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                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K

           FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13
                OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

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

                   FOR THE FISCAL YEAR ENDED JANUARY 31, 2001

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

                FOR THE TRANSITION PERIOD FROM        TO

                           COMMISSION FILE 000-28823

                             SKILLSOFT CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      02-0496115
       (STATE OR OTHER JURISDICTION OF              (I.R.S. EMPLOYER IDENTIFICATION NO.)
        INCORPORATION OR ORGANIZATION)
           20 INDUSTRIAL PARK DRIVE                                03062
            NASHUA, NEW HAMPSHIRE
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (603) 324-3000

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

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

                                (TITLE OF CLASS)
                    COMMON STOCK, $0.001 PAR VALUE PER SHARE

     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 approximate aggregate market value of Common Stock held by
non-affiliates of the registrant was $127,831,283 based on the last reported
sale price of the registrant's Common Stock as of April 23, 2001.

     On April 23, 2001, the registrant had outstanding 13,401,706 shares of
Common Stock, $.001 par value per share.

                      DOCUMENTS INCORPORATED BY REFERENCE

     The registrant intends to file with the Securities and Exchange Commission
a definitive proxy statement with respect to the Annual Meeting of Stockholders
to be held on June 14, 2001. Portions of such proxy statement are incorporated
by reference into Part III of this Form 10-K.
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                             SKILLSOFT CORPORATION

                                   FORM 10-K

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                             PAGE
                                                                            ------
<S>           <C>                                                           <C>
PART I
Item 1.       Business....................................................      1
Item 2.       Properties..................................................      9
Item 3.       Legal Proceedings...........................................      9
Item 4.       Submission of Matters to a Vote of Security Holders.........     11

PART II
Item 5.       Market for Registrant's Common Equity and Related
              Stockholder Matter..........................................     11
Item 6.       Selected Financial Data.....................................     12
Item 7.       Management's Discussion and Analysis of Financial Condition
              and Results of Operations...................................     12
Item 7A.      Quantitative and Qualitative Disclosures About Market
              Risk........................................................     23
Item 8.       Financial Statements and Supplementary Data.................     23
Item 9.       Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure....................................     23

PART III
Item 10.      Directors and Executive Officers of the Registrant..........     24
Item 11.      Executive Compensation......................................     24
Item 12.      Security Ownership of Certain Beneficial Owners and
              Management..................................................     24
Item 13.      Certain Relationships and Related Transactions..............     24

PART IV
Item 14.      Exhibits, Financial Statement Schedules and Reports on Form
              8-K.........................................................     24

              Signatures..................................................     25
</TABLE>
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                                     PART I

     Any statement in this Form 10-K about future expectations, plans and
prospects for SkillSoft, including statements containing the words "believes,"
"anticipates," "plans," "expects," "will" and similar expressions, constitute
forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995. Actual results may differ materially from those
indicated by such forward-looking statements as a result of various important
factors, including those set forth in Item 7 under the heading "Future Operating
Results".

ITEM 1. -- BUSINESS

GENERAL

     SkillSoft is a provider of training courses that are accessible by users
through corporate intranets or remotely through the internet. SkillSoft's
courses are targeted at large companies and cover a variety of professional
effectiveness and business topics (critical business skills commonly called
"soft skills"). All of SkillSoft's courses and support tools have been
specifically designed to take advantage of the benefits offered by the internet
and the Web-based environments of SkillSoft's customers and are accessible
through standard Web browsers, which are common software applications that allow
users to access and interact with Web sites. This enables the users of
SkillSoft's products to access the material they need, with the specificity or
breadth that they require, anytime or anywhere that they may need it.
SkillSoft's customers receive comprehensive training and support solutions for
their employees, comprised of:

     - SkillSoft's library of 624 courses, translations and localizations as of
       January 31, 2001, which encompasses a wide array of professional
       effectiveness skills and business topics; and

     - SkillSoft's Web-based job performance support tools, such as
       Search-and-Learn technology, Online Mentoring, Online Job Aids,
       SkillBriefs and SkillSimulations.

BACKGROUND

     The increasing acceptance of the internet and the proliferation of Web
browsers at work, at home and in laptop computers have dramatically changed many
businesses and business processes, creating exciting opportunities to serve
customers better, faster and more cost-effectively. SkillSoft believes that new
technological capabilities of the internet, such as search engines, which allow
a user to quickly locate and access information without having to know where
that information resides, and hypertext links, which allow a user to use a
computer mouse to click on highlighted text in one electronic document to locate
and display other electronic documents, coupled with dramatically increased
connectivity for workers, have created an opportunity to comprehensively change
the way that organizations and their employees view and implement training and
education. By providing real-time accessibility and user-focused specificity,
SkillSoft believes that Web-based training will change the training and
education process from a distinct event -- often off-site and limited in
scope -- to a process of continuous learning for employees. Given the rising
needs for training in increasingly complex working environments, SkillSoft
believes that a properly designed and deployed Web-based training resource can
effectively address the needs of companies seeking a comprehensive, enterprise-
wide training solution.

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PRODUCTS

  Courses

     SkillSoft's comprehensive library of Web-based courses encompasses a wide
array of professional effectiveness skills and business topics. As of January
31, 2001, SkillSoft offered 624 course offerings, which included 432 course
titles and 192 localized or translated courses which are divided into two
categories: Professional Effectiveness and Business Expertise. Within these
categories, SkillSoft offers courses on the following curricula:

<TABLE>
<CAPTION>
PROFESSIONAL EFFECTIVENESS                                  BUSINESS EXPERTISE
<S>                                                         <C>
Management                                                  Finance
Leadership                                                  Marketing
Team Building                                               Sales
Communication                                               Strategic Planning
Personal Development                                        Human Resources
Customer Service                                            Knowledge Management
Project Management                                          Operations
eLearning                                                   eBusiness
                                                            Industry Foundations
                                                            Financial Services
                                                            Administrative Support
                                                            Business Law
</TABLE>

     Each of these curricula includes a number of series of courses. For
example, within the Project Management curriculum are series entitled
"Professional Project Management," "Advanced Risk Assessment for Project
Management" and "Project Scope Management." Each series is in turn comprised of
three to eight individual courses, which are generally two to three hours in
length. Courses cover a number of different lessons, and each lesson encompasses
a number of different topics. All of SkillSoft's courses are organized in a
modular format, allowing users to take the entire course, or only those portions
of it that are relevant to them.

     SkillSoft's courses are currently available in English and Italian. Some of
SkillSoft's courses have been localized for use in the United Kingdom. In
addition, SkillSoft is currently involved in efforts to translate and localize
course offerings into other languages.

  The SkillSoft Instructional Design Model

     All courses are developed using SkillSoft's Instructional Design model,
which is based on proven concepts for performance-oriented learning. The
Instructional Design model draws heavily from adult learning theory and
emphasizes motivation, topic relevance, self-management, problem solving,
mastery learning and role-playing. SkillSoft believes that its consistent use of
this model in designing its courses not only improves the efficacy of its
courses, but also makes the development of additional courses more efficient.

     The key components of SkillSoft's Instructional Design model are:

     - Consistent, intuitive graphical user interface -- SkillSoft's courses
       employ a graphical user interface, consistent across all of its courses,
       that emphasizes simplicity and clarity to help ensure that employees can
       take SkillSoft's courses with minimal assistance. SkillSoft's graphical
       user interface incorporates features that allow users to interact easily
       and intuitively with its programs and makes rich use of color,
       illustrations and photographs.

     - Variety of instructional media -- SkillSoft's courses all include audio
       instruction, which can increase attention and retention for many users.
       Audio is especially important for SkillSoft's behavior modeling

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       and RolePlay simulations. SkillSoft's courses also incorporate
       photographs, charts and other graphics where appropriate to support and
       clarify the instruction and focus attention on key training points.

     - Practice and interaction -- SkillSoft's courses engage users by requiring
       them to perform practice exercises and providing them with feedback on
       their performance. The courses also include self-evaluation strategies
       that engage the learner with the course content on a more individualized
       level.

     - Integrated assessment strategy -- SkillSoft's testing strategy includes
       both pre-assessment and post-assessment components. Pre-assessment
       features are placed at the beginning of each lesson and are designed to
       quickly identify the content the learner already knows. Post-assessment,
       or mastery, occurs at the end of each lesson and evaluates the learner's
       mastery of the objectives after instruction.

     - Behavior modeling -- SkillSoft believes that observing and modeling the
       behaviors, skills and attitudes of others is a key ingredient in learning
       soft skills such as leadership and customer service. SkillSoft's courses
       present examples, or "models," of behaviors and then ask users to
       rehearse these new behaviors through practice exercises and case studies.

     - RolePlay simulations -- SkillSoft's innovative RolePlay feature, which it
       incorporates into some courses where behavioral practice is particularly
       relevant, presents users with realistic interactive simulations of
       everyday workplace situations. Each simulation has multiple possible
       outcomes, depending upon the user's responses.

     - Accelerated Path -- This feature enables users of SkillSoft's courses to
       create an individualized learning sequence through the course content
       based on their demonstrated mastery of topic objectives. This helps
       ensure that users do not spend time on topics for which they do not need
       training.

     - Performance-oriented instruction -- SkillSoft's courses focus on
       achieving defined outcomes that are stated in terms of cognitive and
       affective objectives. Instructional strategies are chosen to support
       achievement of those objectives and assessments are used to evaluate
       learner achievement of those objectives.

  Web-Based Performance Support

     SkillSoft's Web-based architecture and deployment strategy enables it to
provide a number of features to support users in their learning. Examples
include:

     - Search-and-Learn technology, which adapts the concept of Web search
       engines to SkillSoft's training resources. Using Search-and-Learn
       technology, users can perform keyword-based, intelligent searches
       covering their company's entire library of licensed SkillSoft courses.
       SkillSoft's software presents them with a list of the specific courses
       and topics that match their identified training needs, enabling them to
       directly access that information -- when and where they need it. This
       intelligent search capability is designed to locate the relevant sections
       of course content rather than every mention of the word in any course.

     - Online Job Aids, which are primers or sample documents that are
       accessible online and can be used both to supplement the basic course
       content or as "refresher" materials. SkillSoft's customers can easily
       modify the Online Job Aids to customize them to meet the specific needs
       of the customer or its employees by using word processors or editors that
       work with Hyper Text Markup Language, referred to as HTML (a standard
       used by Web browsers to render electronic documents on a computer
       screen).

     - Online Mentoring, which enables a user to ask questions relating to
       either the course materials or the general subject matter of the course
       and receive e-mail responses (generally within 24 hours) from experts in
       the field.

     - SkillBriefs, which are one-page summaries of over 1500 topics, offer
       on-the-job performance support. They can be used while taking a course,
       as a 5 minute learning event or anytime a student needs a refresher.

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<PAGE>   6

     - SkillPort, which is a Web-based software application that permits course
       users to access a wide variety of learning resources over the Web and
       includes tools for creating and managing individualized learning goals
       and plans. Through SkillPort, course users can find thousands of
       SkillBrief articles, books and web links, which build upon SkillSoft's
       existing library of courses. Users can also join an online learning
       community where they can share questions and ideas in discussion groups,
       chat sessions and other live e-Learning events. SkillSoft's advanced
       modular architecture also helps corporate customers achieve greater
       learning impact and cost-effectiveness by giving them flexibility in
       selecting only those SkillPort modules most appropriate to their
       enterprise learning goals.

     - SkillSimulations, which are simulation tools that permit course users to
       practice new skills taught in a specific SkillSoft course series. Each
       SkillSim presents course users with different scenarios in which they
       encounter and must solve a variety of business problems. Users have the
       opportunity to select different courses of action and the scenario "plays
       out" according to the user's responses. Events such as telephone calls,
       meetings and interruptions add to the reality of each scenario.

     - Course Customizing Toolkit, which offers a simple and comprehensive
       method of individually customizing SkillSoft courses by organizing
       specific content and examples, or combining topics or learning objects
       from different SkillSoft courses using a user-friendly template.

  Web-Based Deployment

     SkillSoft's products incorporate the latest Web technologies that it
believes substantially improves its product performance. SkillSoft's courses and
support tools are developed using cross-platform technologies such as HTML and
the computer programming languages Java and JavaScript. To reduce the risk of
technical problems that would limit access to SkillSoft's training materials,
its products do not use "plug-in" software, which is software written for
specific computer processors and operating systems and must be installed on the
user's computer for use in conjunction with a web browser. In addition,
SkillSoft's products employ advanced techniques to reduce the size of data files
and to retrieve and store quickly accessible copies of text, audio and graphic
files, which allows SkillSoft's products to deliver high-quality performance
within the limitations on the amount of data customers' corporate intranets and
internet connections can handle at any given time. SkillSoft's technology
enables it to provide these advantages to all users, not just those with the
most powerful computers, quickest modems and highest resolution monitors.

     SkillSoft has created a number of different options for customers to make
its courses available throughout their organization, which are designed to
address the needs of a customer, regardless of its network structure or the
location and network access of its employees. Users of its courses can access
them via a Web browser while at work, at home or while traveling, and can access
them whenever, and for as long as, they desire. SkillSoft's deployment
technologies make it possible to scale up the use of its products to address the
expanding training needs of large organizations. Deployment options include:

     - NetPlay, for users with browser access over a corporate intranet.

     - NetDownload, which allows users to select either an entire course, or
       desired portions of it, download it to their personal computer and take
       the course off-line.

     - NetPlay with Local Player, which permits users to download SkillSoft's
       course player and access the licensed library from their local computers
       outside of their corporate network. These users access courses by
       connecting to their company's Web servers via a dial-in connection or
       over the internet, or by connecting via the internet to a Web server
       managed by SkillSoft on behalf of their company. Local Player is designed
       to optimize delivery for users with slower home internet connections
       while also enabling those users to take advantage of SkillSoft's
       Web-based performance support tools.

     - CD-ROMs, for users without access to a network.

     SkillSoft also offers hosting services for companies who prefer to have
users access its courses from SkillSoft-managed servers via the internet rather
than host the courses on their own intranet. For many customers, this option can
significantly simplify and shorten the implementation process.

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  Course Content and Development

     SkillSoft develops all of its courses in cooperation with outside
organizations that provide content and assemble the courses. SkillSoft generally
works with three to six outside content providers. These organizations supply
the content of its courses based upon a jointly defined outline and assemble
courses using SkillSoft's course development toolkit and following SkillSoft's
Instructional Design model. The course development process is a collaborative
exercise between SkillSoft and its outside content providers, and the
development of a series of six courses typically takes 26 to 34 weeks.

     SkillSoft currently has agreements with six developers, pursuant to which
the developer agrees to develop a number of courses from either their own
content, SkillSoft content or content that SkillSoft has licensed. Most
developers generally develop from five to ten courses at a set price per course.
SkillSoft also may engage the developer to supply additional courses.

     SkillSoft currently has agreements with six content providers. Under most
of SkillSoft's agreements, the content provider assigns all of its right, title
and interest in the course and course materials to SkillSoft. Under one
agreement, the content provider licenses the content to SkillSoft in exchange
for royalty payments.

     SkillSoft's course development software tools are a key element of its
business strategy. By requiring that SkillSoft's content providers use
SkillSoft's toolkit rather than commercially available authoring and development
software, SkillSoft ensures that all its courses -- even those being developed
by different content providers -- incorporate its Instructional Design model,
its "look-and-feel" standards and the Web-based deployment features that
SkillSoft requires in its courses. This toolkit also enables its content
providers to develop courses more quickly, which improves SkillSoft's
speed-to-market and lowers its course development costs. Owning its course
development toolkit technology enables SkillSoft to enhance its toolkit whenever
and however SkillSoft sees fit as SkillSoft responds to large customer
opportunities, potential competitive threats and changing market conditions.

  Product Pricing

     The pricing for SkillSoft's courses varies based upon the number of course
titles licensed by a customer, the number of users within the customer's
organization and the length of the license agreement (generally one, two or
three years). SkillSoft's license agreements permit customers to exchange course
titles, generally on the contract anniversary date. Some course features, such
as Online Mentoring, SkillPort, the Course Customizing Toolkit and extranet
hosting, are separately licensed for an additional fee.

SERVICES AND SUPPORT

     SkillSoft offers a broad range of support and services to its customers
through its professional services organization. SkillSoft believes that
providing a high level of customer service and technical support is necessary to
achieve rapid product implementation, customer satisfaction and continued
revenue growth.

     Installation support.  SkillSoft has application engineers available to
assist customers with the installation of its products. These engineers test the
software and courses within the customer's network to ensure that they run
successfully both on the network and at employees' computers.

     Implementation consulting.  SkillSoft employs implementation consultants to
assist customers in planning and implementing their training programs. These
individuals offer expertise in establishing training success criteria, planning
internal marketing programs and communicating with course users. These
implementation consultants work in close coordination with SkillSoft's
application engineers and sales representatives and are an important component
of SkillSoft's efforts to monitor and ensure customer satisfaction.

     Technical support.  SkillSoft also provides telephone support to its
customers through its technical support engineers. They are available to assist
customers seven days per week between the hours of 6:00 a.m. and midnight,
Eastern time.

     Given the nature of SkillSoft's product offerings, these services and
support do not require significant resources. As of January 31, 2001,
SkillSoft's professional services organization consisted of 30 people.
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SALES AND MARKETING

     SkillSoft uses a multi-prong sales strategy, consisting of

     - a direct sales force for larger accounts;

     - a telesales force for lead generation; and

     - resellers for small and mid-sized accounts and some international
       markets.

     SkillSoft believes this strategy enables it to focus its resources on the
largest sales opportunities, while simultaneously leveraging the contacts and
employees of its resellers to address opportunities that may not be
cost-effective for SkillSoft to pursue directly.

     As of January 31, 2001, SkillSoft employed 121 sales professionals,
telesales, and sales management personnel. Each account executive reports to a
regional sales vice president who is responsible for revenue growth and expense
control for his or her area. SkillSoft presently employs two regional sales vice
presidents in the United States, a Director of Channel Sales and a Vice
President/Managing Director of International Sales and Marketing, a Director of
Strategic Alliances and a General Manager of Client Services, each of whom
reports to SkillSoft's Vice President, Worldwide Sales and Marketing. SkillSoft
also has a sales executive focused exclusively on educational institutions.
SkillSoft's sales professionals have backgrounds at companies such as
SmartForce, NETg, Xebec and Ziff-Davis, as well as extensive contacts at the
corporate customers that SkillSoft targets. The sales process for an initial
sale to a large customer typically ranges from three to 12 months and often
involves a coordinated effort among a number of groups within SkillSoft's
organization.

     SkillSoft uses sophisticated salesforce automation software to track each
prospect and customer through a sales cycle covering the following seven stages:
prospect, qualify, discovery, evaluation, proposal, negotiate and close. Each
step of the sales cycle has certain exit criteria that must be satisfied before
the prospect can progress to the next stage. SkillSoft's senior sales executives
meet once each quarter with its regional sales vice presidents and their account
executives to assess their 90-day forecast, 120-day pipeline development and
longer term territory strategy. SkillSoft's regional sales vice presidents and
their account executives typically meet weekly throughout the quarter to review
progress toward quarterly goals and longer term business objectives and for
coaching sessions.

     SkillSoft's products are resold by a number of leading education technology
vendors, including, IBM and Duke Licensing ApS.

     For the fiscal year ended January 31, 2001, 90% of SkillSoft's revenue was
generated within the United States. SkillSoft opened an office in the United
Kingdom in September, 1999, which serves as the hub of its international
operations. SkillSoft also opened an office in Sydney, Australia in February
2000. SkillSoft employs a direct sales force in the United Kingdom and Australia
but its strategy is to address other international markets -- such as
continental Europe and the Far East -- primarily through resellers, with the
goal of penetrating English-speaking markets in those areas.

     SkillSoft's marketing organization utilizes a variety of programs to
support its sales team. As of January 31, 2001, SkillSoft's marketing
organization consisted of eight employees. SkillSoft's marketing programs
include:

     - telemarketing;

     - product and strategy updates with industry analysts;

     - articles in the trade press;

     - public relations activities and speaking engagements;

     - printed promotional materials;

     - promotional materials on SkillSoft's Web site;

     - "roadshow" tours, seminars and trade shows; and

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     - monthly online discussions, using "chat room" technology, on subjects
       such as the successful implementation of Web-based training programs.

CUSTOMERS

     SkillSoft markets its courses primarily to large businesses, governmental
organizations and educational institutions. SkillSoft believes the subject
matter of its courses has appeal across a wide range of business sectors,
including technology, financial services, telecommunications and manufacturing.

     No customer accounted for more than 10% of SkillSoft's revenue for the
fiscal year ended January 31, 2001.

PRODUCT DEVELOPMENT

     SkillSoft devotes substantial resources to the development of new and
innovative technologies that increase the effectiveness of its courses and that
support emerging Web standards. SkillSoft's future success will depend in part
on its ability to anticipate and respond to changes in technologies and customer
demands, enhance the technological features of its courses, and develop and
introduce new course titles.

     SkillSoft's product development efforts are focused primarily on enhancing
its Web-based architecture and technologies and its Instructional Design model
that underlies the development and structure of all of its courses.

     The content for SkillSoft's courses is supplied by outside parties working
in cooperation with SkillSoft's product development personnel.

     As of January 31, 2001, SkillSoft had 39 employees engaged in product
development and production activities. SkillSoft also utilizes independent
contractors for some product development work. SkillSoft expects to continue to
commit significant resources to research and development in the future. To date,
all research and development expenses have been expensed as incurred.

COMPETITION

     The market for soft skills education and training products is fragmented
and highly competitive. SkillSoft expects that competition in this market will
increase substantially in the future for the following reasons:

     - The expected growth of this market.

     - The low barriers to entry. In particular, SkillSoft does not believe that
       proprietary technology is an important competitive factor in this market.

     - SkillSoft's course content providers are often not prohibited from
       developing courses on similar topics for other companies.

     - The fragmented nature of the competitive landscape, including many small
       competitors in the technology-based segment of the market.

     One source of competition for SkillSoft's products is the internal
educational and technological personnel of its potential customers. If an
organization decides to use external providers to supply some or all of its
training, SkillSoft's principal sources of competition are:

     - Providers of traditional classroom instruction. Many of the companies in
       this category are attempting to adapt their courses to a
       non-instructor-led format suitable for access via Web browsers.

     - Providers of CD-ROM training courses.

     - Suppliers of online information technology training courses that are
       attempting to take advantage of their current technology and customer
       base and expand into the soft skills market. Examples of competitors in
       this group are Harcourt General (through subsidiaries such as Drake Beam
       Morin,

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<PAGE>   10

       NETg and Knowledge Communications), SmartForce (through its Knowledge
       Well and Tarragon businesses) and McGraw Hill (through its Xebec
       subsidiary).

     SkillSoft believes that the principal competitive factors in the soft
skills training market include:

     - the breadth and depth of the course content;

     - performance support and other features of the training solution;

     - adaptability, flexibility and scalability of the training products
       offered;

     - the deployment options offered to customers;

     - customer service and support;

     - price/value relationship;

     - relationships with the customer; and

     - corporate reputation.

     Although SkillSoft believes that it currently competes favorably with
respect to those factors, there can be no assurance that it can maintain or
improve its competitive position. Many of SkillSoft's current and potential
competitors have longer operating histories, greater name recognition and
greater financial, technical, sales, marketing, support and other resources than
we do. Increased competition may result in lost sales and may force SkillSoft to
lower prices, which would adversely affect SkillSoft's business and financial
performance.

PROPRIETARY RIGHTS

     SkillSoft does not believe that proprietary technology forms an important
or valuable part of its product offerings. SkillSoft believes that the creative
skills of its personnel in developing new products and technologies, its ability
to develop and introduce new products rapidly and its responsiveness to customer
demands are more important than the availability of legal protections for
proprietary rights.

     SkillSoft attempts to avoid infringing upon intellectual property and
proprietary rights of third parties in its product development efforts. However,
SkillSoft does not conduct patent searches to determine whether the technology
used in its products infringes patents held by third parties. In addition,
product development is inherently uncertain in a rapidly evolving technological
environment in which there may be numerous patent applications pending, many of
which are confidential when filed, with regard to similar technologies. If
SkillSoft's products violate third-party proprietary rights, SkillSoft could be
liable for substantial damages. In addition, SkillSoft may be required to
reengineer its products or seek to obtain licenses to continue offering the
products, and there can be no assurance that those efforts would be successful.

     SkillSoft currently licenses from Lucent Technologies Inc., Allaire
Corporation and other third parties some technology and some course content that
it incorporates into its products. There can be no assurance that this
technology and content will continue to be available to SkillSoft on
commercially reasonable terms, if at all. The loss of this technology or content
could result in delays in development and introduction of new products or
product enhancements, which could have a material adverse effect on its business
and financial performance. Moreover, SkillSoft may face claims from others that
the third-party technology or content incorporated in its products violates
proprietary rights held by those claimants. SkillSoft may also face claims for
indemnification from its customers resulting from infringement claims against
them based on the incorporation of third-party technology or content in its
products. Although SkillSoft is generally indemnified against such claims, in
some cases the scope of that indemnification is limited. Even if SkillSoft
receives broad indemnification, third party indemnitors are not always well
capitalized and may not be able to indemnify SkillSoft in the event of
infringement. In addition, such claims, even if not meritorious, could result in
the expenditure of significant financial and managerial resources in addition to
potential product redevelopment costs and delays, all of which could materially
adversely affect SkillSoft's business.

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     SkillSoft has trademark and service mark applications pending in the United
States for some of its trademarks, including SkillSoft, SkillSoft RolePlay,
Search and Learn, SkillPort, Accelerated Path and "eLearning for the Knowledge
Economy."

EMPLOYEES

     As of January 31, 2001, SkillSoft had 234 employees, of whom 129 were
engaged in sales and marketing, 30 were engaged in customer service and support,
37 were engaged in product development, two were engaged in product production
and 36 were engaged in executive management, finance and administration. None of
its employees is subject to a collective bargaining agreement. SkillSoft
believes that its relations with its employees are good.

ITEM 2. -- PROPERTIES

     SkillSoft's headquarters are located in approximately 22,100 square feet of
office space in Nashua, New Hampshire under a lease that expires in February
2004. SkillSoft also leases a sales office in the Dallas area, in the United
Kingdom and in Australia. SkillSoft believes that its existing facilities are
adequate to meet its current needs and that suitable additional or substitute
space will be available on commercially reasonable terms when needed.

ITEM 3. -- LEGAL PROCEEDINGS

     SkillSoft, several of its executive officers and key employees, and its
largest investor are named as defendants in a lawsuit pending in the Circuit
Court of Cook County, Illinois by National Education Training Group, Inc.
(NETg), the former employer of several of those individuals.

     NETg's most recent complaint alleges in substance that:

     - Charles E. Moran, as the former President of NETg, breached his fiduciary
       obligations to NETg by usurping NETg's corporate opportunities, by
       commencing a rival business while still employed by NETg and by
       soliciting NETg personnel to join his rival business while still employed
       by NETg;

     - Jerald A. Nine, as the former Vice President of Sales and Marketing of
       NETg, breached his fiduciary duty to NETg by assisting Mr. Moran in the
       creation, commencement and operation of the rival concern prior to Mr.
       Nine's resignation from NETg, by assisting Mr. Moran in the usurpation of
       corporate opportunities, by failing to inform his superiors at NETg of
       Mr. Moran's plans to form a rival business and by otherwise failing to
       use his best efforts on behalf of NETg while still employed there;

     - SkillSoft, Mr. Moran, Mr. Nine, Mark A. Townsend, Dennis E. Brown, Lee A.
       Ritze and Sally Welsh misappropriated trade secrets of NETg, and
       SkillSoft and Mr. Moran tortiously interfered with NETg's "prospective
       economic advantage;"

     - Mr. Moran, Mr. Townsend, Mr. Nine, Mr. Ritze, Mr. Brown and Ms. Welsh
       breached certain confidentiality and proprietary matters policies of NETg
       by misappropriating trade secrets and disclosing confidential and
       proprietary information during and after their employment with NETg;

     - Mr. Moran, Mr. Townsend, Mr. Nine, Mr. Ritze and Mr. Brown breached the
       conflict of interest policy of NETg's former corporate parent, National
       Education Corporation, by failing to disclose that Mr. Moran formed and
       solicited funding for SkillSoft, that Messrs. Townsend, Ritze and Brown
       had employment-related discussions with SkillSoft, and that Mr. Nine
       participated in forming and soliciting funding for SkillSoft, during
       their employment with NETg;

     - SkillSoft and Mr. Moran tortiously interfered with NETg's contractual
       relations with Mr. Townsend, Mr. Nine, Mr. Brown, Mr. Ritze and Ms. Welsh
       by offering them employment and inducing them to breach their
       confidentiality and trade secret obligations to NETg;

     - SkillSoft breached provisions of a license agreement with NETg relating
       to the use of NETg's software; and

                                        9
<PAGE>   12

     - Warburg Pincus Ventures, L.P., SkillSoft's largest investor, tortiously
       interfered with NETg's employment relationships with "at-will" employees,
       including Mr. Townsend and Mr. Nine, by offering those employees
       financial incentives to leave NETg and join SkillSoft, engaged in unfair
       competition through that same conduct and tortiously interfered with Mr.
       Moran's and Mr. Nine's fiduciary duty to NETg.

     NETg maintains that the trade secrets allegedly misappropriated by
SkillSoft and the other defendants include:

     - various aspects of the design and functionality of its education and
       training software products;

     - customer lists and information;

     - distribution channels and relationships with course developers and other
       service providers; and

     - the business plan to develop products for use in a Web environment.

     The claims seek injunctive relief against SkillSoft and Messrs. Moran,
Nine, Townsend, Brown and Ritze and Ms. Welsh and demand the return, and no
future use by these defendants, of the alleged trade secrets. The claims also
seek compensatory damages of $400 million, exemplary damages in the additional
amount of $400 million, additional compensatory, incidental and consequential
damages in an unspecified amount and punitive damages of $70 million.

     In addition, on July 26, 2000, NETg filed suit against SkillSoft in the
United States District Court for the Northern District of Illinois alleging that
SkillSoft's educational and training software products infringe United States
Patent No. 6,039,575, which was issued to NETg on March 21, 2000. The complaint
seeks both monetary damages and injunctive relief. SkillSoft filed its answer
and a counterclaim for a declaration of invalidity of the NETg patent on August
17, 2000. NETg filed its reply and affirmative defenses to SkillSoft's
counterclaim on February 2, 2001.

     On April 17, 2001, SkillSoft filed a request for reexamination of the
patent in suit, with the United States Patent and Trademark Office ("PTO"). On
April 18, 2001, SkillSoft filed a motion to stay NETg's patent infringement
action currently in the United States District Court for the Northern District
of Illinois, pending resolution of SkillSoft's request for reexamination. The
stay sought by SkillSoft would hold in abeyance all proceedings in the patent
infringement action, including discovery, pending action by the PTO. The motion
to stay is pending with the court.

     SkillSoft and the other defendants are vigorously defending themselves
against NETg's allegations, and SkillSoft believes that both SkillSoft and the
other defendants have meritorious defenses to the claims made in the lawsuits.
None of the defendants in the first lawsuit were bound by written
non-competition or non-solicitation agreements with NETg. The lawsuits are still
in discovery, so SkillSoft is not yet able to assess the potential liability of
SkillSoft or the other defendants. Nonetheless, SkillSoft's failure to prevail
in this litigation could have any or all of the following significant adverse
effects on SkillSoft's business and financial performance:

     - injunctive relief issues against SkillSoft, which could restrict
       SkillSoft's ability to conduct is business;

     - an adverse judgment against SkillSoft for monetary damages;

     - a settlement on unfavorable terms; or

     - obligations to customers for breach of SkillSoft's warranty of
       noninfringement.

     In addition, this litigation, regardless of its outcome, may result in
significant expenses in defending the lawsuit and may divert the efforts and
attention of SkillSoft's management team from normal business operations.

     SkillSoft is not a party to any other material legal proceedings.

                                        10
<PAGE>   13

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

     Not applicable.

  Executive Officers of the Registrant

     The executive officers of the Registrant are as follows:

<TABLE>
<CAPTION>
NAME                                   AGE                           POSITION
----                                   ---                           --------
<S>                                    <C>    <C>
Charles E. Moran.....................  46     Chairman of the Board, President and Chief Executive
                                              Officer
Thomas J. McDonald...................  51     Chief Financial Officer, Vice President, Operations,
                                              Treasurer and Secretary
Mark A. Townsend.....................  48     Vice President, Product Development
Jerald A. Nine, Jr...................  43     Vice President, Worldwide Sales and Marketing
</TABLE>

     Charles E. Moran is a founder of SkillSoft and has served as its Chairman
of the Board, President and Chief Executive Officer since January 1998. Before
founding SkillSoft, Mr. Moran served as President and Chief Executive Officer of
National Education Training Group, Inc. (NETg), a computer-based information
technology training company, from May 1995 until November 1997. From July 1994
to May 1995, Mr. Moran was an independent consultant. From October 1993 until
July 1994, Mr. Moran served as Chief Financial Office and Chief Operating
officer of Softdesk, Inc., a developer of computer-assisted design and drafting
software.

     Thomas J. McDonald is a founder of SkillSoft and has served as its Chief
Financial Officer and Vice President of Operations since February 1998. From
September 1994 to November 1997, Mr. McDonald served as Chief Financial Officer
and Vice President of Operations at NETg. From February 1990 to August 1994, Mr.
McDonald served as Chief Financial Officer and Vice President of Bear
Automotive. He previously held senior financial and operational positions with
SPX Corporation, U.S. Industries and Cenco, Inc.

     Mark A. Townsend is a founder of SkillSoft and has served as its Vice
President of Product Development since January 1998. From February 1996 to
December 1997, Mr. Townsend served as Vice President of Advanced Technology at
NETg. From March 1994 until February 1996, Mr. Townsend served as Vice President
of Engineering at Sytron Corporation, a software data storage management
company.

     Jerald A. Nine, Jr.  is a founder of SkillSoft and has served as its Vice
President of Worldwide Sales and Marketing since April 1998. From July 1995 to
February 1998, Mr. Nine served as the Vice President of Sales and Marketing at
NETg. From September 1992 until July 1995, Mr. Nine served as Vice President of
Sales and Marketing at Sytron Corporation.

     There are no family relationships among any of the executive officers.

                                    PART II

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

     SkillSoft's common stock is listed on the Nasdaq National Market under the
symbol "SKIL." The following table sets forth, for the periods indicated, the
high and low intraday sale prices per share of the Common Stock as reported on
the Nasdaq National Market between February 1, 2000 and January 31, 2001.

<TABLE>
<CAPTION>
 QUARTER ENDED    HIGH ($)   LOW ($)
 -------------    --------   -------
<S>               <C>        <C>
  April 30, 2000    33.50      9.75
   July 31, 2000   18.875    8.5625
October 31, 2000   21.875    10.125
January 31, 2001       22     11.75
</TABLE>

     As of April 23, 2001, there were 13,401,706 shares of SkillSoft's common
stock issued and outstanding held by approximately 132 holders of record on that
date.

                                        11
<PAGE>   14

     SkillSoft has not paid any cash dividends on its capital stock and does not
anticipate paying any cash dividends in the foreseeable future. SkillSoft
currently intends to retain future earnings, if any, to fund the expansion and
growth of its business. Payments of future dividends, if any, will be at the
discretion of SkillSoft's financial condition, operating results, current and
anticipated cash needs, plans for expansion and other factors that the board
deems relevant.

  Use of Proceeds from Registered Securities

     In connection with SkillSoft's initial public offering in February 2000,
SkillSoft received net proceeds of approximately $45,058,300, reflecting gross
proceeds of $49,910,000 (inclusive of the overallotment option) net of
underwriter commissions of approximately $3,493,700 and other offering costs of
approximately $1,358,000. On January 31, 2000, the Securities and Exchange
Commission declared SkillSoft's Registration Statement on Form S-1 (SEC File No.
333-86815) effective.

     The following table sets forth SkillSoft's cumulative use of proceeds as of
January 31, 2001:

<TABLE>
<CAPTION>
                                                                  AMOUNT
                                                                -----------
<S>                                                             <C>
Construction of plant, building and facilities..............             --
Purchase and installation of machinery and equipment........    $ 1,422,804
Purchases of real estate....................................             --
Acquisition of other businesses.............................             --
Repayment of indebtedness...................................    $ 4,500,000
Working capital.............................................             --
Temporary investments (cash and cash equivalents)...........             --
All other purposes (operating expenses).....................    $39,135,496
</TABLE>

     None of the net proceeds of the offering were paid by SkillSoft, directly
or indirectly, to any director, officer or general partner of SkillSoft or any
of their associates, or to any persons owning ten percent or more of any class
of SkillSoft's equity securities, or any affiliates of SkillSoft.

     The foregoing use of net offering proceeds does not represent a material
change in the use of proceeds described in SkillSoft's Registration Statement on
Form S-1.

ITEM 6. -- SELECTED FINANCIAL DATA

     Incorporated by reference from Appendix A attached hereto.

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

     The following discussion and analysis of the financial condition and
results of operations of SkillSoft should be read in conjunction with
SkillSoft's consolidated financial statements and notes appearing elsewhere in
this Annual Report on Form 10-K.

  Overview

     SkillSoft commenced operations in January 1998, and until March 1999,
devoted substantially all of its efforts to product development, establishing a
course content developer and supplier base, and building a direct sales and
support organization in the United States and a business application and network
infrastructure to support future growth. Since March 1999, SkillSoft has devoted
substantial resources to sales and marketing activities as well as to continued
product development, and has recorded revenue, although it is not yet
profitable. SkillSoft had an accumulated deficit of $54,004,923 as of January
31, 2001. SkillSoft expects to incur additional losses through at least the
fiscal year ending January 31, 2002, due primarily to substantial increases in
sales and marketing expenditures related to expanding its direct sales
organization in North America, Europe and Australia and to increased
personnel-related costs and expenditures for travel, advertising, public
relations, recruiting and other activities. Research and development expenses
will also contribute to losses during this period as SkillSoft continues to
introduce new courses. Legal costs may also increase due to the defense of
lawsuits filed against SkillSoft and certain of its executives by NETg.

                                        12
<PAGE>   15

     SkillSoft derives revenue primarily from license agreements under which
customers license its courses for periods of one, two or three years. The
pricing for licenses varies based upon the number of course titles licensed by a
customer, the number of users within the customer's organization and the length
of the license agreement. For example, a customer would pay SkillSoft
approximately $106,250 per year for a three-year license for 25 courses for
5,000 users. SkillSoft's license agreements may permit customers to exchange
courses, generally on the contract anniversary date. Customers may amend the
license agreements, for an additional fee, to gain access to additional courses
and/or to increase the size of the user base. SkillSoft also derives revenue on
a pay-for-use basis under which some customers are charged based on the number
of courses accessed by users. Revenue derived from pay-for-use contracts has
been minimal to date.

     The annual license fee for the first year is generally billed in advance.
Revenue is recognized either at the time of delivery of products or over the
term of the contract, depending on specific contract terms. In the event that
the customer initially specifies the entire set of licensed courses to be
delivered and those courses are available and delivered, the license revenue for
the first year of the contract is recognized upon execution of the contract and
delivery of the courses. License fees for subsequent years of multi-year license
agreements will be generally billed on the anniversary date of the agreement and
recognized in the manner described above, or if the customer exchanges courses
at the renewal date, upon delivery of the exchanged courses. Revenue is
recognized ratably over the license period if the customer does not initially
specify the entire set of licensed courses or is given exchange privileges that
are exercisable other than on the contract anniversaries, or if the customer
licenses all courses currently available and to be developed during a particular
term. To the extent that a customer is given extended payment terms, revenue is
recognized as cash becomes due. This license approach results in the building of
backlog of future revenue streams. Revenue is recognized as billed monthly or
quarterly under the pay-for-use model. SkillSoft also derives revenue from
optional complementary services such as extranet hosting and mentoring services,
which have been minimal to date. SkillSoft may offer payment terms up to six
months from the initial shipment date or anniversary date for multi-year
agreements.

     SkillSoft's backlog at any given time represents the amount of license fees
which are due to SkillSoft under existing license agreements but which have not
yet been recognized as revenue. This amount is comprised of license fees
attributable to licensed courses that have not yet been selected by the customer
or delivered by SkillSoft and to future years of non-cancellable multi-year
license agreements. SkillSoft's backlog as of January 31, 2001 was approximately
$60,000,000. SkillSoft's backlog can vary based upon a number of factors,
including the timing of the execution of new license agreements, the timing of
product deliveries and the length of SkillSoft license agreements.

     Cost of revenue includes the cost of materials (such as CD-ROM media),
packaging, duplication, custom library CD production, internet hosting services,
the cost of Online Mentoring services, royalties and certain infrastructure and
occupancy expenses. These costs of revenue are generally recognized as incurred.
Research and development expenses consist primarily of salaries and benefits,
certain infrastructure and occupancy expenses, fees to consultants and course
content development fees. Software development costs are accounted for in
accordance with SFAS No. 86, which requires the capitalization of certain
computer software development costs incurred after technological feasibility is
established. To date, development costs after establishment of technological
feasibility have been immaterial, and all software development costs have been
expensed as incurred. Selling and marketing expenses consist primarily of
salaries, commissions and benefits, advertising and promotion, travel and
certain infrastructure and occupancy expenses. General and administrative
expenses consist primarily of salaries and benefits, consulting and service
expenses, legal expenses and certain infrastructure and occupancy expenses.

     SkillSoft recorded deferred compensation of $2,851,551 in the fiscal year
ended January 31, 2000, representing the difference between the exercise price
of stock options granted and the sale price of restricted common stock and the
fair market value of the underlying common stock at the date of grant. SkillSoft
reversed deferred compensation of $123,078 in the fiscal year ended January 31,
2001 in connection with terminated employees whose stock option grants had not
yet vested. No such deferred compensation was recorded for the fiscal years
ended January 31, 1999 or 2001. The deferred compensation is recorded as a
reduction of stockholders' equity and is being amortized over the vesting period
of the applicable options and
                                        13
<PAGE>   16

restricted common stock, which is typically four years. Of the total deferred
compensation amount of $2,851,551, $1,124,606 had been amortized and $123,078
had been reversed as of January 31, 2001. The amortization of deferred
compensation is recorded as an operating expense. SkillSoft currently expects to
amortize the remaining $1,603,867 of deferred compensation as of January 31,
2001 in the periods indicated, as follows:

<TABLE>
<S>                                                           <C>
February 1, 2001-January 31, 2002...........................  $  735,248
February 1, 2002-January 31, 2003...........................     611,367
February 1, 2003-January 31, 2004...........................     257,252
                                                              ----------
                                                              $1,603,867
                                                              ==========
</TABLE>

RESULTS OF OPERATIONS

  Comparison of the fiscal year ended January 31, 2001 and 2000

     Revenue increased $15,106,912, or 360%, to $19,297,459 in the fiscal year
ended January 31, 2001 from $4,190,547 in the fiscal year ended January 31,
2000. This increase is due to new customers signed during the year ended January
31, 2001, and, to a lesser extent, continuing revenue from our existing
customers. One customer accounted for 7.1% of revenue for the fiscal year ended
January 31, 2001.

     Cost of revenue increased $748,344, or 99%, to $1,506,193 in the fiscal
year ended January 31, 2001 from $757,849 in the fiscal year ended January 31,
2000. Cost of revenue as a percentage of total revenue decreased to 8% in the
fiscal year ended January 31, 2001 from 18% in the fiscal year ended January 31,
2000. This decrease as a percentage of revenue was primarily due to the
spreading of these costs of revenue, many of which are fixed, over a
significantly larger revenue base.

     Research and development expenses increased $5,399,712, or 62%, to
$14,046,765 in the fiscal year ended January 31, 2001 from $8,647,053 in the
fiscal year ended January 31, 2000. Research and development expenses as a
percentage of total revenue decreased to 73% in the fiscal year ended January
31, 2001 from 206% in the fiscal year ended January 31, 2000. Research and
development expenses increased due to increased personnel and courseware
development costs. Since SkillSoft's strategy includes offering the largest
library of critical business skill (soft skills) courses in the industry,
SkillSoft believes that a significant investment in research and development is
necessary to remain competitive, and SkillSoft therefore expects research and
development expenses to continue to increase.

     Selling and marketing expenses increased $11,985,638, or 134%, to
$20,946,289 in the fiscal year ended January 31, 2001 from $8,960,651 in the
fiscal year ended January 31, 2000. Selling and marketing expenses as a
percentage of total revenue decreased to 109% in the fiscal year ended January
31, 2001 from 214% in the fiscal year ended January 31, 2000. Selling and
marketing expenses increased due to increased personnel, commissions, marketing,
and travel costs. SkillSoft believes that a significant investment in selling
and marketing to expand its distribution channel worldwide is required to remain
competitive, and SkillSoft therefore expects selling and marketing expenses to
continue to increase.

     General and administrative expenses increased $1,404,952, or 32%, to
$5,776,415 in the fiscal year ended January 31, 2001 from $4,371,463 in the
fiscal year ended January 31, 2000. General and administrative expenses as a
percentage of total revenue decreased to 30% in the fiscal year ended January
31, 2001 from 104% in the fiscal year ended January 31, 2000. General and
administrative expenses increased due to increased personnel expenses and
additional operating expenses associated with operating as a public company.
SkillSoft anticipates that general and administrative expenses will continue to
increase due to increases in information services and additional headcount.

     Stock-based compensation expense increased $442,324, or 119%, to $813,965
in the fiscal year ended January 31, 2001 from $371,641 in the fiscal year ended
January 31, 2000. The expense is primarily the result of awards to employees at
exercise prices below the fair market value of the stock during the fiscal year
ended January 31, 2000.

                                        14
<PAGE>   17

     Interest income (expense), net increased $2,097,853 to $1,832,591 in the
fiscal year ended January 31, 2001 from ($265,262) in the fiscal year ended
January 31, 2000. This increase was due to higher cash balances as the result of
proceeds from the initial public offering and the elimination of borrowings.

  Comparison of the fiscal year ended January 31, 2000 and 1999

     Revenue increased to $4,190,547 in the fiscal year ended January 31, 2000
from $0 in the fiscal year ended January 31, 1999 as SkillSoft did not begin
recognizing revenue until March 1999. This revenue was derived from fulfilling
product orders for the 111 customer license agreements signed during the year
ended January 31, 2000. One customer accounted for 22% of revenue for the fiscal
year ended January 31, 2000.

     Cost of revenue increased to $757,849 in the fiscal year ended January 31,
2000 from $0 in the fiscal year ended January 31, 1999.

     Research and development expenses increased $4,529,866, or 110%, to
$8,647,053 in the fiscal year ended January 31, 2000 from $4,117,187 in the
fiscal year ended January 31, 1999. Research and development expenses increased
due to increased personnel, courseware development costs and facility costs.
Since SkillSoft's strategy includes offering the largest library of critical
business skill (soft skills) courses in the industry.

     Selling and marketing expenses increased $7,289,426, or 436%, to $8,960,651
in the fiscal year ended January 31, 2000 from $1,671,225 in the fiscal year
ended January 31, 1999. Selling and marketing expenses increased due to
increased personnel, commissions, marketing, travel costs and facility costs.
SkillSoft believes that a significant investment in selling and marketing to
expand its distribution channel worldwide is required to remain competitive, and
SkillSoft therefore expects selling and marketing expenses to continue to
increase.

     General and administrative expenses increased $1,550,817, or 55%, to
$4,371,463 in the fiscal year ended January 31, 2000 from $2,820,646 in the
fiscal year ended January 31, 1999. General and administrative expenses
increased due to increased personnel and legal fees incurred in connection with
the NETg lawsuit. SkillSoft anticipates that general and administrative expenses
will continue to increase due to increases in headcount in management,
information services and accounting fees, additional expenses associated with
operating as a public company and the legal fees relating to the NETg lawsuit.

     Interest income (expense), net decreased $601,779 to ($265,262) for the
year ended January 31, 2000, from $336,517 in the fiscal year ended January 31,
1999. The decrease was due to lower cash balances and a non-recurring, no-cash
charge of $319,228 for issuance of warrants associated with establishing
SkillSoft's new line of credit in December 1999.

     The following table sets forth, for the periods indicated, certain
financial data of the Company

QUARTERLY OPERATING RESULTS FOR FISCAL YEARS 2001 AND 2000

<TABLE>
<CAPTION>
                                          Q1 2001        Q2 2001        Q3 2001        Q4 2001
                                        -----------    -----------    -----------    -----------
<S>                                     <C>            <C>            <C>            <C>
Revenues..............................  $ 2,114,357    $ 3,638,955    $ 5,510,529    $ 8,033,618
Cost of revenues......................      224,720        332,920        423,824        524,729
                                        -----------    -----------    -----------    -----------
  Gross profit........................    1,889,637      3,306,035      5,086,705      7,508,889
Operating expenses:
  Research and development............    3,326,326      3,571,968      3,547,662      3,600,809
  Selling and marketing...............    4,317,652      4,720,935      5,577,826      6,329,876
  General and administrative..........    1,319,232      1,376,931      1,457,961      1,622,291
  Stock-based compensation............      195,000        195,000        195,000        228,965
                                        -----------    -----------    -----------    -----------
Total operating expenses..............    9,158,210      9,864,834     10,778,449     11,781,941
                                        -----------    -----------    -----------    -----------
Interest income (expense), net........      333,307        617,475        566,445        315,364
  Net loss............................  $(6,935,266)   $(5,941,324)   $(5,125,299)   $(3,957,688)
                                        ===========    ===========    ===========    ===========
Net loss per share
Basic and diluted loss per share......  $     (0.57)   $     (0.47)   $     (0.40)   $     (0.30)
                                        ===========    ===========    ===========    ===========
Basic and diluted weighted average
  shares outstanding..................   12,259,605     12,762,475     12,896,891     13,031,928
                                        ===========    ===========    ===========    ===========
</TABLE>

                                        15
<PAGE>   18

<TABLE>
<CAPTION>
                                          Q1 2000        Q2 2000        Q3 2000        Q4 2000
                                        -----------    -----------    -----------    -----------
<S>                                     <C>            <C>            <C>            <C>
Revenues..............................  $   197,822    $   890,402    $ 1,282,978    $ 1,819,345
Cost of revenues......................      126,779        127,676        243,229        260,165
                                        -----------    -----------    -----------    -----------
  Gross margin........................       71,043        762,726      1,039,749      1,559,180
Operating expenses:
  Research and development............    1,917,181      1,825,940      2,141,197      2,762,735
  Selling and marketing...............    1,281,092      1,568,294      2,319,837      3,791,428
  General and administrative..........    1,063,685        900,832      1,045,245      1,361,701
  Stock-based compensation............        9,874         28,471        150,943        182,353
                                        -----------    -----------    -----------    -----------
Total operating expenses..............    4,271,832      4,323,537      5,657,222      8,098,217
                                        -----------    -----------    -----------    -----------
Interest income (expense), net........       64,478         55,208         26,186       (411,134)
  Net loss............................  $(4,136,311)   $(3,505,603)   $(4,591,287)   $(6,950,171)
Preferred stock dividend..............           --             --      3,765,000             --
                                        -----------    -----------    -----------    -----------
  Net loss attributable to common
     shareholders.....................  $(4,136,311)   $(3,505,603)   $(8,356,287)   $(6,950,171)
                                        ===========    ===========    ===========    ===========
Net loss per share
Basic and diluted loss per share......  $     (2.40)   $     (1.90)   $     (4.23)   $     (3.29)
                                        ===========    ===========    ===========    ===========
Basic and diluted weighted average
  shares outstanding..................    1,723,532      1,843,373      1,975,181      2,111,870
                                        ===========    ===========    ===========    ===========
Pro forma basic and diluted loss per
  share*..............................  $     (0.57)   $     (0.46)   $     (0.54)   $     (0.79)
                                        ===========    ===========    ===========    ===========
Pro forma basic and diluted weighted
  average shares outstanding*.........    7,279,444      7,684,643      8,569,971      8,749,966
                                        ===========    ===========    ===========    ===========
</TABLE>

---------------
* Pro forma basic and diluted loss per share and weighted average shares
  outstanding assume the conversion of the preferred stock to common stock as if
  it had occurred on the date of purchase.

LIQUIDITY AND CAPITAL RESOURCES

     From inception through January 31, 2000, SkillSoft was funded primarily
through preferred stock financings with Warburg, Pincus and other minority
investors. The net proceeds from these financings through January 31, 2000 were
approximately $20,710,000. In February 2000, SkillSoft received net proceeds
totaling $45,058,894 from the sale of 3,565,000 shares of common stock in its
initial public offering.

     As of January 31, 2001, SkillSoft's principal source of liquidity was its
cash and cash equivalents and marketable securities, which totaled $23,907,139.

     Net cash used in operating activities was $18.0 million for the fiscal year
ended January 31, 2001, which consisted primarily of a net loss totaling $22.0
million and increase in accounts receivable for $3.4 million, partially offset
by an increase in deferred revenue of $4.3 million and non-cash expenses
totaling $1.3 million.

     SkillSoft's primary investing activities during the fiscal year ended
January 31, 2001 were purchases of property and equipment, and purchases and
maturation of marketable securities. Property and equipment purchases for the
fiscal years ended January 31, 2001 and 2000 were approximately $1.4 million and
$0.3 respectively. Purchases and maturation of marketable securities generated a
net cash outflow of approximately $11.4 million in fiscal 2001 compared to a net
cash inflow of approximately $3.3 million in fiscal 2000.

     Cash provided by financing activities for fiscal year ended January 31,
2001 was approximately $42.6 million, which consisted primarily of net proceeds
from the sale of common stock in the initial public offering of approximately
$45.1 million and proceeds from the sale of common stock to Spherion Corporation
(formerly Interim Services, Inc.) of $2.0 million partially offset by the
payment of $4.5 million on the line of credit with Greyrock Capital. This was an
increase from $13.4 million in fiscal 2000, which consisted primarily

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<PAGE>   19

of proceeds from the issuance of Series B and Series C convertible preferred
stock and borrowing under the line of credit with Greyrock Capital.

     Working capital (deficit) was approximately $18.1 million and $(6.9)
million as of fiscal 2001 and fiscal 2000, respectively. Total assets were
approximately $30.5 million and $3.1 million as of fiscal 2001 and fiscal 2000,
respectively. These increases were primarily attributable to the proceeds from
the initial public offering, offset by the funding of operations.

     As of January 31, 2001, SkillSoft had net operating loss carryforwards of
$43.3 million and research and development credit carryforwards of $920,000. The
net operating loss and credit carryforwards will expire at various dates,
through the fiscal year ended January 31, 2020, if not used. Under the
provisions of the Internal Revenue Code, substantial changes in ownership may
limit the amount of net operating loss carryforwards that could be utilized
annually in the future to offset taxable income. A full valuation allowance has
been established in the financial statements to reflect the uncertainty of the
ability to use available tax loss carryforwards and other deferred tax assets.

     SkillSoft expects to continue to experience significant growth in capital
expenditures and operating expenses, particularly sales and marketing and
product development expenses, for the foreseeable future in order to execute the
business plan. SkillSoft believes that existing cash balances will be sufficient
to finance its operations for at least the next 18 months. However, SkillSoft
may be required to raise additional funds thereafter, and may have to raise
funds sooner than that due to unanticipated developments. If SkillSoft seeks to
raise additional funds, it may not be able to obtain funds on terms which are
favorable or acceptable. If SkillSoft raises additional funds through the
issuance of equity securities, the percentage ownership of existing stockholders
would be reduced.

FUTURE OPERATING RESULTS

SKILLSOFT HAS INCURRED SUBSTANTIAL LOSSES, AND EXPECTS TO CONTINUE TO INCUR THEM
IN THE FUTURE, AND SKILLSOFT MAY NOT BE ABLE TO ACHIEVE OR MAINTAIN
PROFITABILITY, WHICH MAY ADVERSELY AFFECT THE MARKET PRICE OF SKILLSOFT'S COMMON
STOCK

     Since SkillSoft began operations in January 1998, it has incurred losses in
every fiscal period. SkillSoft's accumulated deficit through the quarter ended
January 31, 2001 was $54,004,923 SkillSoft expects to continue to incur
substantial losses through at least the first several quarters of the fiscal
year ending January 31, 2002, and SkillSoft cannot be certain if or when it will
become profitable. If SkillSoft does not become profitable within the timeframe
expected by investors, the market price of our common stock may be adversely
affected. SkillSoft has generated relatively small amounts of revenue while
increasing expenditures in all areas in order to develop its business. SkillSoft
expects to continue to incur significant expenses, particularly in sales and
marketing, in an effort to develop our business. As a result, SkillSoft will
need to generate significant revenue to achieve and maintain profitability. Even
if SkillSoft does achieve profitability, it may not be able to sustain or
increase profitability on a quarterly or annual basis in the future.

SKILLSOFT AND SEVERAL OF SKILLSOFT'S EXECUTIVES ARE INVOLVED IN LITIGATION WITH
NETG WHICH ALLEGES, AMONG OTHER THINGS, MISAPPROPRIATION OF TRADE SECRETS; THIS
LITIGATION WILL CONTINUE TO BE COSTLY AND DIVERT THE EFFORTS OF SKILLSOFT'S
MANAGEMENT AND MAY ULTIMATELY RESTRICT SKILLSOFT'S ABILITY TO DO BUSINESS

     SkillSoft, several of SkillSoft's executives, three of SkillSoft's key
employees and SkillSoft's largest investor are involved in a lawsuit brought by
National Education Training Group, Inc. (NETg), the former employer of these
individuals. NETg alleges in substance that the defendants breached their
fiduciary and contractual obligations to NETg in connection with the
organization and operation of SkillSoft, misappropriated trade secrets from
NETg, tortiously interfered with NETg's business and employees and breached
provisions of a license agreement with NETg relating to the use of its software.
NETg maintains that the trade secrets allegedly misappropriated by SkillSoft and
the other defendants include:

     - various aspects of the design and functionality of its education and
       training software products;

     - customer lists and information;
                                        17
<PAGE>   20

     - relationships with service providers; and

     - NETg's soft skills product line business plan

The claims seek injunctive relief against the defendants demanding the return,
and no future use by these defendants, of the alleged trade secrets. The claim
for alleged misappropriation of trade secrets seeks compensatory damages of $400
million and exemplary damages in the additional amount of $400 million. The
other claims seek recovery of compensatory, incidental and consequential damages
in an unspecified amount and punitive damages against various defendants
totaling in excess of $70 million. Named as defendants in the lawsuit, in
addition to SkillSoft, are Charles E. Moran, Jerald A. Nine, Jr., Mark A.
Townsend, Lee A. Ritze, Dennis E. Brown, Sally H. Welsh, Warburg, Pincus
Ventures, L.P., SkillSoft's largest investor, and each partner of Warburg.

     In addition, NETg also filed suit against SkillSoft in July 2000 alleging
that SkillSoft's educational and training software products infringe a patent
allegedly owned by NETg. The complaint seeks both monetary damages and
injunctive relief. SkillSoft has filed an answer and a counterclaim for a
declaration of invalidity of the NETg patent. These lawsuits are still in
discovery, and SkillSoft can not yet assess the potential liability of SkillSoft
or the other defendants. SkillSoft's failure to prevail in these cases could
have any or all of the following significant adverse effects on SkillSoft's
business and financial performance:

     - injunctive relief against SkillSoft and SkillSoft's officers and
       employees, which could restrict SkillSoft's ability to conduct its
       business;

     - an adverse judgment against SkillSoft for monetary damages;

     - a settlement on unfavorable terms; or

     - obligations SkillSoft has to indemnify SkillSoft's employees for
       liabilities and expenses they incur in connection with the lawsuits; or

     - obligations to customers for breach of SkillSoft's warranty of
       noninfringement.

     In addition, these cases, regardless of their outcome, will continue to
result in significant expenses in defending the lawsuits and may divert the
efforts and attention of SkillSoft's management team from normal business
operations.

SKILLSOFT'S LIMITED OPERATING HISTORY DOES NOT AFFORD SIGNIFICANT FINANCIAL DATA
UPON WHICH TO FORECAST QUARTERLY REVENUE OR OPERATING RESULTS, AND SKILLSOFT'S
OPERATING RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER DUE TO THE NATURE OF
SKILLSOFT'S BUSINESS, WHICH COULD HAVE A NEGATIVE IMPACT ON THE PRICE OF
SKILLSOFT'S COMMON STOCK

     As a result of SkillSoft's limited operating history, SkillSoft may not
have sufficient historical financial data upon which to accurately forecast
quarterly revenue and operating results. If SkillSoft's quarterly revenue or
operating results falls below the expectations of investors or securities
analysts; the price of SkillSoft's common stock could fall substantially.
SkillSoft's quarterly operating results may fluctuate as a result of a variety
of factors, including:

     - seasonality -- due to the budget and purchasing cycles of SkillSoft's
       customers, SkillSoft expects its revenue and operating results will
       generally be strongest in the fourth quarter of SkillSoft's fiscal year
       and weakest in the first quarter; and

     - the expenses SkillSoft incurs to support the anticipated growth of its
       business.

     Most of SkillSoft's expenses, such as rent and most employee compensation
do not vary directly with revenue and are difficult to adjust in the short term.
As a result, if revenue for a particular quarter is below SkillSoft's
expectations, SkillSoft could not proportionately reduce operating expenses for
that quarter. Any such revenue shortfall would therefore have a disproportionate
effect on SkillSoft's expected operating results for that quarter. In addition,
SkillSoft expects that a disproportionate amount of its revenue each quarter
will be recognized in the final weeks of that quarter. As a result, any delays
in receiving orders or signing contracts

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<PAGE>   21

may defer the associated revenue to the following quarter, which would adversely
affect SkillSoft's operating results on a quarterly basis.

SKILLSOFT'S BUSINESS WILL SUFFER IF WEB-BASED EDUCATION AND TRAINING PRODUCTS
ARE NOT WIDELY ADOPTED

     SkillSoft's Web-based products represent a new and emerging approach for
the corporate soft skills education and training market. SkillSoft's success
depends substantially upon the widespread adoption of Web-based products for
education and training. The early stage of development of the market for
Web-based education and training makes it difficult for SkillSoft to predict
customer demand accurately. The failure of this market to develop, or a delay in
the development of this market -- whether due to technological, competitive or
other reasons -- would severely limit the growth of SkillSoft's business and
adversely affect SkillSoft's financial performance.

INTENSE COMPETITION FROM OTHER EDUCATION AND TRAINING COMPANIES COULD IMPAIR
SKILLSOFT'S ABILITY TO GROW AND TO ACHIEVE PROFITABILITY

     The market for soft skills education and training is fragmented and highly
competitive. Increased competition may result in lost sales and may force
SkillSoft to lower prices. SkillSoft expects that competition in this market
will increase substantially in the future for a number of reasons.

     One source of competition for SkillSoft's products is the internal
educational and technological personnel of potential customers. If an
organization decides to use external providers to supply some or all of its
training, SkillSoft's principal sources of competition are:

     - Providers of traditional classroom instruction. Many of the companies in
       this category are attempting to adapt their courses to a
       non-instructor-led format suitable for deployment over the internet and
       corporate intranets.

     - Providers of CD-ROM training courses.

     - Suppliers of online information technology training courses that are
       attempting to take advantage of their current technology and customer
       base and expand into the soft skills market.

     There can be no assurance that SkillSoft can maintain or improve its
competitive position. Many of SkillSoft's current and potential competitors have
longer operating histories, greater name recognition and greater financial,
technical, sales, marketing, support and other resources than SkillSoft does.

SKILLSOFT RELIES ON A LIMITED NUMBER OF THIRD PARTIES TO PROVIDE SKILLSOFT WITH
EDUCATIONAL CONTENT FOR ITS COURSES, AND THEY MAY NOT BE ABLE TO DEVELOP NEW
COURSES OR ENHANCE EXISTING COURSES ON A TIMELY BASIS

     To be competitive, SkillSoft must develop and introduce on a timely basis
new course offerings which meet the needs of companies seeking to use
SkillSoft's education and training products. In addition, some of SkillSoft's
courses may need to be updated due to changes in educational doctrines or the
evolving requirements of educational institutions and certification
organizations. SkillSoft relies on independent third parties to provide it with
the educational content for its courses based on learning objectives and
specific instructional design templates that SkillSoft provides to them.
SkillSoft does not have exclusive arrangements or long-term contracts with any
of these content providers. If one or more of SkillSoft's third party content
providers were to stop working with SkillSoft, SkillSoft would have to rely on
other parties to develop SkillSoft course content. SkillSoft cannot predict
whether new content or enhancements would be available from reliable alternative
sources on reasonable terms.

SKILLSOFT COURSE CONTENT PROVIDERS SUPPLY SKILLSOFT WITH THE EDUCATIONAL CONTENT
OF ITS COURSES AND ARE GENERALLY NOT RESTRICTED FROM DEVELOPING SIMILAR CONTENT
FOR SKILLSOFT'S COMPETITORS, WHICH COULD MAKE IT EASIER FOR SKILLSOFT
COMPETITORS TO COMPETE WITH SKILLSOFT

     SkillSoft relies on independent third parties to provide SkillSoft with the
educational content for its courses based on learning objectives and specific
instructional design templates that SkillSoft provides to

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<PAGE>   22

them. SkillSoft's agreements with these content providers do not restrict them
from developing courses on similar topics for SkillSoft's competitors or from
competing directly with SkillSoft. As a result, SkillSoft's competitors may be
able to duplicate some of SkillSoft's course content and may, therefore, find it
easier to enter the market for soft skills education and training.

SKILLSOFT'S SUCCESS DEPENDS ON THE SERVICES OF CHARLES E. MORAN AND SKILLSOFT'S
OTHER EXECUTIVE OFFICERS AND KEY EMPLOYEES

     SkillSoft's future success depends to a significant degree on the skills
and efforts of Charles E. Moran, SkillSoft's founder, Chairman of the Board,
President and Chief Executive Officer. The loss of the services of Mr. Moran
could have a material adverse effect on SkillSoft's business and financial
performance. SkillSoft also depends on the ability of SkillSoft's other
executive officers and members of senior management to work effectively as a
team. The loss of one or more of SkillSoft's executive officers or senior
management members could result in less effective development of SkillSoft's
products and management of its business, which could have a material adverse
effect on SkillSoft's business and financial performance.

SKILLSOFT'S FUTURE GROWTH DEPENDS ON SUCCESSFUL HIRING AND RETENTION,
PARTICULARLY WITH RESPECT TO SALES, MARKETING AND DEVELOPMENT PERSONNEL, AND
SKILLSOFT MAY BE UNABLE TO HIRE AND RETAIN THE SKILLED PERSONNEL SKILLSOFT NEEDS
TO SUCCEED

     SkillSoft's failure to attract and retain sufficient skilled personnel may
limit the rate at which SkillSoft can grow, may adversely affect the quality or
availability of SkillSoft's products and may result in less effective management
of SkillSoft's business, any of which may harm SkillSoft's business and
financial performance. The growth of SkillSoft's business and revenue depends in
large part upon SkillSoft's ability to attract and retain sufficient numbers of
highly skilled employees, particularly sales and marketing personnel and product
development personnel. Qualified personnel are in great demand throughout the
software industry. The demand for qualified personnel is particularly acute in
the New England area due to the large number of software companies and the low
unemployment rate in the region.

THE LENGTHY SALES CYCLE FOR SKILLSOFT'S PRODUCTS MAY MAKE ITS OPERATING RESULTS
UNPREDICTABLE AND VOLATILE

     The period between SkillSoft's initial contact with a potential customer
and the purchase of SkillSoft's products by that customer typically ranges from
three to 12 months. Factors, which may contribute to SkillSoft's long sales
cycle, include:

     - SkillSoft's need to educate potential customers about the benefits of its
       products;

     - competitive evaluations by customers;

     - the customers' internal budgeting and approval processes;

     - the fact that some customers view training products, as discretionary
       spending, rather than purchases essential to their business; and

     - the fact that SkillSoft targets large companies, which often take longer
       to make purchasing decisions due to the size and complexity of the
       enterprise.

     SkillSoft's long sales cycle makes it difficult for SkillSoft to predict if
and when a potential sale will actually occur. In addition, if a sale is delayed
from the quarter in which SkillSoft expects it to occur, SkillSoft's operating
results for that quarter would be adversely affected.

SKILLSOFT'S FINANCIAL PERFORMANCE DEPENDS IN PART ON ITS ABILITY TO DEVELOP
BRAND AWARENESS, AND SKILLSOFT MAY NOT BE SUCCESSFUL IN DOING SO

     SkillSoft believes that developing the SkillSoft brand within the corporate
training market is critical to achieving widespread acceptance of its products.
There are a number of factors which could prevent SkillSoft from successfully
developing the SkillSoft brand, including the emergence of more successful
competitors, product performance problems or customer dissatisfaction, as well
as SkillSoft's failure to devote sufficient resources to marketing efforts.
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<PAGE>   23

SKILLSOFT'S FAILURE TO PROPERLY MANAGE ITS RECENT AND ANTICIPATED GROWTH COULD
HAVE A MATERIAL ADVERSE EFFECT ON THE QUALITY OF SKILLSOFT'S PRODUCTS, ITS
ABILITY TO RETAIN KEY PERSONNEL AND THE EFFICIENCY OF ITS OPERATIONS

     SkillSoft's failure to properly manage its recent and anticipated growth
could have a material adverse effect on the quality of its products, its ability
to retain key personnel and the efficiency of its operations, any of which could
have a material adverse effect on its business and financial performance. From
February 1, 2000 to January 31, 2001, the number of SkillSoft's employees
increased from 146 to 234. This growth has strained, and SkillSoft's future
growth may continue to strain, its management, operational systems and other
resources. To manage its growth effectively, SkillSoft must be able to maintain
and enhance its financial and accounting systems and controls, integrate new
personnel and manage expanded operations. There can be no assurance SkillSoft
will be able to do so.

BECAUSE MANY OF SKILLSOFT'S COURSES AND TECHNOLOGIES ARE STILL UNDER DEVELOPMENT
AND SKILLSOFT EXPECTS TO CONTINUE TO DEVELOP NEW COURSES AND ENHANCE ITS
TECHNOLOGIES, SKILLSOFT'S BUSINESS WILL SUFFER IF IT IS UNABLE TO INTRODUCE
THESE NEW COURSES AND TECHNOLOGIES ON A TIMELY BASIS OR IF NEW COURSES ARE
UNSUCCESSFUL

     SkillSoft's future success will depend significantly on whether it is able
to introduce new courses and enhance its Web-based technologies as planned.
While SkillSoft has new courses and technology features scheduled for commercial
launch, SkillSoft cannot assure investors that it will be successful in
releasing them as scheduled, or that they will meet with market acceptance.
SkillSoft may not have sufficient resources to develop the new courses and
technology enhancements necessary to maintain or improve SkillSoft's competitive
position.

BECAUSE SKILLSOFT'S PRODUCTS AND SERVICES MAY NOT BE VIEWED BY SKILLSOFT'S
CUSTOMERS AS ESSENTIAL TO THEIR BUSINESS, DEMAND FOR SKILLSOFT'S PRODUCTS MAY BE
ESPECIALLY SUSCEPTIBLE TO ADVERSE ECONOMIC CONDITIONS

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

SKILLSOFT MUST CONTINUALLY INTRODUCE NEW PRODUCTS, AND ITS PRODUCTS MUST ADAPT
TO FREQUENT CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS, AND SKILLSOFT MAY HAVE
DIFFICULTY INTRODUCING NEW PRODUCTS OR KEEPING UP WITH THESE CHANGES

     The market for education and training products is characterized by rapidly
changing technologies, frequent new product and service introductions and
evolving industry standards. The growth in the use of the Web and intense
competition in SkillSoft's industry exacerbate these market characteristics.
SkillSoft's future success will depend on its ability to adapt to rapidly
changing technologies and customer demands by continually improving the features
and performance of SkillSoft's products.

THE NATURE OF SKILLSOFT'S PRODUCTS MAKES THEM PARTICULARLY VULNERABLE TO
UNDETECTED ERRORS, OR BUGS, WHICH COULD REDUCE SKILLSOFT'S REVENUE, MARKET SHARE
OR THE DEMAND FOR ITS PRODUCTS

     Product performance problems could result in lost or delayed revenue, loss
of market share, failure to achieve market acceptance, diversion of development
resources or injury to SkillSoft's reputation, any of which could have a
material adverse effect on SkillSoft's business and financial performance.
Software products such as SkillSoft's may contain undetected errors, or bugs,
which result in product failures or poor product performance. SkillSoft's
products may be particularly susceptible to bugs or performance degradation
because of the emerging nature of Web-based technologies and the stress that may
be placed on SkillSoft's products by the full deployment of its products to
thousands of users.

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SKILLSOFT MAY NOT BE ABLE TO GENERATE ENOUGH REVENUE FROM ITS PLANNED
INTERNATIONAL EXPANSION TO OFFSET THE COSTS ASSOCIATED WITH ESTABLISHING AND
MAINTAINING FOREIGN OPERATIONS

     A key component of SkillSoft's growth strategy is to expand its presence in
foreign markets. It will be costly to establish international operations, market
SkillSoft's products internationally and support and manage geographically
dispersed operations. Revenue from international operations is not likely to
offset the expense of establishing and maintaining these foreign operations in
the foreseeable future.

SKILLSOFT'S PLANNED INTERNATIONAL BUSINESS WILL EXPOSE IT TO RISKS IT HAS NOT
HAD TO FACE IN THE PAST

     If SkillSoft is successful in establishing international operations,
SkillSoft will have to confront and manage a number of risks that it has not had
to address in its U.S. operations. SkillSoft cannot assure investors that
SkillSoft will be successful in managing these risks. These risks include:

     - expenses associated with customizing products for foreign countries;

     - challenges and costs inherent in managing geographically dispersed
       operations;

     - protectionist laws and business practices that favor local competitors;

     - economic or political instability in some international markets;

     - difficulties in finding and managing local resellers;

     - multiple, conflicting and changing governmental laws and regulations; and

     - foreign currency exchange rate fluctuations.

BECAUSE MANY USERS OF SKILLSOFT'S COURSES ACCESS THEM OVER THE INTERNET, FACTORS
ADVERSELY AFFECTING THE USE OF THE INTERNET COULD HARM SKILLSOFT'S BUSINESS

     Some users access SkillSoft's courses over the public internet. Examples
include users who access courses from their company's intranet via remote access
and employees of companies that utilize SkillSoft's hosting services and who
therefore access courses from SkillSoft-managed servers via the internet. Any
factors that adversely affect internet usage could disrupt the ability of those
users to access SkillSoft's courses, which would adversely affect customer
satisfaction and therefore SkillSoft's business. Among the factors that could
disrupt internet usage is:

     - slow access and download times;

     - security concerns;

     - network problems or service disruptions that prevent users from accessing
       an internet server; and

     - delays in, or disputes concerning, the development and adoption of
       industry-wide internet standards and protocols.

SKILLSOFT COULD BE SUBJECTED TO LEGAL ACTIONS BASED UPON THE CONTENT SKILLSOFT
OBTAINS FROM THIRD PARTIES OVER WHOM IT EXERTS LIMITED CONTROL

     It is possible that SkillSoft could become subject to legal actions based
upon claims that SkillSoft's course content infringes the rights of others or is
erroneous. Any such claims, with or without merit, could subject SkillSoft to
costly litigation and the diversion of its financial resources and management
personnel. The risk of such claims is exacerbated by the fact that SkillSoft's
course content is provided by third parties over whom SkillSoft exert limited
control. Further, if those claims are successful, SkillSoft may be required to
alter the content, pay financial damages or obtain content from others.

SKILLSOFT'S PRODUCTS MAY BE SUSCEPTIBLE TO CLAIMS BY OTHER COMPANIES THAT
SKILLSOFT'S PRODUCTS INFRINGE UPON THEIR INTELLECTUAL PROPERTY, WHICH COULD
ADVERSELY AFFECT SKILLSOFT'S FINANCIAL CONDITION

     If any of SkillSoft's products violate the proprietary rights of third
parties, SkillSoft may be required to reengineer its products or to obtain
licenses to continue offering SkillSoft's products without substantial
                                        22
<PAGE>   25

reengineering. Any efforts to reengineer SkillSoft's products or obtain licenses
from third parties may not be successful and, in any case, could have a material
adverse effect on SkillSoft's business and financial performance by
substantially increasing its costs. SkillSoft does not conduct comprehensive
patent searches to determine whether the technologies used in SkillSoft's
products infringe upon patents held by others. In addition, product development
is inherently uncertain in a rapidly evolving technological environment in which
there may be numerous patent applications pending; many of, which are
confidential when, filed, with regard to similar technologies.

THE SIGNIFICANT CONCENTRATION OF OWNERSHIP OF SKILLSOFT'S COMMON STOCK WILL
LIMIT INVESTORS ABILITY TO INFLUENCE CORPORATE ACTIONS

     The concentration of ownership of SkillSoft's common stock may have the
effect of delaying, preventing or deterring a change in control of SkillSoft,
could deprive SkillSoft's stockholders of an opportunity to receive a premium
for their common stock as part of a sale of SkillSoft and might affect the
market price of SkillSoft's common stock. Warburg, Pincus Ventures, L.P. owns
approximately 46% of SkillSoft's outstanding common stock and, together with
SkillSoft's executive officers and directors, will beneficially own
approximately 64% of SkillSoft's outstanding common stock. As a result, those
stockholders, if they act together, are able to control all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions.

SOME PROVISIONS OF SKILLSOFT'S CHARTER AND BY-LAWS MAY DELAY OR PREVENT
TRANSACTIONS THAT MANY STOCKHOLDERS MAY FAVOR

     Some provisions of our certificate of incorporation and by-laws may
discourage, delay or prevent a merger or acquisition that SkillSoft's
stockholders may consider favorable, including transactions in which
stockholders might otherwise receive a premium for their shares. Some provisions
of Delaware law may also discourage, delay or prevent someone from acquiring
SkillSoft or merging with SkillSoft.

ITEM 7A. -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     As of January 31, 2001, SkillSoft did not use derivative financial
instruments for speculative or trading purposes.

INTEREST RATE RISK

     SkillSoft's general investing policy is to limit the risk of principal loss
and to ensure the safety of invested funds by limiting market and credit risk.
SkillSoft currently uses a registered investment manager to place its
investments in highly liquid money market accounts and government-backed
securities. All highly liquid investments with original maturities of three
months or less are considered to be cash equivalents.

FOREIGN CURRENCY EXCHANGE RISK

     SkillSoft develops products in the United States and sells them worldwide.
As a result, its financial results could be affected by factors such as changes
in foreign currency exchange rates or weak economic conditions in foreign
markets. Since its sales are currently priced in U.S. dollars and translated to
local currency amounts, a strengthening of the dollar could make its products
less competitive in foreign markets. Interest income is sensitive to changes in
the general level of U.S. interest rates, because SkillSoft's investments are in
short-term instruments. Based on the nature and current levels of our
investments, SkillSoft has concluded that there is no material market risk
exposure.

ITEM 8. -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Incorporated by reference from Appendix B attached hereto.

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

     Not applicable.
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                                    PART III

ITEM 10. -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information under the sections entitled "Election of Directors," and
"Section 16(a) Beneficial Ownership Reporting Compliance" from SkillSoft's
definitive proxy statement for the annual meeting of stockholders to be held on
June 14, 2001, which is to be filed with the Securities and Exchange Commission
not later than 120 days after the close of SkillSoft's fiscal year ended January
31, 2001 (the "2001 Proxy Statement"), is hereby incorporated by reference.
Additional information in response to this Item is included under the caption
"Executive Officers of the Company" at the end of Part I of this Annual Report
on Form 10-K.

ITEM 11. -- EXECUTIVE COMPENSATION

     The information under the sections entitled "Election of Directors -
Directors' Compensation," and "Executive Compensation" from the 2001 Proxy
Statement is hereby incorporated by reference.

ITEM 12. -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information under the section entitled "Security Ownership of Certain
Beneficial Owners and Management" from the 2001 Proxy Statement, is hereby
incorporated by reference.

ITEM 13. -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information under the sections entitled "Certain Relationships and
Related Transactions" from the 2001 Proxy Statement, is hereby incorporated by
reference.

                                    PART IV

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

     (a) Financial Statements, Financial Statement Schedule, and Exhibits

     1. Financial Statements. The following documents are filed as Appendix B
        hereto and are included as part of this Annual Report on Form 10-K:

          Financial Statements:

        Report of Independent Public Accountants

        Consolidated Balance Sheets

        Consolidated Statements of Operations

        Consolidated Statements of Changes in Stockholders' Equity (Deficit) and
     Comprehensive Loss

        Consolidated Statements of Cash Flows

          Notes to Consolidated Financial Statements

     2. Financial Statement Schedules. All Financial Statement Schedules have
        been omitted since they are either not required, not applicable, or the
        information is otherwise included in this report.

     3. Exhibits. The Exhibits listed in the Exhibit Index immediately preceding
        such Exhibits are filed as part of and incorporated by reference to this
        Form 10-K.

     (b) Reports on Form 8-K.

     The Company filed no reports on Form 8-K during the last quarter of the
period covered by this report.

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<PAGE>   27

                                   SIGNATURES

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

                                          SKILLSOFT CORPORATION
                                          (Registrant)

                                          By /s/ CHARLES E. MORAN
                                            ------------------------------------
                                            Charles E. Moran, President

Date: April 30, 2001

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of
SkillSoft and in the capacities and on the date set forth below.

<TABLE>
<CAPTION>
                     SIGNATURE                                      TITLE                      DATE
                     ---------                                      -----                      ----
<S>                                                  <C>                                  <C>

/s/ CHARLES E. MORAN                                 President, Chief Executive Officer   April 30, 2001
---------------------------------------------------    and Chairman of the Board of
     Charles E. Moran                                  Directors (Principal Executive
                                                       Officer)

/s/ THOMAS J. MCDONALD                               Chief Financial Officer (Principal   April 30, 2001
---------------------------------------------------    Financial and Accounting Officer)
     Thomas J. McDonald

/s/ STEWART K.P. GROSS                               Director                             April 30, 2001
---------------------------------------------------
     Stewart K.P. Gross

/s/ C. SAMANTHA CHEN                                 Director                             April 30, 2001
---------------------------------------------------
     C. Samantha Chen

/s/ JAMES ADKISSON                                   Director                             April 30, 2001
---------------------------------------------------
     James Adkisson

/s/ WILLIAM T. COLEMAN III                           Director                             April 30, 2001
---------------------------------------------------
     William T. Coleman III
</TABLE>

                                        25
<PAGE>   28

                                                                      APPENDIX A

                            SELECTED FINANCIAL DATA

     The following selected consolidated financial data should be read in
conjunction with our Consolidated Financial Statements and the related notes,
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," included elsewhere in this report.

<TABLE>
<CAPTION>
                                         PERIOD FROM
                                        INCORPORATION
                                      (OCTOBER 15, 1997)    YEAR ENDED     YEAR ENDED     YEAR ENDED
                                        TO JANUARY 31,      JANUARY 31,    JANUARY 31,    JANUARY 31,
                                             1998              1999           2000           2001
                                      ------------------    -----------    -----------    -----------
                                              (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                                   <C>                   <C>            <C>            <C>
STATEMENTS OF OPERATIONS DATA:
Revenue.............................       $     --         $       --     $    4,191     $    19,297
Cost of revenue.....................             --                 --            758           1,506
                                           --------         ----------     ----------     -----------
  Gross profit......................             --                 --          3,433          17,791
Operating expenses:
  Research and development..........            178              4,117          8,647          14,047
  Selling and marketing.............             --              1,671          8,961          20,946
  General and administrative........            649              2,821          4,371           5,776
  Stock-based compensation..........             --                 --            372             814
                                           --------         ----------     ----------     -----------
     Total operating expenses.......            827              8,609         22,351          41,583
                                           --------         ----------     ----------     -----------
Interest income, net................              3                336           (265)          1,832
                                           --------         ----------     ----------     -----------
     Net loss.......................           (824)            (8,273)       (19,183)        (21,960)
Preferred stock dividend............             --                 --          3,765              --
                                           --------         ----------     ----------     -----------
Net loss attributable to common
  shareholders......................       $   (824)        $   (8,273)    $  (22,948)    $   (21,960)
                                           ========         ==========     ==========     ===========
Net loss per share(1):
  Basic and diluted.................       $  (1.28)        $    (5.64)    $   (11.98)    $     (1.73)
                                           ========         ==========     ==========     ===========
  Basic and diluted weighted average
     common shares outstanding......        645,185          1,466,085      1,915,051      12,667,790
                                           ========         ==========     ==========     ===========
Pro forma net loss per share(1):
  Pro forma basic and diluted.......                        $    (1.70)    $    (2.84)
                                                            ==========     ==========
  Pro forma basic and diluted
     weighted average common shares
     outstanding....................                         4,872,043      8,077,512
                                                            ==========     ==========
</TABLE>

<TABLE>
<CAPTION>
                                                       AS OF             AS OF         AS OF         AS OF
                                                    JANUARY 31,       JANUARY 31,   JANUARY 31,   JANUARY 31,
                                                        1999             1999          2000          2001
                                                 ------------------   -----------   -----------   -----------
                                                                        (IN THOUSANDS)
<S>                                              <C>                  <C>           <C>           <C>
BALANCE SHEETS DATA:
Cash, cash equivalents and short-term
  investments..................................        $7,022           $3,965        $   735       $23,907
Working capital (deficit)......................         6,319            2,726         (6,915)       18,130
Total assets...................................         7,022            4,551          3,112        30,544
Long-term liabilities..........................            --               --             --            --
Stockholders' equity (deficit).................         6,319            3,195         (6,357)       19,668
</TABLE>

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

(1) See note 2(e) of Notes to Consolidated Financial Statements of SkillSoft for
the determination of shares used in computing basic and diluted net loss per
common share and pro forma basic and diluted net loss per common share.

                                       A-1
<PAGE>   29

                                                                      APPENDIX B

                              FINANCIAL STATEMENTS
                                     INDEX

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Public Accountants....................  B-2
Consolidated Balance Sheets as of January 31, 2000 and
  2001......................................................  B-3
Consolidated Statements of Operations for the Years Ended
  January 31, 1999, 2000 and 2001...........................  B-4
Consolidated Statements of Stockholders' Equity (Deficit)
  and Comprehensive Loss for the Years Ended January 31,
  1999, 2000 and 2001.......................................  B-5
Consolidated Statements of Cash Flows for the Years Ended
  January 31, 1999, 2000 and 2001...........................  B-6
Notes to Consolidated Financial Statements..................  B-7
</TABLE>

                                       B-1
<PAGE>   30

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To SkillSoft Corporation:

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SkillSoft Corporation as of
January 31, 2000 and 2001, and the results of its operations and its cash flows
for each of the three years in the period ended January 31, 2001 in conformity
with accounting principles generally accepted in the United States.

                                          /s/ ARTHUR ANDERSEN LLP

Boston, Massachusetts
February 21, 2001

                                       B-2
<PAGE>   31

                     SKILLSOFT CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                      JANUARY 31,
                                                              ----------------------------
                                                                  2000            2001
                                                              ------------    ------------
<S>                                                           <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $    734,595    $ 12,546,854
  Short-term investments....................................            --      11,360,285
  Accounts receivable, less reserves of approximately
     $25,000 and $45,500 as of January 31, 2000 and 2001,
     respectively...........................................       422,713       3,779,301
  Prepaid expenses and other current assets.................     1,397,028       1,320,206
                                                              ------------    ------------
     Total current assets...................................     2,554,336      29,006,646
Property and equipment, at cost:
  Computer equipment........................................       535,909       1,687,992
  Furniture and fixtures....................................       276,727         440,337
  Leasehold improvements....................................        58,063         157,857
                                                              ------------    ------------
                                                                   870,699       2,286,186
  Less -- accumulated depreciation and amortization.........       312,647         776,566
                                                              ------------    ------------
                                                                   558,052       1,509,620
                                                              ------------    ------------
Other assets................................................            --          28,028
                                                              ------------    ------------
                                                              $  3,112,388    $ 30,544,294
                                                              ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Line of credit............................................  $  4,513,209    $         --
  Accounts payable..........................................       702,557       1,357,444
  Accrued expenses..........................................     2,834,030       3,769,374
  Deferred revenue..........................................     1,419,990       5,749,620
                                                              ------------    ------------
     Total current liabilities..............................     9,469,786      10,876,438
Commitments and contingencies (Note 5)
Stockholders' equity (deficit):
  Convertible preferred stock (Note 6)......................    20,710,256              --
  Class A common stock, $.001 par value --
     authorized -- 26,000,000 shares at January 31, 2000 and
     none at January 31, 2001
     issued and outstanding -- 2,848,072 shares at January
     31, 2000 and none at January 31, 2001..................         2,848              --
  Preferred stock, $.001 par value --
     authorized -- none at January 31, 2000 and 5,000,000
     shares at January 31, 2001
     issued and outstanding - none at January 31, 2000 and
     2001...................................................            --              --
  Common stock, $.001 par value --
     authorized -- none at January 31, 2000 and 50,000,000
     shares at January 31, 2001
     issued and outstanding -- none at January 31, 2000 and
     13,294,381 shares at January 31, 2001..................            --          13,294
  Additional paid-in capital................................     7,460,320      75,224,579
  Warrants outstanding......................................       319,228         319,228
  Accumulated deficit.......................................   (32,045,346)    (54,004,923)
  Deferred compensation.....................................    (2,479,910)     (1,603,867)
  Notes receivable from stockholders........................      (339,063)       (339,063)
  Cumulative translation adjustment.........................        14,269          58,608
                                                              ------------    ------------
     Total stockholders' equity (deficit)...................    (6,357,398)     19,667,856
                                                              ------------    ------------
                                                              $  3,112,388    $ 30,544,294
                                                              ============    ============
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       B-3
<PAGE>   32

                     SKILLSOFT CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                              YEARS ENDED JANUARY 31,
                                                    -------------------------------------------
                                                       1999            2000            2001
                                                    -----------    ------------    ------------
<S>                                                 <C>            <C>             <C>
Revenue...........................................  $        --    $  4,190,547    $ 19,297,459
Cost of revenue(1)................................           --         757,849       1,506,193
                                                    -----------    ------------    ------------
       Gross profit...............................           --       3,432,698      17,791,266
Operating expenses:
  Research and development(1).....................    4,117,187       8,647,053      14,046,765
  Selling and marketing(1)........................    1,671,225       8,960,651      20,946,289
  General and administrative(1)...................    2,820,646       4,371,463       5,776,415
  Stock-based compensation........................           --         371,641         813,965
                                                    -----------    ------------    ------------
          Total operating expenses................    8,609,058      22,350,808      41,583,434
                                                    -----------    ------------    ------------
  Operating loss..................................   (8,609,058)    (18,918,110)    (23,792,168)
Interest income...................................      336,517         156,356       1,832,591
Interest expense..................................           --        (421,618)             --
                                                    -----------    ------------    ------------
       Net loss...................................   (8,272,541)    (19,183,372)    (21,959,577)
Preferred stock dividend..........................           --       3,765,000              --
                                                    -----------    ------------    ------------
       Net loss attributable to common
          shareholders............................  $(8,272,541)   $(22,948,372)   $(21,959,577)
                                                    ===========    ============    ============
Net loss per share (Note 2(e)):
  Basic and diluted...............................  $     (5.64)   $     (11.98)   $      (1.73)
                                                    ===========    ============    ============
  Basic and diluted weighted average common shares
     outstanding..................................    1,466,085       1,915,051      12,667,790
                                                    ===========    ============    ============
Pro forma net loss per share (Note 2(e)):
  Pro forma basic and diluted.....................  $     (1.70)   $      (2.84)
                                                    ===========    ============
  Pro forma basic and diluted weighted average
     common shares outstanding....................    4,872,043       8,077,512
                                                    ===========    ============
</TABLE>

---------------
(1) The following summarizes the departmental allocation of the stock-based
    compensation

<TABLE>
<CAPTION>
                                                                       2000            2001
                                                                   ------------    ------------
<S>                                                 <C>            <C>             <C>
          Cost of revenue.........................                 $      2,422    $      4,125
          Research and development................                       61,011         105,848
          Selling and marketing...................                      167,237         405,744
          General and administrative..............                      140,971         298,248
                                                                   ------------    ------------
                                                                   $    371,641    $    813,965
                                                                   ============    ============
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       B-4
<PAGE>   33

                     SKILLSOFT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
                                                                                                 CLASS A COMMON
                                                              CONVERTIBLE PREFERRED STOCK            STOCK            COMMON STOCK
                                                              ----------------------------   ----------------------   ----------
                                                                 NUMBER        CARRYING        NUMBER     $.001 PAR   NUMBER OF
                                                               OF SHARES         VALUE       OF SHARES      VALUE       SHARES
                                                              ------------   -------------   ----------   ---------   ----------
<S>                                                           <C>            <C>             <C>          <C>         <C>
BALANCE, JANUARY 31, 1998...................................    4,000,000     $ 6,957,774     1,340,000    $ 1,340            --
 Issuance of Class A restricted common stock................           --              --     1,124,000      1,124            --
 Issuance of Series B convertible preferred stock, net of
   issuance costs of $6,234.................................    2,380,953       4,993,767            --         --            --
 Net loss...................................................           --              --            --         --            --
                                                               ----------     -----------    ----------    -------    ----------
 Comprehensive net loss for the year ended January 31,
   1999.....................................................
BALANCE, JANUARY 31, 1999...................................    6,380,953      11,951,541     2,464,000      2,464            --
 Issuance of Class A restricted common stock................           --              --       340,000        340            --
 Issuance of Series B convertible preferred stock, net of
   issuance costs of $106...................................    2,380,952       4,999,894            --         --            --
 Issuance of Series C convertible preferred stock, net of
   issuance costs of $6,179.................................    1,195,238       3,758,821            --         --            --
 Deferred compensation related to grants of stock options
   and issuance of Class A restricted common stock..........           --              --            --         --            --
 Amortization of deferred compensation......................           --              --            --         --            --
 Exercise of stock options..................................           --              --        44,072         44            --
 Warrants granted in connection with line of credit.........           --              --            --         --            --
 Translation adjustment.....................................           --              --            --         --            --
 Net loss...................................................           --              --            --         --            --
                                                               ----------     -----------    ----------    -------    ----------
 Comprehensive net loss for the year ended January 31,
   2000.....................................................
BALANCE, JANUARY 31, 2000...................................    9,957,143      20,710,256     2,848,072      2,848            --
 Issuance of common stock, net of issuance costs of
   $4,851,700...............................................           --              --            --         --     3,707,857
 Conversion of Class A common stock into common stock.......           --              --    (2,848,072)    (2,848)    2,848,072
 Conversion of convertible preferred stock into common
   stock....................................................   (9,957,143)    (20,710,256)           --         --     6,638,095
 Exercise of stock options..................................           --              --            --         --       100,357
 Amortization of deferred compensation......................           --              --            --         --            --
 Issuance of stock options to a non-employee................           --              --            --         --            --
 Deferred compensation reversal due to termination of
   employees................................................           --              --            --         --            --
 Translation adjustment.....................................           --              --            --         --            --
 Net loss...................................................           --              --            --         --            --
                                                               ----------     -----------    ----------    -------    ----------
 Comprehensive net loss for the year ended January 31,
   2001.....................................................
BALANCE, JANUARY 31, 2001...................................           --     $        --            --    $    --    13,294,381
                                                               ==========     ===========    ==========    =======    ==========

<CAPTION>

                                                            MMON STOCK
                                                                -----------   ADDITIONAL
                                                                  $.001 PAR     PAID-IN      WARRANTS     ACCUMULATED
                                                                    VALUE       CAPITAL     OUTSTANDING     DEFICIT
                                                                  ---------   -----------   -----------   ------------
<S>                                                               <C>         <C>           <C>           <C>
BALANCE, JANUARY 31, 1998...................................       $    --    $   350,410    $     --     $   (824,433)
 Issuance of Class A restricted common stock................            --        293,926          --               --
 Issuance of Series B convertible preferred stock, net of
   issuance costs of $6,234.................................            --             --          --               --
 Net loss...................................................            --             --          --       (8,272,541)
                                                                   -------    -----------    --------     ------------
 Comprehensive net loss for the year ended January 31,
   1999.....................................................
BALANCE, JANUARY 31, 1999...................................            --        644,336          --       (9,096,974)
 Issuance of Class A restricted common stock................            --        187,910          --               --
 Issuance of Series B convertible preferred stock, net of
   issuance costs of $106...................................            --             --          --               --
 Issuance of Series C convertible preferred stock, net of
   issuance costs of $6,179.................................            --      3,765,000          --       (3,765,000)
 Deferred compensation related to grants of stock options
   and issuance of Class A restricted common stock..........            --      2,851,551          --               --
 Amortization of deferred compensation......................            --             --          --               --
 Exercise of stock options..................................            --         11,523          --               --
 Warrants granted in connection with line of credit.........            --             --     319,228               --
 Translation adjustment.....................................            --             --          --               --
 Net loss...................................................            --             --          --      (19,183,372)
                                                                   -------    -----------    --------     ------------
 Comprehensive net loss for the year ended January 31,
   2000.....................................................
BALANCE, JANUARY 31, 2000...................................            --      7,460,320     319,228      (32,045,346)
 Issuance of common stock, net of issuance costs of
   $4,851,700...............................................         3,708     47,055,184          --               --
 Conversion of Class A common stock into common stock.......         2,848             --          --               --
 Conversion of convertible preferred stock into common
   stock....................................................         6,638     20,703,618          --               --
 Exercise of stock options..................................           100         67,535          --               --
 Amortization of deferred compensation......................            --             --          --               --
 Issuance of stock options to a non-employee................            --         61,000          --               --
 Deferred compensation reversal due to termination of
   employees................................................            --       (123,078)         --               --
 Translation adjustment.....................................            --             --          --               --
 Net loss...................................................            --             --          --      (21,959,577)
                                                                   -------    -----------    --------     ------------
 Comprehensive net loss for the year ended January 31,
   2001.....................................................
BALANCE, JANUARY 31, 2001...................................       $13,294    $75,224,579    $319,228     $(54,004,923)
                                                                   =======    ===========    ========     ============

<CAPTION>

                                                                                NOTES                         TOTAL
                                                                              RECEIVABLE    CUMULATIVE    STOCKHOLDERS'
                                                                DEFERRED         FROM       TRANSLATION      EQUITY
                                                              COMPENSATION   STOCKHOLDERS   ADJUSTMENT      (DEFICIT)
                                                              ------------   ------------   -----------   -------------
<S>                                                           <C>            <C>            <C>           <C>
BALANCE, JANUARY 31, 1998...................................  $        --     $(166,250)      $    --     $  6,318,841
 Issuance of Class A restricted common stock................           --      (140,000)           --          155,050
 Issuance of Series B convertible preferred stock, net of
   issuance costs of $6,234.................................           --            --            --        4,993,767
 Net loss...................................................           --            --            --       (8,272,541)
                                                              -----------     ---------       -------     ------------
 Comprehensive net loss for the year ended January 31,
   1999.....................................................
BALANCE, JANUARY 31, 1999...................................           --      (306,250)           --        3,195,117
 Issuance of Class A restricted common stock................           --       (32,813)           --          155,437
 Issuance of Series B convertible preferred stock, net of
   issuance costs of $106...................................           --            --            --        4,999,894
 Issuance of Series C convertible preferred stock, net of
   issuance costs of $6,179.................................           --            --            --        3,758,821
 Deferred compensation related to grants of stock options
   and issuance of Class A restricted common stock..........   (2,851,551)           --            --               --
 Amortization of deferred compensation......................      371,641            --            --          371,641
 Exercise of stock options..................................           --            --            --           11,567
 Warrants granted in connection with line of credit.........           --            --            --          319,228
 Translation adjustment.....................................           --            --        14,269           14,269
 Net loss...................................................           --            --            --      (19,183,372)
                                                              -----------     ---------       -------     ------------
 Comprehensive net loss for the year ended January 31,
   2000.....................................................
BALANCE, JANUARY 31, 2000...................................   (2,479,910)     (339,063)       14,269       (6,357,398)
 Issuance of common stock, net of issuance costs of
   $4,851,700...............................................           --            --            --       47,058,892
 Conversion of Class A common stock into common stock.......           --            --            --               --
 Conversion of convertible preferred stock into common
   stock....................................................           --            --            --               --
 Exercise of stock options..................................           --            --            --           67,635
 Amortization of deferred compensation......................      752,965            --            --          752,965
 Issuance of stock options to a non-employee................           --            --            --           61,000
 Deferred compensation reversal due to termination of
   employees................................................      123,078            --            --               --
 Translation adjustment.....................................           --            --        44,339           44,339
 Net loss...................................................           --            --            --      (21,959,577)
                                                              -----------     ---------       -------     ------------
 Comprehensive net loss for the year ended January 31,
   2001.....................................................
BALANCE, JANUARY 31, 2001...................................  $(1,603,867)    $(339,063)      $58,608     $ 19,667,856
                                                              ===========     =========       =======     ============

<CAPTION>

                                                              COMPREHENSIVE
                                                                  LOSS
                                                              -------------
<S>                                                           <C>
BALANCE, JANUARY 31, 1998...................................
 Issuance of Class A restricted common stock................
 Issuance of Series B convertible preferred stock, net of
   issuance costs of $6,234.................................
 Net loss...................................................  $ (8,272,541)
                                                              ------------
 Comprehensive net loss for the year ended January 31,
   1999.....................................................  $ (8,272,541)
                                                              ============
BALANCE, JANUARY 31, 1999...................................
 Issuance of Class A restricted common stock................
 Issuance of Series B convertible preferred stock, net of
   issuance costs of $106...................................
 Issuance of Series C convertible preferred stock, net of
   issuance costs of $6,179.................................
 Deferred compensation related to grants of stock options
   and issuance of Class A restricted common stock..........
 Amortization of deferred compensation......................
 Exercise of stock options..................................
 Warrants granted in connection with line of credit.........
 Translation adjustment.....................................  $     14,269
 Net loss...................................................   (19,183,372)
                                                              ------------
 Comprehensive net loss for the year ended January 31,
   2000.....................................................  $(19,169,103)
                                                              ============
BALANCE, JANUARY 31, 2000...................................
 Issuance of common stock, net of issuance costs of
   $4,851,700...............................................
 Conversion of Class A common stock into common stock.......
 Conversion of convertible preferred stock into common
   stock....................................................
 Exercise of stock options..................................
 Amortization of deferred compensation......................
 Issuance of stock options to a non-employee................
 Deferred compensation reversal due to termination of
   employees................................................
 Translation adjustment.....................................  $     44,339
 Net loss...................................................   (21,959,577)
                                                              ------------
 Comprehensive net loss for the year ended January 31,
   2001.....................................................  $(21,915,238)
                                                              ============
BALANCE, JANUARY 31, 2001...................................
</TABLE>

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

                                       B-5
<PAGE>   34

                     SKILLSOFT CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                              YEARS ENDED JANUARY 31,
                                                    -------------------------------------------
                                                       1999            2000            2001
                                                    -----------    ------------    ------------
<S>                                                 <C>            <C>             <C>
Cash flows from operating activities:
  Net loss........................................  $(8,272,541)   $(19,183,372)   $(21,959,577)
  Adjustments to reconcile net loss to net cash
     used in operating activities --
     Stock-based compensation.....................           --         371,641         813,965
     Interest expense related to warrants.........           --         319,228              --
     Accrued interest expense.....................           --          13,209              --
     Depreciation and amortization................       85,726         227,025         465,691
     Provision for bad debts......................           --          25,000          20,751
     Changes in current assets and liabilities --
       Accounts receivable........................           --        (447,715)     (3,392,594)
       Prepaid expenses and other current
          assets..................................     (116,144)     (1,281,836)         62,027
       Accounts payable...........................      132,204         492,500         664,753
       Accrued expenses...........................      520,111       1,690,683         948,455
       Deferred revenue...........................           --       1,420,537       4,346,045
                                                    -----------    ------------    ------------
          Net cash used in operating activities...   (7,650,644)    (16,353,100)    (18,030,484)
                                                    -----------    ------------    ------------
Cash flows from investing activities:
  Purchases of property and equipment.............     (555,119)       (316,204)     (1,422,805)
  Purchases of short-term investments.............   (3,341,702)     (9,868,310)    (39,991,494)
  Maturity of short-term investments..............    4,371,333      13,210,012      28,631,209
  Increase in other assets........................           --              --         (28,028)
                                                    -----------    ------------    ------------
          Net cash provided by (used in) investing
            activities............................      474,512       3,025,498     (12,811,118)
Cash flows from financing activities:
  Issuance of Series B convertible preferred
     stock, net of issuance costs.................    4,993,767       4,999,894              --
  Issuance of Series C convertible preferred
     stock, net of issuance costs.................           --       3,758,821              --
  Issuance of Class A restricted common stock.....      155,050         155,437              --
  Issuance of common stock, net of issuance
     costs........................................           --              --      47,058,892
  Exercise of stock options.......................           --          11,567          67,635
  Proceeds from line of credit....................           --       4,500,000              --
  Payments on line of credit......................           --              --      (4,500,000)
                                                    -----------    ------------    ------------
          Net cash provided by financing
            activities............................    5,148,817      13,425,719      42,626,527
                                                    -----------    ------------    ------------
Effect of exchange rate changes on cash and cash
  equivalents.....................................           --          13,156          27,334
                                                    -----------    ------------    ------------
Net increase (decrease) in cash and cash
  equivalents.....................................   (2,027,315)        111,273      11,812,259
Cash and cash equivalents, beginning of year......    2,650,637         623,322         734,595
                                                    -----------    ------------    ------------
Cash and cash equivalents, end of year............  $   623,322    $    734,595    $ 12,546,854
                                                    ===========    ============    ============
Supplemental disclosure of cash flow information:
  Cash paid for interest..........................           --    $     89,181    $     20,664
                                                    ===========    ============    ============
Supplemental disclosure of noncash financing
  transactions:
  Issuance of Class A restricted common stock for
     notes receivable from stockholders...........  $   140,000    $     32,813    $         --
                                                    ===========    ============    ============
  Preferred stock dividend due to beneficial
     conversion feature of Series C convertible
     preferred stock..............................  $        --    $  3,765,000    $         --
                                                    ===========    ============    ============
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       B-6
<PAGE>   35

                     SKILLSOFT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) OPERATIONS

     SkillSoft Corporation (the Company) was incorporated in Delaware on October
15, 1997. The Company commenced operations on January 8, 1998 in conjunction
with its initial round of financing. The Company is a provider of web-based
training resources that cover a variety of professional effectiveness and
business topics.

     On February 4, 2000, the Company closed its initial public offering of
3,100,000 shares of common stock at a public offering price of $14 per share. On
February 15, 2000, in connection with the exercise of the underwriters'
over-allotment option, the Company issued an additional 465,000 shares of common
stock at the initial public offering price of $14 per share. Net proceeds to the
Company from the initial public offering and the exercise of the over-allotment
option were approximately $45,000,000.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  (a) Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.

  (b) Management's Estimates

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions 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. Actual results could differ from those estimates.

  (c) Revenue Recognition

     The Company follows the provisions of the American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-4 and SOP 98-9. The Company derives revenue
primarily pursuant to license agreements under which customers license usage of
delivered products for a period of one, two or three years. On each anniversary
date during the term of multi-year license agreements, customers are generally
allowed to exchange any or all of the licensed products for an equivalent number
of alternative products within the Company's course library.

     The annual license fee for the first year is generally billed in advance.
Revenue is recognized either at the time of delivery of products or over the
term of the contract, depending on specific contract terms. In the event that
the customer initially specified the entire set of licensed courses to be
delivered and those courses are available and delivered, the license revenue for
the first year of the contract is recognized upon execution of the contract and
delivery of the courses. License fees for subsequent years of multiyear license
agreements will be generally billed on the anniversary date of the agreement and
recognized in the manner described above or, if the customer exchanges courses
at the renewal date, upon delivery of the exchanged courses. Revenue is
recognized ratably over the license period if the customer does not initially
specify the entire set of licensed courses or is given exchange privileges that
are exercisable other than on the contract anniversaries or if the customer
licenses all courses currently available and to be developed during a particular
term. To the extent that a customer is given extended payment terms, revenue is
recognized as cash becomes due. The Company may offer payment terms generally up
to six months from the initial shipment date or anniversary date for multi-year
agreements to some of its customers.

     The Company also derives service revenue from installation and technical
support, extranet hosting and online mentoring services, which is recognized as
revenue as the service is performed. For the fiscal years ended January 31, 2000
and 2001, the Company recognized approximately $115,000 and $490,000 of service
revenue, respectively.

     The cost of satisfying any Post Contract Support (PCS) is accrued at the
time license revenue is recognized, as PCS fees are included in the annual
license fee. The accrued PCS costs are included in

                                       B-7
<PAGE>   36
                       SKILLSOFT CORPORATION SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

deferred revenue in the accompanying consolidated balance sheets. The estimated
cost of providing PCS during the agreements is insignificant and the Company
does not offer it separately. Unspecified upgrades or enhancements offered have
been and are expected to be minimal and infrequent. For multi-element
agreements, vendor specific objective evidence exists to allocate the total fee
to the elements of the agreement.

     Deferred revenue primarily represents the unrecognized portion of revenue
associated with license fees for which the Company has received payment. Amounts
billed for product revenue for which the Company has not recorded accounts
receivable and deferred revenue totaled $2,187,697 and $12,501,068 at January
31, 2000 and 2001, respectively.

  (e) Net Loss Per Share

     Basic and diluted net loss per common share was determined by dividing net
loss applicable to common shareholders by the weighted average common shares
outstanding during the period. Weighted average shares outstanding excludes
unvested shares of restricted common stock of 797,093, 671,870 and 175,054 as of
January 31, 1999, 2000 and 2001, respectively. Basic and diluted net loss per
share are the same, as outstanding common stock options and convertible
preferred stock are antidilutive as the Company has recorded a net loss for all
periods presented. Common stock options of 290,167, 832,875 and 1,374,144 common
shares have been excluded from the computation of diluted weighted average
shares outstanding as of January 31, 1999, 2000 and 2001, respectively. Warrants
to purchase 60,606 shares of common stock outstanding at January 31, 2000 and
2001, have also been excluded from the computation of diluted weighted average
shares outstanding for the years then ended. Shares of common stock issuable
upon the conversion of outstanding convertible preferred stock have also been
excluded for all periods presented. In accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 98, Earnings Per Share in an Initial
Public Offering, there were no issuances of the Company's common stock at
nominal consideration prior to the Company's initial public offering in February
2000.

     The calculation of pro forma net loss per common share assumes that all
Series A, Series B and Series C convertible preferred stock had been converted
to common stock as of the issuance date.

  (f) Foreign Currency Translation

     Assets and liabilities of the foreign subsidiaries are translated in
accordance with Statement of Financial Accounting Standards (SFAS) No. 52,
Foreign Currency Translation. In accordance with SFAS No. 52, assets and
liabilities of the Company's foreign operations are translated into U.S. dollars
at current exchange rates, and income and expense items are translated at
average rates of exchange prevailing during the year. Gains and losses arising
from translation are accumulated as a separate component of stockholders' equity
(deficit). Gains and losses arising from transactions denominated in foreign
currencies were not material for the periods presented.

  (g) Cash, Cash Equivalents and Short-term Investments

     The Company considers all highly liquid investments with original
maturities of 90 days or less at the time of purchase to be cash equivalents.
The Company accounts for its investments in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Under SFAS No.
115, securities that the Company has the positive intent and ability to hold to
maturity are reported at amortized cost, which approximates market value, and
are classified as held-to-maturity.

                                       B-8
<PAGE>   37
                       SKILLSOFT CORPORATION SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Cash, cash equivalents and short-term investments as of January 31, 2000
and 2001 are as follows:

<TABLE>
<CAPTION>
                                                                    JANUARY 31,
                                               CONTRACTED     ------------------------
DESCRIPTION                                     MATURITY        2000          2001
-----------                                    -----------    ---------    -----------
<S>                                            <C>            <C>          <C>
Cash and cash equivalents:
  Cash.......................................          N/A    $ 21,659     $ 1,204,543
  Commercial paper...........................   0-3 months     578,285       1,284,053
  Federal agency notes.......................   0-3 months          --       7,980,160
  Money market funds.........................   0-3 months     134,651       2,078,098
                                                              --------     -----------
          Total cash and cash equivalents....                  734,595      12,546,854
Short-term investments:
  Federal agency notes.......................  4-12 months          --      11,360,285
                                                              --------     -----------
          Total short-term investments.......
                                                              $734,595     $23,907,139
                                                              ========     ===========
</TABLE>

  (h) Depreciation and Amortization

     The Company provides for depreciation and amortization by charges to
operations in amounts estimated to allocate the cost of property and equipment
over their estimated useful lives, on a straight-line basis, as follows:

<TABLE>
<CAPTION>
                                                                ESTIMATED
                                                              USEFUL LIVES
                                                              -------------
<S>                                                           <C>
Computer equipment..........................................  2-3 years
Furniture and fixtures......................................  5 years
Leasehold improvements......................................  Life of lease
</TABLE>

  (i) Software Development Costs and Research and Development Expenses

     SFAS No. 86, Accounting for the Costs of Computer Software To Be Sold,
Leased or Otherwise Marketed, requires the capitalization of certain computer
software development costs incurred after technological feasibility is
established. Once technological feasibility of a software product has been
established, the additional development costs incurred to bring the product to a
commercially acceptable level has not been and is not expected to be
significant. The Company did not capitalize software development costs during
the fiscal years ended January 31, 2000 or 2001.

     The Company charges all research and development expenses, which include
course content development fees, to operations as incurred.

  (j) Comprehensive Loss

     SFAS No. 130, Reporting Comprehensive Income, requires disclosure of all
components of comprehensive income (loss) on an annual and interim basis.
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions, other events and circumstances
from nonowner sources. Comprehensive income (loss) is disclosed in the
accompanying consolidated statements of stockholders' equity (deficit) and
comprehensive loss.

  (k) Fair Value of Financial Instruments

     Financial instruments consist mainly of cash and cash equivalents,
short-term investments, accounts receivable, accounts payable and line of
credit. The carrying amounts of these instruments approximate their fair value,
due to the short-term nature of these instruments.

  (l) Concentrations of Credit Risk

     SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet or
concentration of credit risks such as foreign exchange contracts, option
contracts or other foreign hedging arrangements. For

                                       B-9
<PAGE>   38
                       SKILLSOFT CORPORATION SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the year ended and as of January 31, 2000, the Company had a customer that
individually comprised 22% and 40% of the Company's total revenue and accounts
receivable, respectively. For the year ended and as of January 31, 2001, no
customers individually comprised greater than 10% of total revenue or accounts
receivable.

  (m) Disclosures About Segments of an Enterprise

     The Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, in the fiscal year ended January 31, 1999.
SFAS No. 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision making group, in making decisions how to allocate
resources and assess performance. The Company's chief operating decision makers,
as defined under SFAS No. 131, are the Chief Executive Officer and the Chief
Financial Officer. To date, the Company has viewed its operations and manages
its business as principally one operating segment. As a result, the financial
information disclosed herein represents all of the material financial
information related to the Company's principal operating segment.

  (n) Long-Lived Assets

     The Company follows the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of.
SFAS No. 121 requires that long-lived assets be reviewed for impairment by
comparing the future undiscounted cash flows from the assets with the carrying
amount. Any write-downs are to be treated as permanent reductions in the
carrying amount of the assets. The Company believes that the carrying value of
these assets is realizable and to date has not recorded any impairment charges.

  (o) Recent Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133, as amended by SFAS Nos. 137 and 138, is effective for periods beginning
after June 15, 2000. SFAS No. 133 establishes methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. Because the Company currently
holds no derivative financial instruments and does not currently engage in
hedging activities, the adoption of SFAS No. 133 is not expected to have a
material impact on the Company's financial condition or results of operations.

     In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition. This bulletin established guidelines for revenue recognition and
was effective as of the beginning of fiscal 2000. The Company's adoption of this
guidance did not have a material impact on its financial condition or results of
operations.

     In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation -An Interpretation of APB
Opinion No. 25. The Interpretation clarifies the application of Opinion 25 in
certain situations, as defined. The Interpretation is effective as of July 1,
2000 but covers certain events having occurred after December 15, 1998. The
Company's adoption of this Interpretation did not have a material impact on the
Company's financial condition or results of operations.

(3) NOTES RECEIVABLE FROM STOCKHOLDERS

     In December 1997, the Company issued 633,333 shares of Class A common stock
to a founder of the Company in exchange for a full recourse note receivable
equal to the fair market value of the shares. The note receivable accrues
interest at a rate of 6.2% per annum and the principal and all outstanding
interest are due upon the maturity of the note in December 2002. The balance on
this note receivable is $166,250 at January 31, 2000 and 2001, and is included
as a reduction of stockholders' equity in the accompanying

                                       B-10
<PAGE>   39
                       SKILLSOFT CORPORATION SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

consolidated balance sheets and consolidated statements of stockholders' equity
(deficit) and comprehensive loss.

     During the fiscal years ended January 31, 1999 and 2000, the Company issued
a total of 658,333 shares of Class A restricted common stock to three officers
and several key employees of the Company in exchange for full recourse notes
receivable equal to the fair market value of the shares. The shares vest ratably
on a monthly basis over three years (see Note 7(b)). The notes receivable accrue
interest at rates of 4.83% -- 5.77% per annum and the principal and all
outstanding interest are due upon the maturity of the notes through March 2004.
The total balance of these notes receivable is $172,813 at January 31, 2000 and
2001 and is included as a reduction of stockholders' equity in the accompanying
consolidated balance sheets and consolidated statements of stockholders' equity
(deficit) and comprehensive loss.

     See Note 7(b) for the restrictions on the Class A Restricted Common Stock.

(4) INCOME TAXES

     The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes. Under the liability
method specified by SFAS No. 109, a deferred tax asset or liability is
determined based on the difference between the financial statement and tax bases
of assets and liabilities, as measured by the enacted tax rates assumed to be in
effect when these differences are expected to reverse. A deferred tax valuation
allowance is required if it is more likely than not that all or a portion of the
recorded deferred tax assets will not be realized.

     No provision for federal or state income taxes has been recorded, as the
Company incurred net operating losses for all periods presented. As of January
31, 2000 and 2001, the Company had net operating loss carryforwards of
approximately $24,439,000 and $43,309,000, respectively, available to reduce
future income taxes, if any. The Company also has available federal tax credit
carryforwards of approximately $230,000 and $920,000 at January 31, 2000 and
2001, respectively. If not utilized, these carryforwards expire at various dates
through the fiscal year ended January 31, 2020. If substantial changes in the
Company's ownership should occur, as defined by Section 382 of the Internal
Revenue Code (the Code), there could be annual limitations on the amount of
carryforwards which can be realized in future periods. The Company has completed
several financings since its inception and has incurred ownership changes as
defined under the Code. The Company does not believe that these changes in
ownership will have a material impact on its ability to use its net operating
loss and tax credit carryforwards.

     Net deferred tax assets consist of the following:

<TABLE>
<CAPTION>
                                                          JANUARY 31,
                                                  ----------------------------
                                                      2000            2001
                                                  ------------    ------------
<S>                                               <C>             <C>
Net operating loss carryforwards................  $  9,433,000    $ 17,324,000
Nondeductible expenses and reserves.............     1,447,000       1,457,000
Tax credits.....................................       230,000         920,000
                                                  ------------    ------------
                                                    11,110,000      19,701,000
Less -- Valuation allowance.....................   (11,110,000)    (19,701,000)
                                                  ------------    ------------
                                                  $         --    $         --
                                                  ============    ============
</TABLE>

     Due to the Company's history of operating losses, there is significant
uncertainty surrounding the Company's ability to utilize its net operating loss
and tax credit carryforwards. Accordingly, the Company has provided a full
valuation allowance against its otherwise recognizable deferred tax assets as of
January 31, 2000 and 2001.

                                       B-11
<PAGE>   40
                       SKILLSOFT CORPORATION SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:

<TABLE>
<CAPTION>
                                                                    JANUARY 31,
                                                              -----------------------
                                                              1999     2000     2001
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Income tax provision at federal statutory rate..............  (34.0)%  (34.0)%  (34.0)%
Increase (decrease) in tax resulting from --
  State tax provision, net of federal benefit...............   (4.6)    (4.6)    (4.6)
  Increase in valuation allowance...........................   38.6     38.6     38.6
                                                              -----    -----    -----
     Effective tax rate.....................................     --%      --%      --%
                                                              =====    =====    =====
</TABLE>

(5) COMMITMENTS AND CONTINGENCIES

  (a) Line of Credit with a Financial Institution

     The Company had a working capital credit facility agreement with a
financial institution, which was terminated in May 2000. Under the working
capital line of credit, the Company could borrow up to the lesser of $12,000,000
or the sum of 80% of eligible accounts receivable, as defined, plus $1,000,000.
As of March 1, 2000 the loan balance was paid in full.

     In December 1999, the Company granted warrants to purchase 60,606 shares of
Class A common stock at an exercise price of $8.25 per share to the financial
institution. The Company valued the warrants at $319,228 using the Black-Scholes
option pricing model. This amount was charged to interest expense in the
accompanying consolidated statement of operations for the year ended January 31,
2000, the period representing the estimated term of the borrowings.

  (b) Leases

     The Company leases its facility and certain equipment and furniture under
operating lease agreements that expire at various dates through October 2005.
Included in the accompanying statements of operations is rent expense for the
leased facility and equipment of approximately $55,000, $134,000 and $909,000
for the fiscal years ended January 31, 1999, 2000 and 2001, respectively.

     Future minimum lease payments under the operating lease agreements are
approximately as follows:

<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S>                                                <C>
2002...........................................    $  843,000
2003...........................................       666,000
2004...........................................       382,000
2005...........................................        43,000
2006...........................................        23,000
                                                   ----------
                                                   $1,957,000
                                                   ==========
</TABLE>

  (c) Litigation

     In May 1998, the former employer of several of the Company's executive
officers and key employees filed a lawsuit against the Company, three executive
officers and a key employee. The lawsuit has since been amended to include
additional key employees and the Company's largest investor. The former employer
claims in substance that the Company's President and Chief Executive Officer
breached his fiduciary obligations to his former employer by misappropriating
alleged trade secrets, commencing a rival concern and interfering with
employment relationships by soliciting other employees to join the Company while
employed by their former employer; that the Company's Vice President, Worldwide
Sales and Marketing breached his fiduciary obligations to his former employer by
assisting the Company's President and Chief Executive Officer in these
activities; that the other individuals allegedly misappropriated alleged trade
secrets; that the Company misappropriated alleged trade secrets and allegedly
interfered with employment relationships; and that the Company's largest
investor allegedly interfered with employment relationships. The claims seek
injunctive relief and compensatory damages of $400,000,000, exemplary damages in
the additional amount of $400,000,000 and punitive damages of $70,000,000.

                                       B-12
<PAGE>   41
                       SKILLSOFT CORPORATION SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In July 2000, the former employer filed another suit against the Company,
alleging that the Company's courseware products infringe on patents of the
former employer. The claim seeks both injunctive relief and unspecified monetary
damages.

     Management denies all allegations and believes that it has meritorious
defenses to all claims and intends to vigorously defend its positions. It is not
possible to predict the outcome of the litigation.

     Regardless of the outcome, the litigation will continue to result in
significant expenses and may divert the efforts and attention of the Company's
management from normal business operations and may have a material adverse
impact on the Company's business, financial condition or results of operations.
In connection with the defense of the lawsuits, the Company has recorded as
expense legal fees of $416,717, $1,919,831 and $1,365,590 for the fiscal years
ended January 31, 1999, 2000 and 2001, respectively, which is included in
general and administrative expenses in the accompanying consolidated statements
of operations.

(6) CONVERTIBLE PREFERRED STOCK

     Prior to its initial public offering, the Company authorized the issuance
of 13,000,000 shares of convertible preferred stock (the Preferred Stock), $.001
par value, of which 4,000,000, 4,761,905, and 3,174,603 shares were designated
as Series A, Series B and Series C Preferred Stock, respectively. At January 31,
2000, 1,063,492 shares of preferred stock were undesignated for a particular
series.

     In January 1998, the Company issued 4,000,000 shares of Series A
convertible preferred stock for gross proceeds of approximately $7,000,000. In
August 1998, the Company issued 2,380,953 shares of Series B convertible
preferred stock for gross proceeds of approximately $5,000,000. In February
1999, the Company issued the remaining 2,380,952 shares of Series B convertible
preferred stock for gross proceeds of approximately $5,000,000. In August 1999,
the Company issued 1,195,238 shares of Series C convertible preferred stock for
gross proceeds of approximately $3,765,000, and an amount of $3,765,000 was
allocated to the beneficial conversion feature in accordance with Emerging
Issues Task Force Issue No. 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingency Adjustable Conversion Ratios" and
was fully amortized through accumulated deficit on the date of issuance.

     Convertible preferred stock outstanding, at carrying value, consists of the
following:

<TABLE>
<CAPTION>
                                                                   JANUARY 31,
                                                            --------------------------
                                                               2000           2001
                                                            -----------    -----------
<S>                                                         <C>            <C>
Series A convertible preferred stock, $.001 par value --
  authorized, issued and outstanding -- 4,000,000 shares
  at January 31, 2000 and none at January 31, 2001
  (liquidation preference of $8,143,333 at January 31,
  2000)...................................................  $ 6,957,774    $        --
Series B convertible preferred stock, $.001 par value --
  authorized, issued and outstanding -- 4,761,905 shares
  at January 31, 2000 and none at January 31, 2001,
  (liquidation preference of $10,966,666 at January 31,
  2000)...................................................    9,993,661             --
Series C convertible preferred stock, $.001 par value --
  authorized -- 3,174,603 shares
  issued and outstanding -- 1,195,238 shares at January
  31, 2000 and none at January 31, 2001, (liquidation
  preference of $3,915,600 at January 31, 2000)...........    3,758,821             --
                                                            -----------    -----------
                                                            $20,710,256    $        --
                                                            ===========    ===========
</TABLE>

     The rights, preferences and privileges of the Preferred Stock were as
follows:

  Voting Rights

     Each holder of outstanding shares of Preferred Stock was entitled to the
number of votes equal to the number of whole shares of Class A common stock into
which the shares of Series A, B and C Preferred Stock were then convertible.

                                       B-13
<PAGE>   42
                       SKILLSOFT CORPORATION SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Dividends

     The holders of the Series A, B and C Preferred Stock were entitled to
receive dividends of $0.14, $0.168 and $0.252 per share per annum, respectively,
payable when and if declared by the Board of Directors of the Company. The Board
of Directors has not declared dividends since the inception of the Company.

  Liquidation Preference

     In the event of any voluntary or involuntary liquidation, winding up or
dissolution of the Company, the holders of the Company's Preferred Stock then
outstanding were entitled to be paid out of the assets of the Company before any
payment is made to common stockholders. The Series A, B and C preferred
stockholders were entitled to be paid at a rate of $1.75, $2.10 and $3.15 per
share, respectively, plus any declared but unpaid dividends. In addition, the
preferred stockholders were entitled to a liquidation dividend of an amount
equal to 8% of the original issuance price for each year that the shares have
been outstanding.

     After payment of all preferential amounts required to be paid to holders of
the Preferred Stock as set forth above, upon the involuntary liquidation,
winding up or dissolution of the Company, the remaining assets and funds of the
Company would have been distributed solely to the holders of the common stock.

  Conversion

     Each share of Series A, B and C Preferred Stock was convertible, at the
option of the holder, at any time into .67 shares of common stock, subject to
adjustment based on certain defined events.

     Shares of Preferred Stock were convertible into Class A common stock,
provided that the conversion did not cause the holder to possess greater than
49.9% of the total Class A common stock then outstanding. In such event, any
additional shares were convertible to Class B common stock.

     In connection with the Company's initial public offering, all outstanding
shares of Preferred Stock automatically converted into 6,638,095 shares of
common stock.

(7) STOCKHOLDER'S EQUITY

  (a) Recapitalization

     Upon the closing of the Company's initial public offering, the certificate
of incorporation was amended and restated to change the authorized capital stock
to 50,000,000 shares of $0.001 par value common stock and 5,000,000 shares of
$0.001 par value preferred stock.

  (b) Common Stock

     Prior to the Company's initial public offering, the Company authorized the
issuance of up to 33,000,000 shares of common stock, $.001 par value, of which
26,000,000 and 7,000,000 shares had been designated as Class A and Class B,
respectively. The voting, dividend and liquidation rights of the holders of the
common stock were subject to, and qualified by, the rights of the holders of
Preferred Stock. The Company has reserved 3,126,667 shares of common stock to be
issued as either restricted stock awards or stock options under the 1998 Stock
Incentive Plan discussed in Note 7(c).

     The holders of the Class A common stock were entitled to vote on all
corporate matters, and the holders of the Class B common stock were not entitled
to vote for any such matters except changes and amendments to the Class B common
stock rights and preferences.

     The Company issued 1,340,000 shares of Class A common stock, which were not
part of the 1998 Stock Incentive Plan, to a founder of the Company and to
several private investors in December 1997. Of these shares, 633,333 shares were
issued to a founder of the Company in exchange for a full recourse note
receivable (see Note 3).

     During the fiscal years ended January 31, 1999 and 2000 the Company issued
1,124,000 and 340,000 shares of Class A restricted common stock, respectively,
pursuant to the 1998 Stock Incentive Plan. Of these shares, 658,333 were issued
to three officers and several key employees of the Company in exchange for full
recourse notes receivable (see Note 3). These shares all vest ratably on a
monthly basis over a three-year period; unvested shares are subject to the right
of repurchase by the Company at the original sales price of the

                                       B-14
<PAGE>   43
                       SKILLSOFT CORPORATION SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

shares. In addition, these shares are subject to a restriction on transfer of
ownership, and the Company holds a right of first refusal option upon the sale
of the shares.

     As of January 31, 2001, a total of 175,054 shares of common stock are
subject to the right of repurchase by the Company.

     In connection with the Company's initial public offering, all issued and
outstanding shares of Class A common stock were converted to a new class of
common stock, and the certificate of incorporation was amended to eliminate the
designation of the Class A and Class B common stock.

 (c) Stock Option Plan

     In February 1998, the Company adopted the 1998 Stock Incentive Plan (the
Plan), pursuant to which up to 3,126,667 shares of common stock may be issued
over a 10-year period. Under the Plan, the Company may grant both incentive
stock options and nonqualified stock options, as well as award or sell shares of
common stock to employees, directors or outside consultants of the Company. All
option grants, prices and vesting periods are determined by the Board of
Directors. Incentive stock options may be granted at a price not less than 100%
of the fair market value of the common stock on the date of grant and not less
than 110% of the fair market value for a stockholder holding more than 10% of
the Company's voting common stock.

     All stock option activity under the Plan for the fiscal years ended January
31, 1999, 2000 and 2001 is as follows:

<TABLE>
<CAPTION>
                                                                                WEIGHTED
                                                                                AVERAGE
                                                                 EXERCISE       EXERCISE
                                                   OPTIONS         PRICE         PRICE
                                                  ---------    -------------    --------
<S>                                               <C>          <C>              <C>
  Granted.......................................    290,167    $        0.26     $0.26
                                                  ---------    -------------     -----
Outstanding, January 31, 1999...................    290,167             0.26      0.26
  Granted.......................................    651,863     0.26 - 13.00      4.35
  Exercised.....................................    (44,072)            0.26      0.26
  Canceled......................................    (65,083)     0.26 - 1.50      0.64
                                                  ---------    -------------     -----
Outstanding, January 31, 2000...................    832,875     0.26 - 13.00      3.43
  Granted.......................................    756,115     8.81 - 30.00     15.09
  Exercised.....................................   (100,357)    0.26 - 10.50      0.67
  Canceled......................................   (114,489)    0.26 - 27.50      9.34
                                                  ---------    -------------     -----
Outstanding, January 31, 2001...................  1,374,144    $0.26 - 30.00     $9.56
                                                  =========    =============     =====
Exercisable, January 31, 2001...................    223,863    $0.26 - 13.75     $3.21
                                                  =========    =============     =====
Exercisable, January 31, 2000...................     47,350    $        0.26     $0.26
                                                  =========    =============     =====
Exercisable, January 31, 1999...................         --    $          --     $  --
                                                  =========    =============     =====
</TABLE>

                                       B-15
<PAGE>   44
                       SKILLSOFT CORPORATION SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes certain information relating to the
outstanding and exercisable options as of January 31, 2001:

<TABLE>
<CAPTION>
                    OUTSTANDING
---------------------------------------------------
                              WEIGHTED                   EXERCISABLE
                               AVERAGE                ------------------
    RANGE                     REMAINING    WEIGHTED             WEIGHTED
      OF                     CONTRACTUAL   AVERAGE    NUMBER    AVERAGE
   EXERCISE      NUMBER OF      LIFE       EXERCISE     OF      EXERCISE
    PRICES        SHARES       (YEARS)      PRICE     SHARES     PRICE
--------------   ---------   -----------   --------   -------   --------
<S>              <C>         <C>           <C>        <C>       <C>
$         0.26     289,204      7.85        $ 0.26    108,186    $ 0.26
          1.50     199,337      8.51          1.50     66,332      1.50
  8.81 - 12.56     275,890      9.16         10.65     29,689     11.13
 13.00 - 21.38     569,165      9.43         15.36     19,656     13.19
 23.63 - 30.00      40,548      9.15         26.90         --        --
                 ---------      ----        ------    -------    ------
                 1,374,144      8.90        $ 9.56    223,863    $ 3.21
                 =========      ====        ======    =======    ======
</TABLE>

     In connection with certain issuances of Class A restricted common stock and
stock option grants during the year ended January 31, 2000, the Company recorded
deferred compensation of $2,851,551, which represents the aggregate difference
between the exercise or sale price and the fair market value of the common stock
as determined for accounting purposes. The deferred compensation will be
recognized as an operating expense over the vesting period of the restricted
common stock and the underlying stock options. The Company recorded compensation
expense of $371,641 and $752,965 in the years ended January 31, 2000 and 2001,
respectively, related to these restricted shares and options.

     During the year ended January 31, 2001, the Company granted options to
purchase 5,000 shares of common stock to a non-employee in consideration for
rendered services. These options were fully vested at the date of grant. The
Company recorded stock-based compensation of $61,000, which represents the value
of such options as calculated using the Black-Scholes option pricing model.

  (d) Stock-Based Compensation

     The Company applies the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 requires the measurement of the fair
value of stock options to employees to be included in the statements of
operations or disclosed in the notes to financial statements. The Company
accounts for stock-based compensation for its employees under Accounting
Principles Board (APB) Opinion No. 25 and elected the disclosure-only
alternative under SFAS No. 123, which requires disclosure of the pro forma
effects on earnings as if the fair-value-based method of accounting under SFAS
No. 123 had been adopted, as well as certain other information.

     The Company has computed the pro forma disclosures required under SFAS No.
123 for options granted in fiscal 1999, 2000 and 2001 using the Black-Scholes
option pricing model prescribed by SFAS No. 123. The weighted average
information and assumptions used for the grants is as follows:

<TABLE>
<CAPTION>
                                                 YEAR ENDED JANUARY 31,
                                      --------------------------------------------
                                          1999            2000            2001
                                      ------------    ------------    ------------
<S>                                   <C>             <C>             <C>
Risk-free interest rates............  4.46 - 5.56%    5.10 - 6.38%    5.28 - 6.72%
Expected dividend yield.............       --              --              --
Volatility factor...................      126%             68%            102%
Expected lives......................    7 years         7 years         7 years
Weighted average fair value of
  options granted...................  $   0.24        $   3.17        $  12.96
</TABLE>

                                       B-16
<PAGE>   45
                       SKILLSOFT CORPORATION SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Had compensation expense for the Plan been determined consistent with SFAS
No. 123, the Company's net loss and basic and diluted net loss per share would
have been increased to the following pro forma amounts:

<TABLE>
<CAPTION>
                                              YEAR ENDED JANUARY 31,
                                    -------------------------------------------
                                       1999            2000            2001
                                    -----------    ------------    ------------
<S>                                 <C>            <C>             <C>
Net loss-
  As reported.....................  $(8,272,541)   $(19,183,372)   $(21,959,577)
  Pro forma.......................   (8,276,914)    (19,277,792)    (23,861,345)
Basic and diluted net loss per
  share-
  As reported.....................        (5.64)         (11.98)          (1.73)
  Pro forma.......................        (5.65)         (12.03)          (1.88)
</TABLE>

     Because additional option grants are expected to be made in future periods,
the above pro forma disclosures may not be representative of pro forma effects
on results for future periods.

(8) ACCRUED EXPENSES

     Accrued expenses in the accompanying consolidated balance sheets consist of
the following:

<TABLE>
<CAPTION>
                                                            JANUARY 31,
                                                      ------------------------
                                                         2000          2001
                                                      ----------    ----------
<S>                                                   <C>           <C>
Accrued compensation................................  $1,072,159    $  921,120
Course development fees.............................     258,850       776,797
Professional fees...................................     725,976       632,766
Other...............................................     777,045     1,438,691
                                                      ----------    ----------
                                                      $2,834,030    $3,769,374
                                                      ==========    ==========
</TABLE>

(9) RELATED PARTIES

  (a) Spherion Corporation

     In April 2000, the Company sold 142,857 shares of common stock to Spherion
Corporation (Spherion) (formerly Interim Services, Inc.), at a price of $14 per
share, which approximated the fair market value at that date. In addition, the
Company entered into a separate license arrangement with Spherion, under which
the Company recognized approximately $383,000 of product revenue in the year
ended January 31, 2001. The Company believes that all transactions with Spherion
are rendered at arms length.

  (b) Business Performance Technologies, LLP

     During 2000, the Company invested approximately $100,000 in Business
Performance Technologies, LLP (BPT), a provider of consulting services to the
Company's customers. The investment entitles the Company to a minority interest
in BPT and is accounted for using the cost method. This investment is not valued
on the accompanying consolidated balance sheets, because the Company is
uncertain of the ultimate value of BPT. Included in accounts payable on the
accompanying Consolidated Balance Sheet as of January 31, 2001 was approximately
$50,000 due to BPT. Revenue associated with work performed by BPT has not been
material to date.

(10) FINANCIAL INFORMATION BY GEOGRAPHIC AREA

     Domestic and international revenues as a percentage of total revenues are
as follows:

<TABLE>
<CAPTION>
                                                               YEAR ENDED
                                                              JANUARY 31,
                                                              ------------
                                                              2000    2001
                                                              ----    ----
<S>                                                           <C>     <C>
United States...............................................  100%     90%
Europe......................................................   --       8
Other.......................................................   --       2
                                                              ---     ---
                                                              100%    100%
                                                              ===     ===
</TABLE>

                                       B-17
<PAGE>   46
                       SKILLSOFT CORPORATION SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Long-lived assets located at international facilities are not significant.

(11) EMPLOYEE BENEFIT PLAN

     The Company has a 401(k) plan covering all employees of the Company who
have met certain eligibility requirements. Under the terms of the 401(k) plan,
the employees may elect to make tax-deferred contributions to the 401(k) plan.
In addition, the Company may match employee contributions, as determined by the
Board of Directors, and may make a discretionary contribution to the 401(k)
plan. No matching or discretionary contributions have been made to the 401(k)
plan in any period.

(12) VALUATION & QUALIFYING ACCOUNTS

     ALLOWANCE FOR DOUBTFUL ACCOUNTS

<TABLE>
<CAPTION>
                                                                 ADDITION
                                                   BALANCE AT    CHARGED                   BALANCE AT
                                                   BEGINNING        TO                       END OF
                                                   OF PERIOD     EXPENSE     DEDUCTIONS      PERIOD
                                                   ----------    --------    ----------    ----------
<S>                                                <C>           <C>         <C>           <C>
Year ended January 31, 2000......................   $    --      $25,000         $--        $25,000
                                                    =======      =======         ==         =======
Year ended January 31, 2001......................   $25,000      $20,462         $--        $45,462
                                                    =======      =======         ==         =======
</TABLE>

                                       B-18
<PAGE>   47

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO.                                  TITLE
-------                              -----
<C>       <S>
   3.01+  Amended and Restated Certificate of Incorporation of
          SkillSoft.
   3.02   Amended and Restated By-Laws of SkillSoft.
   4.01+  Specimen Stock Certificate representing Common Stock
  10.01+  1998 Stock Incentive Plan, as amended.
  10.02+  1999 Non-Employee Director Stock Option Plan
  10.03*+ Employment Agreement between SkillSoft and Charles E. Moran.
  10.04*+ Security Agreement and Secured Promissory Note between
          SkillSoft and Charles E. Moran, each dated December 10,
          1997.
  10.05*+ Employment Agreement dated January 12, 1998 between
          SkillSoft and Mark A. Townsend.
  10.06*+ Employment Agreement dated January 12, 1998 between
          SkillSoft and Thomas J. McDonald.
  10.07*+ Employment Agreement dated April 9, 1998 between SkillSoft
          and Jerald A. Nine.
  10.08+  Amended and Restated Registration and Investor Rights
          Agreement dated August 5, 1999, between SkillSoft and the
          Investors named therein.
  10.09+  Amendment No. 1 to Amended and Restated Registration and
          Investor Rights Agreement.
  10.10++ Lease dated February 18, 1998, as amended, between SkillSoft
          and Five N Associates.
  10.11*+ Restricted Stock Purchase Agreement dated March 13, 1999
          between SkillSoft and Jerald A. Nine.
  10.12*+ Restricted Stock Purchase Agreement dated March 15, 1999
          between SkillSoft and Thomas J. McDonald.
  10.13*+ Restricted Stock Purchase Agreement dated March 31, 1999
          between SkillSoft and Charles E. Moran.
  10.14*+ Restricted Stock Purchase Agreement dated March 31, 1999
          between SkillSoft and Mark A. Townsend.
  10.15*+ Restricted Stock Purchase Agreement dated August 30, 1999
          between SkillSoft and James Adkisson.
  10.16*+ Restricted Stock Purchase Agreement dated September 1, 1999
          between SkillSoft and William T. Coleman, Trustee of the
          Coleman Family Trust.
  21.01   Subsidiaries of SkillSoft.
  23.01   Consent of Arthur Andersen LLP.
</TABLE>

---------------
 * Management contracts and compensatory plans or arrangements.

 + Incorporated by reference to the Registration Statement on Form S-1 (File No.
   333-86815).

++ Replaces previously filed exhibit.