowances against
     accounts receivable.



                                       55
<PAGE>   56





     PART III

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

     None.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information required by this Item appears in sections captioned
"Nominees," "Other Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive Proxy Statement to be
delivered to stockholders in connection with the 1998 Annual Meeting of
Stockholders (the "1998 Proxy Statement"). Such information is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

         Information required by this Item appears in sections captioned
"Directors' Compensation," "Compensation Committee Interlocks and Insider
Participation," "Compensation Committee Report on Executive Compensation,"
"Comparative Stock Performance," "Executive Compensation," "Employment
Arrangements," "Stock Option Grants," "Option Exercises and Year-End Option
Table," "Repricing of Options" and "Compensation Committee Report on Option
Repricing" in the 1998 Proxy Statement. Such information is incorporated herein
by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information required by this Item appears in section captioned
"Security Ownership of the Company" in the 1998 Proxy Statement. Such
information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information required by this Item appears in sections captioned
"Directors' Compensation" and "Certain Relationships and Related Transactions"
in the 1998 Proxy Statement. Such information is incorporated herein by
reference.





                                       56
<PAGE>   57





PART IV

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

(a)     Documents filed as part of this report

        (1)     FINANCIAL STATEMENTS
                                                                            PAGE
                                                                            ----

                CONSOLIDATED FINANCIAL STATEMENTS:

                    Report of Independent Accountants                        32

                    Consolidated Balance Sheets as of December 31, 
                    1997 and 1996                                            33

                    Consolidated Statements of Operations for the 
                    Years Ended December 31, 1997, 1996 and 1995             34

                    Consolidated Statements of Stockholders' Equity 
                    (Deficit) for the Years Ended December 31, 1997, 
                    1996 and 1995                                            35

                    Consolidated Statements of Cash Flows for the 
                    Years Ended December 31, 1997, 1996 and 1995             36

                    Notes to Consolidated Financial Statements               38

        (2)     FINANCIAL STATEMENT SCHEDULE

                CONSOLIDATED SUPPLEMENTARY FINANCIAL SCHEDULE:

                    Schedule II - Valuation and Qualifying Accounts          55




                                       57
<PAGE>   58





        (3)     EXHIBITS

Exhibit
Number                              Description
-------                             -----------

   3.1      Restated Certificate of Incorporation, as amended(1)

   3.2      Certificate of Designation of Series A Convertible Participating
            Preferred Stock Setting Forth the Powers, Preferences, Rights,
            Qualifications, Limitations and Restrictions of such Series of
            Preferred Stock (15)
   
   3.3      Bylaws of the Company, as amended (17)
    

   4.1      Indenture dated as of October 16, 1995 between the Company and State
            Street Bank and Trust Company, as Trustee, for 5 1/2% Senior
            Convertible Notes due 2000 (the "Indenture")(2)

   4.2      First Supplemental Indenture to the Indenture, dated as of November
            22, 1995, by and between the Company and State Street Bank and Trust
            Company, as Trustee(3)

   4.3      Note Resale Registration Rights Agreement dated as of October 23,
            1995 by and between the Company, on the one hand, and the Initial
            Purchasers set forth therein, on the other hand (the "Registration
            Rights Agreement")(3)

   4.4      Letter Agreement dated November 22, 1995 amending the Registration
            Rights Agreement(3)

   4.5      Form of Securities Resale Registration Rights Agreement by and among
            the Company and Tribune Company(4)

   4.6      Voting and Exchange Trust Agreement dated as of February 4, 1994
            among the Company and SoftKey Software Products Inc. and R-M Trust
            Company, as Trustee(5)

   4.7      Plan of Arrangement of SoftKey Software Products Inc. under Section
            182 of the Business Corporations Act (Ontario)(5)
   
   4.8      Form of Special Warrant dated November 6, 1997 of SoftKey Software
            Products Inc. (17)

   4.9      Special Warrant Indenture dated November 6, 1997 between SoftKey
            Software Products Inc. and CIBC Mellon Trust Company (17)

   4.10     Registration Rights Agreement dated as of August 26, 1997 among the
            Company and Thomas H. Lee Company, Thomas H. Lee Equity Fund III,
            L.P., Thomas H. Lee Foreign Fund III, L.P., Bain Capital Fund V,
            L.P., Bain Capital V-B. L.P., BCIP Associates, L.P., BCIP Trust
            Associates, L.P., Centre Capital Investors II, L.P., Centre Capital
            Tax-Exempt Investors II, L.P., Centre Capital Offshore Investors II,
            L.P. , State Board of Administration of Florida, Centre Parallel
            Management Partners, L.P. and Centre Partners Coinvestment, L.P.(17)
    

  10.1      Employment Agreement dated as of April 9, 1997 by and between the
            Company and Michael Perik(6)*

  10.2      Employment Agreement dated as of April 9, 1997 by and between the
            Company and Kevin O'Leary (6)*

  10.3      Employment Agreement dated as of May 22, 1997 by and between the
            Company and R. Scott Murray (7)*

  10.4      Employment Agreement dated October 8, 1993 by and between SoftKey
            Software Products Inc. and David E. Patrick (8)*

  10.5      Employment Agreement dated March 1, 1994 by and between SoftKey
            Software Products Inc. and Robert Gagnon (13)*


                                       58


<PAGE>   59
   
  10.6      Employment Agreement dated as of February 6, 1997 by and between the
            Company and Neal S. Winneg* (17)
    

  10.7      Employment Agreement dated as of March 5, 1997 by and between the
            Company and Anthony Bordon (14)*

  10.8      Credit Agreement dated as of September 30, 1994 between SoftKey Inc.
            and Fleet Bank of Massachusetts, N.A. (10)

  10.9      Second Amendment dated as of May 17, 1995 by and between SoftKey
            Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated
            as of September 30, 1994 (11)

  10.10     Third Amendment dated as of December 22, 1995 by and among SoftKey
            Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated
            as of September 30, 1994 (9)

  10.11     Fourth Amendment dated as of February 28, 1996 by and among SoftKey
            Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated
            as of September 30, 1994 (9)

  10.12     Fifth Amendment dated as of October 4, 1996 by and among SoftKey
            Inc. and Fleet National Bank, as successor in interest to Fleet Bank
            of Massachusetts, to Credit Agreement dated as of September 30,
            1994 (12)
   

  10.13     Sixth Amendment dated December 31, 1997 by and among SoftKey Inc.
            and Fleet National Bank, as successor in interest to Fleet Bank of
            Massachusetts, NA to Credit Agreement dated September 30, 1994 (17)
    
  10.14     Sublease Agreement dated as of January 5, 1995 by and between Mellon
            Financial Services Corporation #1 and SoftKey Inc. (13)

  10.15     Continuing Guaranty of Lease dated as of January 5, 1995 by the
            Company in favor of Mellon Financial Services Corporation #1 (13)

  10.16     1994 Non-Employee Director Stock Option Plan, as amended and
            restated effective February 5, 1996 (9)*

  10.17     Form of Stock Option Agreement under 1994 Non-Employee Director
            Stock Option Plan (9)*
   
  10.18     1990 Long Term Equity Incentive Plan, as amended through December 4,
            1997* (17)
    

  10.19     Form of Stock Option Agreement under 1990 Long Term Equity Incentive
            Plan (9)*

  10.20     1996 Stock Option Plan, as amended and restated through October 31,
            1996 (14)*

  10.21     Form of Stock Option Agreement under 1996 Stock Option Plan (9)*

  10.22     1996 Non-Employee Director Stock Option Plan (15)*

   
  10.23     Form of Stock Option Agreement under 1996 Non-Employee Director
            Stock Option Plan* (17)
    

  10.24     1997 Employee Stock Purchase Plan (15)*

  10.25     Form of Standstill Agreement by and between the Company and Tribune
            Company (4)

  10.26     Securities Purchase Agreement dated as of August 26, 1997 among the
            Company and Thomas H. Lee Company, Thomas H. Lee Equity Fund III,
            L.P. and Thomas H. Lee Foreign Fund III, L.P. (16)

  10.27     Securities Purchase Agreement dated as of August 26, 1997 among the
            Company and Bain Capital Fund V, L.P., Bain Capital V-B. L.P., BCIP
            Associates, L.P. and BCIP Trust Associates, L.P. (16)

  10.28     Securities Purchase Agreement dated as of August 26, 1997 among the
            Company and Centre Capital Investors II, L.P., Centre Capital
            Tax-Exempt Investors II, L.P., Centre Capital Offshore Investors II,
            L.P. , State Board of Administration of Florida, Centre Parallel
            Management Partners, L.P. and Centre Partners Coinvestment, L.P. 
            (16)



                                       59

<PAGE>   60

  10.29     Receivables Purchase Agreement dated as of June 30, 1997 by and
            among The Learning Company Funding, Inc. ("Funding"), Lexington
            Partner Capital Company ("Lexington"), Fleet National Bank
            ("Fleet"), TLC Multimedia Inc. and the Company (7)

  10.30     Receivables Sales Agreement dated as of June 30, 1997 by and between
            TLC Multimedia Inc. and Funding (7)

  10.31     Capital Contribution Agreement dated as of June 30, 1997 by and
            among TLC Multimedia Inc., Funding and the Company (7)
   
  21.1      Subsidiaries of the Company (17)
    

  23.1      Written Consent of Coopers & Lybrand L.L.P.
   
  27.1      Financial Data Schedule (17)
    
-------------------------

*        Denotes management contract or compensatory plan or arrangement.

(1)      Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarterly period ended July 6,
         1996.

(2)      Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarterly period ended September
         30, 1995.

(3)      Incorporated by reference to exhibits filed with the Company's
         Registration Statement on Form S-3 (Reg . No. 333-145) filed January
         26, 1996.

(4)      Filed as exhibits to the Agreement and Plan of Merger dated November
         30, 1995 by and among the Company, Cubsco I, Inc., Cubsco II, Inc.,
         Tribune Company, Compton's NewMedia, Inc. and Compton's Learning
         Company, incorporated by reference to exhibits filed with the Company's
         Current Report on Form 8-K dated December 11, 1995.

(5)      Incorporated by reference to exhibits filed with the Company's
         Registration Statement on Form S-3 (Reg . No. 333-40549) filed December
         3, 1997.

(6)      Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarterly period ended April 5,
         1997.

(7)      Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarterly period ended July 5,
         1997.

(8)      Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarterly period ended April 2,
         1994.

(9)      Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended January 6, 1996.

(10)     Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarterly period ended October 1,
         1994.

(11)     Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarterly period ended July 1,
         1995.

(12)     Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarterly period ended October 5,
         1996.

(13)     Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended December 31, 1994.




                                       60


<PAGE>   61

(14)     Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended January 4, 1997.

(15)     Incorporated by reference to exhibits filed with the Company's
         Definitive Proxy Statement filed October 24, 1997.

(16)     Incorporated by reference to exhibits filed with the Company's Current
         Report on Form 8-K dated August 26, 1997.
   
(17)     Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended January 3, 1998.
    

(b)     REPORTS ON FORM 8-K

The registrant filed a Current Report on Form 8-K reporting that, on November 6,
1997, it sold 4,072,000 special warrants to certain Canadian institutional
investors pursuant to Regulation S under the Securities Act of 1933, as amended.



                                       61
<PAGE>   62





                                   SIGNATURES
   

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Amendment
No. 1 to be signed on its behalf by the undersigned, thereunto duly authorized.

                                          THE LEARNING COMPANY, INC.

                                          By:  /s/ R. Scott Murray
                                               ----------------------------- 
                                               R. Scott Murray
                                               Executive Vice President and
                                               Chief Financial Officer

Date:  May 28, 1998
    

   
    

                                       62



<PAGE>   63



                                  EXHIBIT INDEX

Exhibit
Number                            Description
-------                           -----------

   3.1      Restated Certificate of Incorporation, as amended (1)

   3.2      Certificate of Designation of Series A Convertible Participating
            Preferred Stock Setting Forth the Powers, Preferences, Rights,
            Qualifications, Limitations and Restrictions of such Series of
            Preferred Stock (15)
   

   3.3      Bylaws of the Company, as amended (17)
    

   4.1      Indenture dated as of October 16, 1995 between the Company and State
            Street Bank and Trust Company, as Trustee, for 5 1/2% Senior
            Convertible Notes due 2000 (the "Indenture") (2)

   4.2      First Supplemental Indenture to the Indenture, dated as of November
            22, 1995, by and between the Company and State Street Bank and Trust
            Company, as Trustee (3)

   4.3      Note Resale Registration Rights Agreement dated as of October 23,
            1995 by and between the Company, on the one hand, and the Initial
            Purchasers set forth therein, on the other hand (the "Registration
            Rights Agreement") (3)

   4.4      Letter Agreement dated November 22, 1995 amending the Registration
            Rights Agreement(3)

   4.5      Form of Securities Resale Registration Rights Agreement by and among
            the Company and Tribune Company (4)

   4.6      Voting and Exchange Trust Agreement dated as of February 4, 1994
            among the Company and SoftKey Software Products Inc. and R-M Trust
            Company, as Trustee (5)

   4.7      Plan of Arrangement of SoftKey Software Products Inc. under Section
            182 of the Business Corporations Act (Ontario) (5)
   

   4.8      Form of Special Warrant dated November 6, 1997 of SoftKey Software
            Products Inc. (17)

   4.9      Special Warrant Indenture dated November 6, 1997 between SoftKey
            Software Products Inc. and CIBC Mellon Trust Company (17)

   4.10     Registration Rights Agreement dated as of August 26, 1997 among the
            Company and Thomas H. Lee Company, Thomas H. Lee Equity Fund III,
            L.P., Thomas H. Lee Foreign Fund III, L.P., Bain Capital Fund V,
            L.P., Bain Capital V-B. L.P., BCIP Associates, L.P., BCIP Trust
            Associates, L.P., Centre Capital Investors II, L.P., Centre Capital
            Tax-Exempt Investors II, L.P., Centre Capital Offshore Investors II,
            L.P. , State Board of Administration of Florida, Centre Parallel
            Management Partners, L.P. and Centre Partners Coinvestment, L.P.
            (17)
    

  10.1      Employment Agreement dated as of April 9, 1997 by and between the
            Company and Michael Perik (6)*

  10.2      Employment Agreement dated as of April 9, 1997 by and between the
            Company and Kevin O'Leary (6)*

  10.3      Employment Agreement dated as of May 22, 1997 by and between the
            Company and R. Scott Murray (7)*

  10.4      Employment Agreement dated October 8, 1993 by and between SoftKey
            Software Products Inc. and David E. Patrick (8)*



                                       64


<PAGE>   64

  10.5      Employment Agreement dated March 1, 1994 by and between SoftKey
            Software Products Inc. and Robert Gagnon (13)*
   

  10.6      Employment Agreement dated February 6, 1997 by and between the
            Company and Neal S. Winneg* (17)
    

  10.7      Employment Agreement dated March 5, 1997 by and between the Company
            and Anthony Bordon (14)*


  10.8      Credit Agreement dated as of September 30, 1994 between SoftKey Inc.
            and Fleet Bank of Massachusetts, N.A. (10)

  10.9      Second Amendment dated as of May 17, 1995 by and between SoftKey
            Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated
            as of September 30, 1994 (11)

  10.10     Third Amendment dated as of December 22, 1995 by and among SoftKey
            Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated
            as of September 30, 1994 (9)

  10.11     Fourth Amendment dated as of February 28, 1996 by and among SoftKey
            Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated
            as of September 30, 1994 (9)

  10.12     Fifth Amendment dated as of October 4, 1996 by and among SoftKey
            Inc. and Fleet National Bank, as successor in interest to Fleet Bank
            of Massachusetts, to Credit Agreement dated as of September 30,
            1994 (12)
   

  10.13     Sixth Amendment dated December 31, 1997 by and among SoftKey Inc.
            and Fleet National Bank, as successor in interest to Fleet Bank of
            Massachusetts, NA to Credit Agreement dated September 30, 1994 (17)
    

  10.14     Sublease Agreement dated as of January 5, 1995 by and between Mellon
            Financial Services Corporation #1 and SoftKey Inc. (13)

  10.15     Continuing Guaranty of Lease dated as of January 5, 1995 by the
            Company in favor of Mellon Financial Services Corporation #1 (13)

  10.16     1994 Non-Employee Director Stock Option Plan, as amended and
            restated effective February 5, 1996 (9)*

  10.17     Form of Stock Option Agreement under 1994 Non-Employee Director
            Stock Option Plan (9)*
   

  10.18     1990 Long Term Equity Incentive Plan, as amended through December 4,
            1997* (17)
    

  10.19     Form of Stock Option Agreement under 1990 Long Term Equity Incentive
            Plan (9)*

  10.20     1996 Stock Option Plan, as amended and restated through October 31,
            1996 (14)*

  10.21     Form of Stock Option Agreement under 1996 Stock Option Plan (9)*

  10.22     1996 Non-Employee Director Stock Option Plan (15)*
   

  10.23     Form of Stock Option Agreement under 1996 Non-Employee Director
            Stock Option Plan* (17)
    

  10.24     1997 Employee Stock Purchase Plan (15)*

  10.25     Form of Standstill Agreement by and between the Company and Tribune
            Company (4)

  10.26     Securities Purchase Agreement dated as of August 26, 1997 among the
            Company and Thomas H. Lee Company, Thomas H. Lee Equity Fund III,
            L.P. and Thomas H. Lee Foreign Fund III, L.P. (16)

  10.27     Securities Purchase Agreement dated as of August 26, 1997 among the
            Company and Bain Capital Fund V, L.P., Bain Capital V-B. L.P., BCIP
            Associates, L.P. and BCIP Trust Associates, L.P. (16)



                                       65



<PAGE>   65

  10.28     Securities Purchase Agreement dated as of August 26, 1997 among the
            Company and Centre Capital Investors II, L.P., Centre Capital
            Tax-Exempt Investors II, L.P., Centre Capital Offshore Investors II,
            L.P. , State Board of Administration of Florida, Centre Parallel
            Management Partners, L.P. and Centre Partners Coinvestment, L.P. 
            (16)

  10.29     Receivables Purchase Agreement dated as of June 30, 1997 by and
            among The Learning Company Funding, Inc. ("Funding"), Lexington
            Partner Capital Company ("Lexington"), Fleet National Bank
            ("Fleet"), TLC Multimedia Inc. and the Company (7)

  10.30     Receivables Sales Agreement dated as of June 30, 1997 by and between
            TLC Multimedia Inc. and Funding (7)

  10.31     Capital Contribution Agreement dated as of June 30, 1997 by and
            among TLC Multimedia Inc., Funding and the Company (7)
   
  21.1      Subsidiaries of the Company (17)
    

  23.1      Written Consent of Coopers & Lybrand L.L.P.
   
  27.1      Financial Data Schedule (17)
    

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

*        Denotes management contract or compensatory plan or arrangement.

(1)      Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarterly period ended July 6,
         1996.

(2)      Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarterly period ended September
         30, 1995.

(3)      Incorporated by reference to exhibits filed with the Company's
         Registration Statement on Form S-3 (Reg . No. 333-145) filed January
         26, 1996.

(4)      Filed as exhibits to the Agreement and Plan of Merger dated November
         30, 1995 by and among the Company, Cubsco I, Inc., Cubsco II, Inc.,
         Tribune Company, Compton's NewMedia, Inc. and Compton's Learning
         Company, incorporated by reference to exhibits filed with the Company's
         Current Report on Form 8-K dated December 11, 1995.

(5)      Incorporated by reference to exhibits filed with the Company's
         Registration Statement on Form S-3 (Reg . No. 333-40549) filed December
         3, 1997.

(6)      Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarterly period ended April 5,
         1997.

(7)      Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarterly period ended July 5,
         1997.

(8)      Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarterly period ended April 2,
         1994.

(9)      Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended January 6, 1996.

(10)     Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarterly period ended October 1,
         1994.

(11)     Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarterly period ended July 1,
         1995.




                                       66


<PAGE>   66

(12)     Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarterly period ended October 5,
         1996.

(13)     Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended December 31, 1994.

(14)     Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended January 4, 1997.

(15)     Incorporated by reference to exhibits filed with the Company's
         Definitive Proxy Statement filed October 24, 1997.

(16)     Incorporated by reference to exhibits filed with the Company's Current
         Report on Form 8-K dated August 26, 1997.
   
(17)     Incorporated by reference to exhibits filed with the Company's Annual 
         Report on Form 10-K for the year ended January 3, 1998.
    







                                       67