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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 FISCAL YEAR ENDED JANUARY 31, 2000

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

     The approximate aggregate market value of Common Stock held by
non-affiliates of the Registrant was $72,947,031 based on the closing price of
the Common Stock as of February 29, 2000.

     On February 29, 2000, the Registrant had outstanding 13,060,340 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 9, 2000. Portions of such proxy statement are incorporated by
reference into Part III of this Form 10-K.
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                                     PART I

ITEM 1. -- BUSINESS

     This Business section and other parts of this Form 10-K contain
forward-looking statements that involve risk and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those set forth in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in this Form
10-K.

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 (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 225 courses, 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, and Online Job Aids.

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.

PRODUCTS

  Courses

     SkillSoft's comprehensive library of Web-based courses encompasses a wide
array of professional effectiveness skills and business topics. SkillSoft offers
225 courses which are currently divided into two

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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
</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 "Advanced Project Scope, Time and Cost 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. SkillSoft is in the
process of developing a localized version of some of SkillSoft's courses for use
in the United Kingdom and other English-speaking markets (such as Australia and
South Africa).

  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 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

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       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.

     - NetUniversity, which is a Web-based software application that permits
       course users to access a wide variety of learning resources over the Web
       and enables training administrators to control, monitor and generate
       reports on the use of training courses -- either SkillSoft's or those of
       other vendors -- by employees throughout the enterprise.

  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

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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.

  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 24 to 30 weeks.

     SkillSoft currently has agreements with seven 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 two
agreements, 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.

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  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 of its features, such
as Online Mentoring 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, 2000,
SkillSoft's professional services organization consisted of 13 people.

SALES AND MARKETING

     SkillSoft uses a multi-prong sales strategy, consisting of

     - a direct sales force for larger accounts;

     - a telesales force for smaller accounts and lead generation; and

     - resellers for 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, 2000, SkillSoft employed 77 sales professionals,
telesales, and sales management. 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, 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, PeopleSoft 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 twelve
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

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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 Click2Learn, Achievement Tec Inc., IBM and First Class
Systems. SkillSoft has established and is developing reseller arrangements with
internet commerce sites focused on training and education, such as Headlight.com
and Fatbrain.com, as well as internet portals such as AltaVista through WorkLife
Solutions, Inc. SkillSoft has also established a reseller arrangement with
Delmar, a division of Thompson Learning, under which Delmar will resell
SkillSoft's courses, principally to educational institutions such as junior
colleges, vocational schools and high schools.

     Through January 31, 2000, substantially all of SkillSoft's revenue was
generated within the United States. SkillSoft recently opened an office in the
United Kingdom in September 1999, which will serve as the hub of its
international operations. Although SkillSoft expects to employ a direct sales
force in the United Kingdom and Australia, 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, 2000, SkillSoft's marketing
organization consisted of five 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

     - 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.

     GTE accounted for 21.5% of SkillSoft's revenue for the fiscal year ended
January 31, 2000. No other customer accounted for more than 10% of its revenue
for that year.

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.

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

     As of January 31, 2000, SkillSoft had 26 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, 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.
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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. 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.

     SkillSoft has trademark applications pending in the United States for some
of its trademarks, including NetPlay and NetUniversity and "eLearning for the
Knowledge Economy."

EMPLOYEES

     As of January 31, 2000, SkillSoft had 146 employees, of whom 82 were
engaged in sales and marketing, thirteen were engaged in customer service and
support, 24 were engaged in product development, two were engaged in product
production and 25 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 15,500 square feet of
office space in Nashua, New Hampshire under a lease that expires in February
2001. SkillSoft also lease a sales office in the United Kingdom. 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, three of its executive officers, three of its 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.

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     The most recent complaint filed by NETg alleged 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 H. Welsh misappropriated trade secrets of NETg, and
       SkillSoft, Mr. Moran and Mr. Nine intentionally interfered with NETg's
       "prospective economic advantage;"

     - Messrs. Moran, Townsend, Nine, Ritze, 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;

     - Messrs. Moran, Townsend, Nine, Ritze and 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 discussion 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 Messrs. Townsend, Nine, Brown 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 its software; and

     - Warburg, Pincus Ventures, L.P., SkillSoft's largest investor,
       intentionally interfered with NETg's employment relationships with
       "at-will" employees, including Messrs. Townsend and 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 Messrs. Moran's and 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
sought 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 in excess of $70 million.

     None of the defendants in this lawsuit were bound by written
non-competition or non-solicitation agreements with NETg. 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 lawsuit. The lawsuit is still in
discovery, so SkillSoft is not yet able to assess

                                        9
<PAGE>   11

the potential liability of SkillSoft or the other defendants. SkillSoft's
failure to prevail in this litigation could have any or all of the following
significant adverse effects on its business and financial performance:

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

     - an adverse judgment against SkillSoft for monetary damages;

     - a settlement on unfavorable terms; or

     - obligations SkillSoft has to indemnify its employees for liabilities and
       expenses they incur in connection with the lawsuit.

In addition, this litigation, regardless of its outcome, will continue to 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.

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.....................  45     Chairman of the Board, President and Chief Executive
                                              Officer
Thomas J. McDonald...................  50     Chief Financial Officer, Vice President, Operations,
                                              Treasurer and Secretary
Mark A. Townsend.....................  46     Vice President, Product Development
Jerald A. Nine, Jr...................  42     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. Mr. Moran is also a director of Workgroup Technology Corporation.

     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.

                                       10
<PAGE>   12

                                    PART II

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

     SkillSoft effected its initial public offering of its common stock on
January 31, 2000 at a price to the public of $14.00 per share. As of February
29, 2000, there were approximately 60 holders of record of SkillSoft's common
stock. SkillSoft's common stock is listed on the Nasdaq National Market under
the symbol "SKIL."

     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.

  Recent Sales of Unregistered Securities

     During the fiscal year ended January 31, 2000, SkillSoft issued the
following securities that were not registered under the Securities Act of 1933,
as amended:

     On August 5, 1999, SkillSoft issued and sold an aggregate of 1,195,238
shares of its Series C preferred stock, $.001 par value per share, for an
aggregate purchase price of $3,765,000. Each share of SkillSoft's Series C
preferred stock automatically converted into .667 shares of SkillSoft's common
stock upon the closing of SkillSoft's initial public offering on February 4,
2000.

     On December 8, 1999, SkillSoft issued an aggregate of 60,606 warrants to
purchase SkillSoft's common stock for an exercise price of $8.25 per share.

     From February 1, 1999 to January 31, 2000, SkillSoft issued and sold 44,072
shares of common stock at an exercise price of $.2625 per share for an aggregate
purchase price of $11,567 pursuant to the exercise of employee stock options.

     From February 1, 1999 to January 31, 2000, SkillSoft issued and sold an
aggregate of 313,000 shares of restricted common stock, at a purchase prices
ranging from $.2625 to $1.50 per share for an aggregate purchase price of
$181,163.

     No underwriters were involved in the foregoing sales of securities. The
shares issued in the above mentioned transactions were issued in private
placements in reliance upon the exemption from registration provided by section
4 (2) of the Securities Act of 1933, or, in the case of the exercises of options
to purchase common stock and restricted stock purchases, Rule 701 under the
Securities Act.

  Use of Proceeds from Registered Securities

     On February 1, 2000 SkillSoft commenced its initial public offering of
3,100,000 shares of common stock, $.001 par value per share, pursuant to
SkillSoft's final prospectus dated January 31, 2000. This prospectus was
contained in SkillSoft's Registration Statement on Form S-1, which was declared
effective by the Securities and Exchange Commission (SEC File No. 333-86815) on
January 31, 2000. As part of the initial public offering, SkillSoft granted the
several underwriters, for whom Credit Suisse First Boston Corporation, Banc of
America Securities LLC and Thomas Weisel Partners LLC acted as representatives
(the "Representatives"), an overallotment option to purchase an additional
465,000 shares of common stock. The initial public offering closed on February
4, 2000.

     On February 15, 2000, the Representatives, on behalf of the several
underwriters, purchased 465,000 shares of common stock pursuant to the exercise
of the overallotment option.

                                       11
<PAGE>   13

     The aggregate offering price of the initial public offering to the public
was $49,910,000 (inclusive of the overallotment option), with the proceeds to
SkillSoft, after deduction of underwriting discounts and commission, of
$46,416,300 (before deducting offering expenses payable by SkillSoft).

     The aggregate amount of expenses incurred by SkillSoft through January 31,
2000 in connection with the issuance and distribution of the shares of common
stock offered and sold in the initial public offering was approximately
$4,851,700, including the $3,493,700 in underwriting discounts and $1,358,000 in
other expenses.

     None of the expenses paid by SkillSoft in connection with the initial
public offering or the exercise of the overallotment option were paid, directly
or indirectly, to directors, officers, persons owning 10% or more of SkillSoft's
equity securities, or affiliates of SkillSoft.

     The total net proceeds to SkillSoft from the initial public offering, after
deducting underwriting discounts and commissions and other expenses, were
approximately $45,058,300.

     No uses of the net proceeds were made in the fiscal year ended January 31,
2000. SkillSoft invested the net proceeds primarily in high quality securities
with maturities not exceeding ninety days.

ITEM 6. -- SELECTED FINANCIAL DATA

     Incorporated by reference from Exhibit 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 financial statements and notes appearing elsewhere in this Annual
Report on Form 10-K. This discussion and analysis contains forward-looking
statements that involve risks and uncertainties. SkillSoft's actual results may
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including but not limited to those set forth under
"Future Operating Results" below.

  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 $32,045,346 as of January
31, 2000. SkillSoft expects to incur additional losses through at least the
fiscal year ending January 31, 2001, 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 a
lawsuit filed against SkillSoft and certain of its executives by NETg.

     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 three-year license for 25 courses for
5,000 users would cost approximately $106,250 per year. SkillSoft's license
agreements 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.

                                       12
<PAGE>   14

     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
course 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.
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 flexible payment terms, or if the customer
licenses all courses currently available and to be developed during a particular
term. This license approach enables us to build a 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, 2000 was approximately
$13,200,000. 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. In
particular, if customer or competitive pressures cause SkillSoft to change its
business model from multi-year license agreements to one-year license
agreements, SkillSoft's backlog (although not necessarily its revenue) would
decrease. In addition, although SkillSoft expects to develop all licensed
courses, and although its license agreements generally may not be canceled by
its customers unless SkillSoft breaches the agreement, there can be no assurance
that all of SkillSoft's backlog will be ultimately recognized as revenue.
Accordingly, SkillSoft's backlog as of any particular date should not be relied
upon as an indication of actual revenue for any future period.

     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 and certain infrastructure and occupancy
expenses. In the future, cost of revenue is expected to include content
royalties, although SkillSoft intends to minimize the use of such arrangements.
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 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. No such
deferred compensation was recorded for the fiscal year ended January 31, 1999.
The difference is recorded as a reduction of stockholders' equity and is being
amortized over the vesting period of the applicable options and restricted
common stock, which is typically four years. Of the total deferred compensation
amount, $371,641 had been amortized as of January 31, 2000. The amortization of
deferred compensation is recorded as an

                                       13
<PAGE>   15

operating expense. SkillSoft currently expects to amortize the remaining
$2,479,910 of deferred compensation as of January 31, 2000 in the periods
indicated, as follows:

<TABLE>
<S>                                                           <C>
February 1, 2000-January 31, 2001...........................  $  773,900
February 1, 2001-January 31, 2002...........................  $  773,900
February 1, 2002-January 31, 2003...........................  $  650,019
February 1, 2003-January 31, 2004...........................  $  282,090
                                                              ----------
                                                              $2,479,910
                                                              ==========
</TABLE>

RESULTS OF OPERATIONS

  Year Ended January 31, 2000 versus Year Ended January 31, 1999

     Revenue for the year ended January 31, 2000 was $4,190,547 compared to $0
revenue for the 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 in the year
ended January 31, 2000.

     Cost of revenue was $757,849, or 18% of revenue, for the year ended January
31, 2000, compared to $0 for the year ended January 31, 1999.

     Research and development expenses were $8,647,053 for the year ended
January 31, 2000, compared to $4,117,187 for the year ended January 31, 1999.
This increase was primarily due to increased personnel, course development costs
and facility costs amounting to approximately $850,000, $3,400,000 and $250,000,
respectively. Since SkillSoft's strategy includes offering the largest library
of 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 were $8,960,651 for the year ended January
31, 2000, compared to $1,671,225 for the year ended January 31, 1999. This
increase was primarily due to increased personnel, commissions, marketing,
travel costs and facility costs amounting to $5,000,000, $678,000, $385,000,
$745,000 and $450,000, respectively. 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 were $4,371,463 for the year ended
January 31, 2000, compared to $2,820,646 for the year ended January 31, 1999.
This increase was primarily due to increased personnel and legal fees incurred
in connection with the NETg lawsuit amounting to $600,000 and $950,000,
respectively. 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 expense totaled $421,618 for the year ended January 31, 2000,
compared to interest income of $336,517 for the year ended January 31, 1999. The
decrease was due to lower cash balances and a non-recurring, non-cash charge of
$319,228 for issuance of warrants associated with establishing SkillSoft's new
line of credit in December 1999.

  Year Ended January 31, 1999 versus Period from Incorporation (October 15,
1997) to January 31, 1998

     SkillSoft commenced operations in January 1998 and had no revenue until
March 1999. SkillSoft did not incur significant operating expenses during the
year ended January 31, 1998.

     Research and development expenses were $4,117,187 for the year ended
January 31, 1999. SkillSoft had 18 research and development personnel and had
not yet completed development of any courses as of January 31, 1999.

                                       14
<PAGE>   16

     Selling and marketing expenses were $1,671,225 for the year ended January
31, 1999. SkillSoft had 36 selling and marketing personnel as of January 31,
1999.

     General and administrative expenses were $2,820,646 for the year ended
January 31, 1999. SkillSoft had 9 general and administrative personnel as of
January 31, 1999.

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.

     As of January 31, 2000, SkillSoft's principal source of liquidity was its
cash and cash equivalents and marketable securities balances, which totaled
approximately $735,000. In February 2000, SkillSoft received net proceeds
totalling $45,058,300 from the sale of 3,565,000 shares of common stock in its
initial public offering. As of the end of fiscal 1998 and 1999, SkillSoft's cash
and cash equivalents and marketable securities balances totaled approximately
$7.0 million and $4.0 million, respectively. The overall increase in cash and
cash equivalents and marketable securities balances during fiscal 1998 was due
to proceeds from the issuance of Series A convertible preferred stock. The
overall decrease in cash and cash equivalents and marketable securities during
fiscal 1999 and during fiscal 2000 was due to the funding of operations,
partially offset by proceeds from the issuance of Series B and Series C
convertible preferred stock and the Greyrock credit line.

     SkillSoft has a line of credit agreement with GreyRock Capital that permits
borrowings of up to $12.0 million. The line of credit is comprised of a $7.5
million term loan facility that matures on June 30, 2000 and a revolving credit
facility, with borrowings under the revolving facility limited to 80% of
eligible accounts receivable. In connection with an amendment to this agreement
in December 1999, SkillSoft paid GreyRock a $70,000 fee and issued GreyRock
warrants for 60,606 shares of common stock at an exercise price of $8.25 per
share. At January 31, 2000, there was $4,513,209 outstanding under this line of
credit. On February 9, 2000, this amount was repaid in full.

     SkillSoft's primary investing activities were purchases of property and
equipment, and purchases and maturation of marketable securities. Property and
equipment purchases were approximately $0, $555,000, and $316,000 in fiscal
1998, fiscal 1999 and fiscal 2000, respectively. Purchases and maturation of
marketable securities generated a net cash outflow of approximately $4.4 million
in fiscal 1998 compared to a net cash inflow of approximately $1.0 million and
$3.3 million in fiscal 1999 and fiscal 2000, respectively.

     Cash provided by financing activities was approximately $7.1 million, $5.1
million and $13.4 million in fiscal 1998, fiscal 1999 and fiscal 2000,
respectively. This consisted of proceeds from the issuance of Series A, B and C
convertible preferred stock, as well as sale of common stock and $4.5 million
from the Greyrock credit line in fiscal 2000.

     Working capital (deficit) was approximately $6.3 million, $2.7 million and
$(6.9) million as of January 31, 1998, 1999 and 2000, respectively. Total assets
were approximately $7.0 million, $4.6 million and $3.1 million as of January 31,
1998, 1999 and 2000, respectively. These decreases were attributable to the
funding of operations and product development.

     SkillSoft believes that its current cash, cash equivalents and short-term
investments and its credit facility with GreyRock Capital will be sufficient to
satisfy its funding needs for at least the next 18 months.

RECENT ACCOUNTING PRONOUNCEMENTS

     In December 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions. SOP 98-9
requires use of the residual method of recognition of revenues when
vendor-specific objective evidence exists for undelivered elements, but does not
exist for delivered elements of a software arrangement. SkillSoft will be
required to comply with the provisions of SOP 98-9 for applicable transactions

                                       15
<PAGE>   17

entered into beginning February 1, 2000. SkillSoft does not expect that the
adoption of SOP 98-9 will have a material effect on its financial position or
operating results.

     In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS
No. 137, 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 SkillSoft 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 SkillSoft'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 is
effective for periods beginning after March 15, 2000. SkillSoft does not expect
that the adoption of this guidance will 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. To the
extent that events covered by this Interpretation occur during the period after
December 15, 1998, but before the effective date of the Interpretation, the
effects of applying this Interpretation will be recognized on a prospective
basis from the effective date. Accordingly, upon initial application of the
Interpretation, (a) no adjustments will be made to financial statements for
periods before the effective date and (b) no expense will be recognized for any
additional compensation cost measured that is attributable to periods before the
effective date. SkillSoft does not expect the adoption of this Interpretation to
have a material impact on SkillSoft's financial condition or results of
operations.

FUTURE OPERATING RESULTS

BECAUSE SKILLSOFT BEGAN OPERATIONS ONLY RECENTLY AND HAS A LIMITED NUMBER OF
CUSTOMERS AND A LIMITED AMOUNT OF REVENUE, INVESTORS COULD HAVE DIFFICULTY
EVALUATING SKILLSOFT'S BUSINESS AND ITS FUTURE PROSPECTS

     An evaluation of the risks and uncertainties of SkillSoft's business will
be difficult because of SkillSoft's limited operating history. SkillSoft
commenced operations in January 1998 and commercially released its first product
in March 1999. Although SkillSoft does not believe that SkillSoft's business
will be dependent upon any one customer in the future, one customer accounted
for 22% of its limited revenue in the year ended January 31, 2000.

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 year ended
January 31, 2000 was $32,045,346. 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.

                                       16
<PAGE>   18

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;

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

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

The claims seek injunctive relief against the defendants demanding 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 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.

     The lawsuit is still in discovery, and SkillSoft can not yet assess the
potential liability of SkillSoft or the other defendants. 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 issued against SkillSoft and SkillSoft's officers,
       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 lawsuit.

     In addition, this litigation, regardless of its outcome, will continue to
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'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 does not
have sufficient historical financial data upon which to forecast quarterly
revenue and operating results. If SkillSoft's quarterly revenue or operating
results fall 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:

     - the fact that SkillSoft depends upon a relatively small number of
       customers for its revenue, so that a delay in any particular customer
       order beyond a fiscal quarter would have a significant impact on
       SkillSoft's revenue for that quarter;
                                       17
<PAGE>   19

     - 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 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's most important content provider,

                                       18
<PAGE>   20

Institute for Performance Excellence, Inc., is responsible for the development
of more than half of SkillSoft's courses. 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 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 ofone 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

                                       19
<PAGE>   21

     - 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.

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
January 1, 1999 to January 31, 2000, the number of SkillSoft's employees
increased from 45 to 146. 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

                                       20
<PAGE>   22

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.

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 are:

     - 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.

                                       21
<PAGE>   23

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 COPYRIGHTS OR PATENTS, WHICH COULD
ADVERSELY AFFECT SKILLSOFT'S FINANCIAL CONDITION

     If any of our 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 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
47.5% of SkillSoft's outstanding common stock and, together with SkillSoft's
executive officers and directors, will beneficially own approximately 68.7% 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, 2000, SkillSoft did not use derivative financial
instruments for speculative or trading purposes.

INTEREST RATE RISK

     SkillSoft invests its excess cash in high quality securities with
maturities not exceeding ninety days and therefore would not expect its
operating results or cash flows to be affected to any significant degree by the
effect of a sudden change in market interest rates.

                                       22
<PAGE>   24

FOREIGN CURRENCY EXCHANGE RISK

     To date, SkillSoft has not generated significant revenues originating
outside the United States, and therefore, foreign currency fluctuations have not
had a material effect on SkillSoft's operating results.

ITEM 8. -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Incorporated by reference from Exhibit B attached hereto.

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

     None.

                                    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 9, 2000, 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, 2000 (the "2000 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 -- Compensation of Directors," and "Executive Compensation" from the
2000 Proxy Statement is hereby incorporated by reference.

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

     The information under the sections entitled "Security Ownership by
Management and Principal Stockholders" from the 2000 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 2000 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 financial statements as set forth under Item 8
        of this report on Form 10-K are incorporated herein by reference.

     2. Financial Statement Schedule.

        All financial statement schedules have been omitted since they are
        either not required, not applicable, or the information is otherwise
        included.

     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.

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

                                       23
<PAGE>   25

                                   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 28, 2000

     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 28, 2000
---------------------------------------------------    and Chairman of the Board of
     Charles E. Moran                                  Directors (Principal Executive
                                                       Officer)

/s/ THOMAS J. MCDONALD                               Chief Financial Officer (Principal   April 28, 2000
---------------------------------------------------    Financial and Accounting Officer)
     Thomas J. McDonald

/s/ STEWART K.P. GROSS                               Director                             April 28, 2000
---------------------------------------------------
     Stewart K.P. Gross

/s/ C. SAMANTHA CHEN                                 Director                             April 28, 2000
---------------------------------------------------
     C. Samantha Chen

                                                     Director                             April   , 2000
---------------------------------------------------
     James Adkisson

/s/ WILLIAM T. COLEMAN III                           Director                             April 28, 2000
---------------------------------------------------
     William T. Coleman III
</TABLE>

                                       24
<PAGE>   26

                                                                       EXHIBIT A

                            SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                       PERIOD FROM
                                                      INCORPORATION
                                                    (OCTOBER 15, 1997)    YEAR ENDED     YEAR ENDED
                                                      TO JANUARY 31,      JANUARY 31,    JANUARY 31,
                                                           1998              1999           2000
                                                    ------------------    -----------    -----------
                                                    (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                                                 <C>                   <C>            <C>
STATEMENTS OF OPERATIONS DATA:
Revenue...........................................       $     --         $       --     $    4,191
Cost of revenue...................................             --                 --            758
                                                         --------         ----------     ----------
  Gross profit....................................             --                 --          3,433
Operating expenses:
  Research and development........................            178              4,117          8,647
  Selling and marketing...........................             --              1,671          8,961
  General and administrative......................            649              2,821          4,371
  Amortization of deferred compensation...........             --                 --            372
                                                         --------         ----------     ----------
     Total operating expenses.....................            827              8,609         22,351
                                                         --------         ----------     ----------
Interest income, net..............................              3                336           (265)
                                                         --------         ----------     ----------
     Net loss.....................................       $   (824)        $   (8,273)    $  (19,183)
                                                         ========         ==========     ==========
Net loss per share(1):
  Basic and diluted...............................       $  (1.28)        $    (5.64)    $   (11.98)
                                                         --------         ----------     ----------
  Basic and diluted weighted average common shares
     outstanding..................................        645,185          1,466,085      1,915,051
                                                         --------         ----------     ----------
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
                                                    JANUARY 31,   JANUARY 31,     AS OF JANUARY 31, 2000
                                                       1998          1999         ACTUAL      PRO FORMA(2)
                                                    -----------   -----------   -----------   ------------
                                                                        (IN THOUSANDS)
<S>                                                 <C>           <C>           <C>           <C>
BALANCE SHEETS DATA:
Cash, cash equivalents and short-term
  investments.....................................    $7,022        $3,965        $   735       $ 41,280
Working capital...................................     6,319         2,726         (6,915)        36,323
Total assets......................................     7,022         4,551          3,112         43,657
Long-term liabilities.............................        --            --             --             --
Stockholders' equity (deficit)....................     6,319         3,195         (6,357)        38,701
</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.

(2) See Note (c) of Notes to Consolidated Financial Statements of SkillSoft for
    a description of the transactions reflected in the January 31, 2000 pro
    forma balance sheet data.

                                       25
<PAGE>   27

                                                                       EXHIBIT B

                                     INDEX

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Public Accountants....................  27
Consolidated Balance Sheets as of January 31, 1999 and 2000,
  and Pro Forma January 31, 2000 (unaudited)................  28
Consolidated Statements of Operations for the Period from
  Incorporation (October 15, 1997) to January 31, 1998 and
  for the Years Ended January 31, 1999 and 2000.............  29
Consolidated Statements of Stockholders' Equity (Deficit)
  and Comprehensive Loss for the Period from Incorporation
  (October 15, 1997) to January 31, 1998 and for the Years
  Ended January 31, 1999 and 2000, and Pro Forma January 31,
  2000 (unaudited)..........................................  30
Consolidated Statements of Cash Flows for the Period from
  Incorporation (October 15, 1997) to January 31, 1998 and
  for the Years Ended January 31, 1999 and 2000.............  32
Notes to Consolidated Financial Statements..................  33
</TABLE>

                                       26
<PAGE>   28

                    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, 1999 and 2000 and the
related consolidated statements of operations, stockholders' equity (deficit)
and comprehensive loss and cash flows for the period from incorporation (October
15, 1997) to January 31, 1998 and for the years ended January 31, 1999 and 2000.
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, 1999 and 2000 and the results of its operations and its cash flows
for the period from incorporation (October 15, 1997) to January 31, 1998 and for
the years ended January 31, 1999 and 2000 in conformity with accounting
principles generally accepted in the United States.

/s/ Arthur Andersen LLP

Boston, Massachusetts
February 23, 2000

                                       27
<PAGE>   29

                             SKILLSOFT CORPORATION

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                              JANUARY 31,
                                                              -------------------------------------------
                                                                                                 2000
                                                                                              PRO FORMA
                                                                 1999            2000        (NOTE 2(C))
                                                              -----------    ------------    ------------
                                                                                             (UNAUDITED)
<S>                                                           <C>            <C>             <C>
ASSETS
Current Assets:
  Cash and cash equivalents.................................  $   623,322    $    734,595    $ 41,279,686
  Short-term investments....................................    3,341,702              --              --
  Accounts receivable, less reserves of $25,000 at January
    31, 2000................................................           --         422,713         422,713
  Prepaid expenses and other current assets.................      116,144       1,397,028       1,397,028
                                                              -----------    ------------    ------------
    Total current assets....................................    4,081,168       2,554,336      43,099,427
Property and Equipment, at cost:
  Computer equipment........................................      357,719         535,909         535,909
  Furniture and fixtures....................................      173,456         276,727         276,727
  Leasehold improvements....................................       23,944          58,063          58,063
                                                              -----------    ------------    ------------
                                                                  555,119         870,699         870,699
  Less -- Accumulated depreciation and amortization.........       85,726         312,647         312,647
                                                              -----------    ------------    ------------
                                                                  469,393         558,052         558,052
                                                              -----------    ------------    ------------
                                                              $ 4,550,561    $  3,112,388    $ 43,657,479
                                                              ===========    ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
  Line of credit............................................  $        --    $  4,513,209    $         --
  Accounts payable..........................................      210,741         702,557         702,557
  Accrued expenses..........................................    1,144,703       2,834,030       2,834,030
  Deferred revenue..........................................           --       1,419,990       1,419,990
                                                              -----------    ------------    ------------
    Total current liabilities...............................    1,355,444       9,469,786       4,956,577
Commitments and Contingencies (Note 5)
Stockholders' Equity (Deficit):
  Series A convertible preferred stock, $.001 par value --
    Authorized, issued and outstanding -- 4,000,000 shares
      at January 31, 1999 and 2000, no shares pro forma
      (liquidation preference of $8,143,333 at January 31,
      2000).................................................    6,957,774       6,957,774              --
  Series B convertible preferred stock, $.001 par value --
    Authorized -- 4,761,905 shares
    Issued and outstanding -- 2,380,953 and 4,761,905 shares
      at January 31, 1999 and 2000, respectively, no shares
      pro forma (liquidation preference of $10,966,666 at
      January 31, 2000).....................................    4,993,767       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, no shares pro forma (liquidation preference
      of $3,915,600 at January 31, 2000)....................           --       3,758,821              --
  Class A common stock, $.001 par value --
    Authorized -- 26,000,000 shares
    Issued and outstanding -- 2,464,000 and 2,848,072 shares
      at January 31, 1999 and 2000, respectively, no shares
      pro forma.............................................        2,464           2,848              --
  Common stock, $.001 par value --
    Authorized -- 50,000,000 shares
    Issued and outstanding -- No shares at January 31, 1999
      and 2000, 13,051,167 shares pro forma (see Note
      2(c)).................................................           --              --          13,051
  Additional paid-in capital................................      644,336       7,460,320      73,218,673
  Warrants outstanding......................................           --         319,228         319,228
  Deferred compensation.....................................           --      (2,479,910)     (2,479,910)
  Notes receivable from stockholders........................     (306,250)       (339,063)       (339,063)
  Accumulated deficit.......................................   (9,096,974)    (32,045,346)    (32,045,346)
  Cumulative translation adjustment.........................           --          14,269          14,269
                                                              -----------    ------------    ------------
    Total stockholders' equity (deficit)....................    3,195,117      (6,357,398)    (38,700,902)
                                                              -----------    ------------    ------------
                                                              $ 4,550,561    $  3,112,388    $ 43,657,479
                                                              ===========    ============    ============
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       28
<PAGE>   30

                             SKILLSOFT CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATION

<TABLE>
<CAPTION>
                                                    PERIOD FROM
                                                   INCORPORATION
                                                 (OCTOBER 15, 1997)      YEARS ENDED JANUARY 31,
                                                   TO JANUARY 31,      ---------------------------
                                                        1998              1999            2000
                                                 ------------------    -----------    ------------
<S>                                              <C>                   <C>            <C>
Revenue........................................      $      --         $        --    $  4,190,547
Cost of Revenue(1).............................             --                  --         757,849
                                                     ---------         -----------    ------------
     Gross profit..............................             --                  --       3,432,698
Operating Expenses:
  Research and development(1)..................        177,836           4,117,187       8,647,053
  Selling and marketing(1).....................             --           1,671,225       8,960,651
  General and administrative(1)................        649,404           2,820,646       4,371,463
  Amortization of deferred compensation........             --                  --         371,641
                                                     ---------         -----------    ------------
     Total operating expenses..................        827,240           8,609,058      22,350,808
Interest Income................................          2,807             336,517         156,356
Interest Expense...............................             --                  --        (421,618)
                                                     ---------         -----------    ------------
     Net loss..................................       (824,433)         (8,272,541)    (19,183,372)
Preferred Stock Dividend.......................             --                  --       3,765,000
                                                     ---------         -----------    ------------
     Net loss attributable to Common
       Shareholders............................      $(824,433)        $(8,272,541)   $(22,948,372)
                                                     =========         ===========    ============
Net Loss Per Share (Note 2(e)):
  Basic and diluted............................      $   (1.28)        $     (5.64)   $     (11.98)
                                                     =========         ===========    ============
  Basic and diluted weighted average common
     shares outstanding........................        645,185           1,466,085       1,915,051
                                                     =========         ===========    ============
Pro Forma Net Loss Per Share (unaudited ) (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) Excludes amortization of deferred compensation (see Note 6(d))

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       29
<PAGE>   31

                             SKILLSOFT CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
                                                    CONVERTIBLE PREFERRED STOCK
                           ------------------------------------------------------------------------------           CLASS A
                                   SERIES A                   SERIES B                   SERIES C                COMMON STOCK
                           ------------------------   ------------------------   ------------------------   -----------------------
                             NUMBER      CARRYING       NUMBER      CARRYING       NUMBER      CARRYING       NUMBER      $.001 PAR
                           OF SHARES       VALUE      OF SHARES       VALUE      OF SHARES       VALUE       OF SHARES      VALUE
                           ----------   -----------   ----------   -----------   ----------   -----------   -----------   ---------
<S>                        <C>          <C>           <C>          <C>           <C>          <C>           <C>           <C>
INCORPORATION (OCTOBER
 15, 1997)...............          --   $        --           --   $        --           --   $        --            --    $    --
 Initial
   capitalization........          --            --           --            --           --            --     1,340,000      1,340
 Issuance of Series A
   convertible preferred
   stock, net of issuance
   costs of $42,226......   4,000,000     6,957,774           --            --           --            --            --         --
 Net loss................          --            --           --            --           --            --            --         --
                           ----------   -----------   ----------   -----------   ----------   -----------   -----------    -------
 Comprehensive net loss
   for the period from
   Incorporation to
   January 31, 1998......
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....................   4,000,000     6,957,774    2,380,953     4,993,767           --            --     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
   issuances 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............          --            --           --            --           --            --            --         --

<CAPTION>

                                COMMON STOCK                                                      NOTES
                           ----------------------   ADDITIONAL                                  RECEIVABLE
                             NUMBER     $.001 PAR     PAID-IN      WARRANTS       DEFERRED         FROM       ACCUMULATED
                           OF SHARES      VALUE       CAPITAL     OUTSTANDING   COMPENSATION   STOCKHOLDERS     DEFICIT
                           ----------   ---------   -----------   -----------   ------------   ------------   ------------
<S>                        <C>          <C>         <C>           <C>           <C>            <C>            <C>
INCORPORATION (OCTOBER
 15, 1997)...............          --    $    --    $        --    $     --     $        --     $      --     $         --
 Initial
   capitalization........          --         --        350,410          --              --      (166,250)              --
 Issuance of Series A
   convertible preferred
   stock, net of issuance
   costs of $42,226......          --         --             --          --              --            --               --
 Net loss................          --         --             --          --              --            --         (824,433)
                           ----------    -------    -----------    --------     -----------     ---------     ------------
 Comprehensive net loss
   for the period from
   Incorporation to
   January 31, 1998......
BALANCE, JANUARY 31,
 1998....................          --         --        350,410          --              --      (166,250)        (824,433)
 Issuance of Class A
   restricted common
   stock.................          --         --        293,926          --              --      (140,000)              --
 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          --              --      (306,250)      (9,096,974)
 Issuance of Class A
   restricted common
   stock.................          --         --        187,910          --              --       (32,813)              --
 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
   issuances of Class A
   restricted common
   stock.................          --         --      2,851,551          --      (2,851,551)           --               --
 Amortization of deferred
   compensation..........          --         --             --          --         371,641            --               --
 Exercise of stock
   options...............          --         --         11,523          --              --            --               --
 Warrants granted in
   connection with line
   of credit.............          --         --             --     319,228              --            --               --
 Translation
   adjustment............          --         --             --          --              --            --               --

<CAPTION>

                                             TOTAL
                           CUMULATIVE    STOCKHOLDERS
                           TRANSLATION      EQUITY       COMPREHENSIVE
                           ADJUSTMENT      (DEFICIT)         LOSS
                           -----------   -------------   -------------
<S>                        <C>           <C>             <C>
INCORPORATION (OCTOBER
 15, 1997)...............    $    --     $         --
 Initial
   capitalization........         --          185,500
 Issuance of Series A
   convertible preferred
   stock, net of issuance
   costs of $42,226......         --        6,957,774
 Net loss................         --         (824,433)   $   (824,433)
                             -------     ------------    ------------
 Comprehensive net loss
   for the period from
   Incorporation to
   January 31, 1998......                                $   (824,433)
BALANCE, JANUARY 31,
 1998....................         --        6,318,841
 Issuance of Class A
   restricted common
   stock.................         --          155,050
 Issuance of Series B
   convertible preferred
   stock, net of issuance
   costs of $6,234.......         --        4,993,767
 Net loss................         --       (8,272,541)   $ (8,272,541)
                             -------     ------------    ------------
 Comprehensive net loss
   for the year ended
   January 31, 1999......                                $ (8,272,541)
BALANCE, JANUARY 31,
 1999....................         --        3,195,117
 Issuance of Class A
   restricted common
   stock.................         --          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
   issuances of Class A
   restricted common
   stock.................         --               --
 Amortization of deferred
   compensation..........         --          371,641
 Exercise of stock
   options...............         --           11,567
 Warrants granted in
   connection with line
   of credit.............         --          319,228
 Translation
   adjustment............     14,269           14,269    $     14,269
</TABLE>

                                       30
<PAGE>   32
<TABLE>
<CAPTION>
                                                    CONVERTIBLE PREFERRED STOCK
                           ------------------------------------------------------------------------------           CLASS A
                                   SERIES A                   SERIES B                   SERIES C                COMMON STOCK
                           ------------------------   ------------------------   ------------------------   -----------------------
                             NUMBER      CARRYING       NUMBER      CARRYING       NUMBER      CARRYING       NUMBER      $.001 PAR
                           OF SHARES       VALUE      OF SHARES       VALUE      OF SHARES       VALUE       OF SHARES      VALUE
                           ----------   -----------   ----------   -----------   ----------   -----------   -----------   ---------
<S>                        <C>          <C>           <C>          <C>           <C>          <C>           <C>           <C>
 Net loss................          --            --           --            --           --            --            --         --
                           ----------   -----------   ----------   -----------   ----------   -----------   -----------    -------
 Comprehensive net loss
   for the year ended
   January 31, 2000......
BALANCE, JANUARY 31,
 2000....................   4,000,000     6,957,774    4,761,905     9,993,661    1,195,238     3,758,821     2,848,072      2,848
 Issuance of Common
   Stock, net of issuance
   costs of $4,851,700
   (unaudited)...........          --            --           --            --           --            --            --         --
 Conversion of Class A
   common stock into
   common stock
   (unaudited)...........          --            --           --            --           --            --    (2,848,072)    (2,848)
 Conversion of
   convertible preferred
   stock into common
   stock (unaudited).....  (4,000,000)   (6,957,774)  (4,761,905)   (9,993,661)  (1,195,238)   (3,758,821)           --         --
                           ----------   -----------   ----------   -----------   ----------   -----------   -----------    -------
PRO FORMA BALANCE,
 JANUARY 31, 2000
 (UNAUDITED).............          --   $        --           --   $        --           --   $        --            --    $    --
                           ==========   ===========   ==========   ===========   ==========   ===========   ===========    =======

<CAPTION>

                                COMMON STOCK                                                      NOTES
                           ----------------------   ADDITIONAL                                  RECEIVABLE
                             NUMBER     $.001 PAR     PAID-IN      WARRANTS       DEFERRED         FROM       ACCUMULATED
                           OF SHARES      VALUE       CAPITAL     OUTSTANDING   COMPENSATION   STOCKHOLDERS     DEFICIT
                           ----------   ---------   -----------   -----------   ------------   ------------   ------------
<S>                        <C>          <C>         <C>           <C>           <C>            <C>            <C>
 Net loss................          --         --             --          --              --            --      (19,183,372)
                           ----------    -------    -----------    --------     -----------     ---------     ------------
 Comprehensive net loss
   for the year ended
   January 31, 2000......
BALANCE, JANUARY 31,
 2000....................          --         --      7,460,320     319,228      (2,479,910)     (339,063)     (32,045,346)
 Issuance of Common
   Stock, net of issuance
   costs of $4,851,700
   (unaudited)...........   3,565,000      3,565     45,054,735          --              --            --               --
 Conversion of Class A
   common stock into
   common stock
   (unaudited)...........   2,848,072      2,848             --          --              --            --               --
 Conversion of
   convertible preferred
   stock into common
   stock (unaudited).....   6,638,095      6,638     20,703,618          --              --            --               --
                           ----------    -------    -----------    --------     -----------     ---------     ------------
PRO FORMA BALANCE,
 JANUARY 31, 2000
 (UNAUDITED).............  13,051,167    $13,051    $73,218,673    $319,228     $(2,479,910)    $(339,063)    $(32,045,346)
                           ==========    =======    ===========    ========     ===========     =========     ============

<CAPTION>

                                             TOTAL
                           CUMULATIVE    STOCKHOLDERS
                           TRANSLATION      EQUITY       COMPREHENSIVE
                           ADJUSTMENT      (DEFICIT)         LOSS
                           -----------   -------------   -------------
<S>                        <C>           <C>             <C>
 Net loss................         --      (19,183,372)    (19,183,372)
                             -------     ------------    ------------
 Comprehensive net loss
   for the year ended
   January 31, 2000......                                $(19,169,103)
BALANCE, JANUARY 31,
 2000....................     14,269       (6,357,398)
 Issuance of Common
   Stock, net of issuance
   costs of $4,851,700
   (unaudited)...........         --       45,058,300
 Conversion of Class A
   common stock into
   common stock
   (unaudited)...........         --               --
 Conversion of
   convertible preferred
   stock into common
   stock (unaudited).....         --               --
                             -------     ------------
PRO FORMA BALANCE,
 JANUARY 31, 2000
 (UNAUDITED).............    $14,269     $ 38,700,902
                             =======     ============
</TABLE>

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

                                       31
<PAGE>   33

                             SKILLSOFT CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                      PERIOD FROM
                                                     INCORPORATION
                                                     (OCTOBER 15,
                                                       1997) TO         YEARS ENDED JANUARY 31,
                                                      JANUARY 31,     ---------------------------
                                                         1998            1999            2000
                                                     -------------    -----------    ------------
<S>                                                  <C>              <C>            <C>
Cash Flows from Operating Activities:
  Net loss.........................................   $  (824,433)    $(8,272,541)   $(19,183,372)
  Adjustments to reconcile net loss to net cash
     used in operating activities --
     Amortization of deferred compensation.........            --              --         371,641
     Interest expense related to warrants..........            --              --         319,228
     Accrued interest expense......................            --              --          13,209
     Depreciation and amortization.................            --          85,726         227,025
     Provision for bad debts.......................            --              --          25,000
     Changes in current assets and liabilities --
       Accounts receivable.........................            --              --        (447,715)
       Prepaid expenses and other current assets...            --        (116,144)     (1,281,836)
       Accounts payable............................        78,537         132,204         492,500
       Accrued expenses............................       624,592         520,111       1,690,683
       Deferred revenue............................            --              --       1,420,537
                                                      -----------     -----------    ------------
          Net cash used in operating activities....      (121,304)     (7,650,644)    (16,353,100)
                                                      -----------     -----------    ------------
Cash Flows from Investing Activities:
  Purchases of property and equipment..............            --        (555,119)       (316,204)
  Purchases of short-term investments..............    (4,371,333)     (3,341,702)     (9,868,310)
  Maturity of short-term investments...............            --       4,371,333      13,210,012
                                                      -----------     -----------    ------------
          Net cash (used in) provided by investing
            activities.............................    (4,371,333)        474,512       3,025,498
Cash Flows from Financing Activities:
  Issuance of Series A convertible preferred stock,
     net of issuance costs.........................     6,957,774              --              --
  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 common stock.................       185,500              --              --
  Issuance of Class A restricted common stock......            --         155,050         155,437
  Exercise of stock options........................            --              --          11,567
  Proceeds from Line of Credit.....................            --              --       4,500,000
                                                      -----------     -----------    ------------
          Net cash provided by financing
            activities.............................     7,143,274       5,148,817      13,425,719
                                                      -----------     -----------    ------------
Effect of Exchange Rate Changes on Cash............            --              --          13,156
                                                      -----------     -----------    ------------
Net Increase (Decrease) in Cash and Cash
  Equivalents......................................     2,650,637      (2,027,315)        111,273
Cash and Cash Equivalents, beginning of period.....            --       2,650,637         623,322
                                                      -----------     -----------    ------------
Cash and Cash Equivalents, end of period...........   $ 2,650,637     $   623,322    $    734,595
                                                      ===========     ===========    ============
Supplemental Disclosure of Noncash Financing
  Transactions:
  Issuance of Class A restricted common stock for
     notes receivable from stockholders............   $   166,250     $   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.
                                       32
<PAGE>   34

                             SKILLSOFT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JANUARY 31, 2000

(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 subsidiary. 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) Unaudited Pro Forma Presentation

     Since the close of the Company's initial public offering on February 4,
2000, the Company has had a single class of common stock. All shares of Class A
common stock issued and outstanding were converted into a new single class of
common stock in connection with the offering.

     The unaudited pro forma balance sheet as of January 31, 2000 and the pro
forma net loss per share for the year ended January 31, 2000 reflect the
automatic conversion of all outstanding shares of Series A, Series B and Series
C convertible preferred stock into 6,638,095 shares of common stock, which
occurred upon the closing of the Company's initial public offering. In addition,
the unaudited Pro Forma Balance Sheet reflects (i) the sale of 3,565,000 shares
of common stock and the receipt of $45,058,300 of net proceeds in connection
with the Company's initial public offering and the exercise of the underwriters'
over-allotment option, and (ii) the subsequent payoff of the line of credit with
$4,513,209 of the net proceeds.

  (d) 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. 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

                                       33
<PAGE>   35
                             SKILLSOFT CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

available and delivered, the license revenue for the first year of the contract
is recognized upon execution of the contract. 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 flexible payment terms, or if the customer licenses all courses
currently available and to be developed during a particular term.

     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 year ended January 31, 2000, the
Company recognized approximately $115,000 of service revenue. 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 cost of
satisfying any Post Contract Support (PCS) is accrued and included in deferred
revenue at the time revenue is recognized, as PCS fees are included in the
annual license fee. 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
represents the undelivered portion of first year license fees and PCS for which
the Company has received payment.

  (e) Net Loss Per Share

     Basic and diluted net loss per common share was determined by dividing net
loss by the weighted average common shares outstanding during the period. Basic
and diluted net loss per share are the same, as outstanding unvested shares of
restricted common stock, common stock options and convertible preferred stock
are antidilutive because the Company has recorded a net loss for all periods
presented. Unvested shares of restricted common stock and common stock options
totaling 0, 661,302, and 1,421,212 weighted average common shares have been
excluded from the computation of diluted weighted average shares outstanding for
the period from incorporation (October 15, 1997) to January 31, 1998 and for the
years ended January 31, 1999 and 2000, respectively. Warrants to purchase 60,606
shares of common stock outstanding at January 31, 2000, have also been excluded
from the computation of diluted weighted average shares outstanding for the year
ended January 31, 2000. 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 subsidiary 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.

                                       34
<PAGE>   36
                             SKILLSOFT CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (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. At
January 31, 1999 and 2000, cash equivalents consisted mainly of money market
funds. 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. At January 31, 1999, the Company's
investments consisted of held-to-maturity securities that are investments in
high grade commercial paper instruments, short-term notes and U.S. Treasury
bills. All of these investments are classified as current assets in the
accompanying consolidated balance sheets as they mature within one year.

  (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. As a result, the Company has not
     capitalized software development costs as of January 31, 1999 and 2000.

     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.

                                       35
<PAGE>   37
                             SKILLSOFT CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (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 concentration
of credit risk such as foreign exchange contracts, option contracts or other
foreign hedging arrangements. The Company's accounts receivable credit risk is
concentrated domestically, because for year ended January 31, 2000, all revenue
was derived from domestic customers. For the year ended and at January 31, 2000,
the Company had a customer that individually comprised 22% and 40% of the
Company's total revenue and accounts receivable, respectively.

  (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 fair value of 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 December 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions. SOP 98-9
requires use of the residual method of recognition of revenues when
vendor-specific objective evidence exists for undelivered elements, but does not
exist for delivered elements of a software arrangement. The Company will be
required to comply with the provisions of SOP 98-9 for applicable transactions
entered into beginning February 1, 2000. The Company does not expect that the
adoption of SOP 98-9 will have a material effect on its financial position or
operating results.

     In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS
No. 137, 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.

                                       36
<PAGE>   38
                             SKILLSOFT CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition. This bulletin established guidelines for revenue recognition and is
effective for periods beginning after March 15, 2000. The Company does not
expect that the adoption of this guidance will 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. To the
extent that events covered by this Interpretation occur during the period after
December 15, 1998, but before the effective date of the Interpretation, the
effects of applying this Interpretation will be recognized on a prospective
basis from the effective date. Accordingly, upon initial application of the
Interpretation, (a) no adjustments will be made to financial statements for
periods before the effective date and (b) no expense will be recognized for any
additional compensation cost measured that is attributable to periods before the
effective date. The Company does not expect the adoption of this Interpretation
to 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 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, 1999 and 2000, and is included as a reduction of
stockholders' equity in the accompanying consolidated balance sheets and
consolidated statements of stockholders' equity (deficit).

     During the fiscal year ended January 31, 1999, the Company issued a total
of 533,333 shares of Class A restricted common stock to three founders of the
Company in exchange for notes receivable equal to the fair market value of the
shares. The shares vest ratably on a monthly basis over three years (see Note
6(c)). The notes receivable accrue interest at a rate of 5.77% per annum and the
principal and all outstanding interest are due upon the maturity of the notes in
June 2003. The total balance of these notes receivable is $140,000 at January
31, 1999 and 2000 and is included as a reduction of stockholders' equity in the
accompanying consolidated balance sheets and consolidated statements of
stockholders' equity (deficit).

     During March 1999, the Company issued a total of 125,000 shares of Class A
restricted common stock to several officers and employees of the Company in
exchange for notes receivable equal to the fair market value of the shares. The
shares vest ratably on a monthly basis over three years (see Note 6(c)). The
notes receivable accrue interest at a rate of 4.83% per annum and the principal
and all outstanding interest are due upon the maturity of the notes in March
2004. The total balance of these notes receivable is $32,813 at January 31,
2000, and is included as a reduction of stockholders' equity in the accompanying
consolidated balance sheets and consolidated statements of stockholders' equity
(deficit).

     See Note 6(c) 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.

                                       37
<PAGE>   39
                             SKILLSOFT CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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, 1999 and 2000, the Company had net operating loss carryforwards of
approximately $3,741,000 and $24,439,000, respectively, available to reduce
future income taxes, if any. The Company also has available federal tax credit
carryforwards of approximately $120,000 and $230,000 at January 31, 1999 and
2000, 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 that 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,
                                                   ---------------------------
                                                      1999            2000
                                                   -----------    ------------
<S>                                                <C>            <C>
Net operating loss carryforwards.................  $ 1,272,000    $  9,433,000
Nondeductible expenses and reserves..............    2,072,000       1,447,000
Tax credits......................................      120,000         230,000
                                                   -----------    ------------
                                                     3,464,000      11,110,000
Less -- Valuation allowance......................   (3,464,000)    (11,110,000)
                                                   -----------    ------------
                                                   $        --    $         --
                                                   ===========    ============
</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, 1999 and 2000.

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

<TABLE>
<CAPTION>
                                                                    JANUARY 31,
                                                              -----------------------
                                                              1998     1999     2000
                                                              -----    -----    -----
<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

     In June 1999, the Company entered into a working capital credit facility
agreement with a financial institution, which expires on June 30, 2000 and is
automatically renewable for additional one-year terms. This agreement was
amended in December 1999. Under the working capital line of credit, the Company
may borrow up to the lesser of $12,000,000 or the sum of 80% of eligible
accounts receivable, as defined, and $1,000,000. Borrowings bear interest at the
LIBOR (6.75% at January 31, 2000) plus 4.875%. The working capital line of
credit is collateralized by substantially all assets of the Company. The
agreement contains certain covenants, with which, as of January 31, 2000, the
Company was in compliance. As of January 31, 2000, there was $4,513,209
outstanding under the working capital line of credit and approximately
$5,140,000

                                       38
<PAGE>   40
                             SKILLSOFT CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

was available for borrowing. In February 2000, upon the closing of the Company's
initial public offering, the working capital line of credit was paid-off in
full.

     In conjunction with the December 1999 amendment, 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 has 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 January 2002.
Included in the accompanying statements of operations is rent expense for the
leased facility and equipment of approximately $0, $55,000 and $134,000 for the
period from incorporation (October 15, 1997) to January 31, 1998 and for the
years ended January 31, 1999 and 2000, respectively.

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

<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S>                                                 <C>
2001..............................................  $516,000
2002..............................................   142,000
                                                    --------
                                                    $658,000
                                                    ========
</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, the three
executive officers and the key employee. 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; and that the
Company misappropriated alleged trade secrets and 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, additional compensatory, incidental and consequential damages in
an unspecified amount and punitive damages in excess of $70,000,000. 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 this litigation. Regardless of the outcome, this
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
this lawsuit, the Company has recorded as expense legal fees of $416,717 and
$1,919,831 for the fiscal years ended January 31, 1999 and 2000, respectively,
which is included in general and administrative expenses in the accompanying
consolidated statements of operations.

                                       39
<PAGE>   41
                             SKILLSOFT CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) STOCKHOLDERS' EQUITY

  (a) Convertible Preferred Stock

     Prior to its initial public offering, the Company had 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 have
been 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.

     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.

     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.

                                       40
<PAGE>   42
                             SKILLSOFT CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

          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 and 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 shares
     of common stock.

  (b) Recapitalization

     In December 1999, the Company effected a two-for-three reverse stock split
of common stock outstanding. Accordingly, the accompanying financial statements
and footnotes have been restated to reflect the stock split. 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.

  (c) Common Stock

     The Company has authorized the issuance of up to 50,000,000 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, prior to the Company's initial
public offering. The voting, dividend and liquidation rights of the holders of
the common stock are 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 6(c). An additional 2,666,667, 3,174,603 and
2,116,402 shares of common stock were reserved for issuance upon the conversion
of the Series A, B and C Preferred Stock, respectively.

     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
shareholder rights and preferences.

     The Company issued 1,340,000 shares of Class A common stock, that 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 were issued
to a founder of the Company in exchange for a full recourse note receivable (see
Note 3).

     During the fiscal year ended January 31, 1999, the Company issued an
additional 1,124,000 shares of Class A restricted common stock pursuant to the
1998 Stock Incentive Plan. Of these shares, 533,333 were issued to three
founders 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 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.

     During the year ended January 31, 2000, the Company issued an additional
340,000 shares of Class A restricted common stock pursuant to the 1998 Stock
Incentive Plan. Of these shares, 125,000 were issued to several officers and
employees of the Company in exchange for full recourse notes receivable (see
Note 3). These shares all vest over a three-year period; unvested shares are
subject to the right of repurchase by the Company at the original sales price of
the shares.

     As of January 31, 2000, a total of 671,870 shares of Class A restricted
common stock are subject to the right of repurchase by the Company.

                                       41
<PAGE>   43
                             SKILLSOFT CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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.

  (d) 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 and 2000 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
                                                   =======    =============     =====
Exercisable, January 31, 2000....................   47,350    $        0.26     $0.26
                                                   =======    =============     =====
Exercisable, January 31, 1999....................       --    $          --     $  --
                                                   =======    =============     =====
</TABLE>

     The following table summarizes certain information relating to the
outstanding and exercisable options as of January 31, 2000:

<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    399,181       8.84        $ 0.26    47,350    $0.26
          1.50    227,000       9.43          1.50        --       --
 10.50 - 13.00    206,694       9.89         11.67        --       --
                  -------       ----        ------    ------    -----
                  832,875       9.27        $ 3.43    47,350    $0.26
                  =======       ====        ======    ======    =====
</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 in the year ended January 31, 2000 related to these
restricted shares and options. If the Company allocated this expense to each
operating category, cost of

                                       42
<PAGE>   44
                             SKILLSOFT CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

revenue, research and development, selling and marketing and general and
administrative expenses would have increased by $2,422, $61,011, $167,237 and
$140,971, respectively, during the year ended January 31, 2000.

  (e) 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 and 2000 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>
                                                    YEARS ENDED JANUARY 31,
                                                 ------------------------------
                                                     1999             2000
                                                 -------------    -------------
<S>                                              <C>              <C>
Risk-free interest rates.......................  4.46 - 5.56%     5.10 - 6.38%
Expected dividend yield........................       --               --
Volatility factor..............................      126%              68%
Expected lives.................................     7 years          7 years
Weighted average fair value of options
  granted......................................  $   0.24         $   3.17
Weighted average remaining contractual life of
  outstanding options..........................    8.7 years        9.5 years
</TABLE>

     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>
                                                     YEARS ENDED JANUARY 31,
                                                   ---------------------------
                                                      1999            2000
                                                   -----------    ------------
<S>                                                <C>            <C>
Net loss --
  As reported....................................  $(8,272,541)   $(19,183,372)
  Pro forma......................................   (8,276,914)    (19,277,792)
Basic and diluted net loss per share --
  As reported....................................        (5.64)         (11.98)
  Pro forma......................................        (5.65)         (12.03)
</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.

                                       43
<PAGE>   45
                             SKILLSOFT CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) ACCRUED EXPENSES

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

<TABLE>
<CAPTION>
                                                            JANUARY 31,
                                                      ------------------------
                                                         1999          2000
                                                      ----------    ----------
<S>                                                   <C>           <C>
Accrued compensation................................  $  654,430    $1,072,159
Professional fees...................................     380,449       725,976
Other...............................................     109,824     1,035,895
                                                      ----------    ----------
                                                      $1,144,703    $2,834,030
                                                      ==========    ==========
</TABLE>

(8) 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.

(9) VALUATION & QUALIFYING ACCOUNTS

     ALLOWANCE FOR DOUBTFUL ACCOUNTS

<TABLE>
<CAPTION>
                                                    BALANCE     ADDITION
                                                      AT        CHARGED                   BALANCE AT
                                                   BEGINNING       TO                       END OF
                                                   OF PERIOD    EXPENSE     DEDUCTIONS      PERIOD
                                                   ---------    --------    ----------    ----------
<S>                                                <C>          <C>         <C>           <C>
Period from Incorporation (October 15, 1997) to
  January 31, 1998...............................     $--       $    --         $--        $    --
                                                      ==        =======         ==         =======
Year ended January 31, 1999......................     $--       $    --         $--             --
                                                      ==        =======         ==         =======
Year ended January 31, 2000......................     $--       $25,000         $--        $25,000
                                                      ==        =======         ==         =======
</TABLE>

                                       44
<PAGE>   46

                                 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 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+  Loan and Security Agreement dated June 18, 1999 between
          SkillSoft and GreyRock Capital.
  10.12+  Amendment to Loan Documents between SkillSoft and GreyRock
          Capital dated December 8, 1999.
  10.13*+ Restricted Stock Purchase Agreement dated March 13, 1999
          between SkillSoft and Jerald A. Nine.
  10.14*+ Restricted Stock Purchase Agreement dated March 15, 1999
          between SkillSoft and Thomas J. McDonald.
  10.15*+ Restricted Stock Purchase Agreement dated March 31, 1999
          between SkillSoft and Charles E. Moran.
  10.16*+ Restricted Stock Purchase Agreement dated March 31, 1999
          between SkillSoft and Mark A. Townsend.
  10.17*+ Restricted Stock Purchase Agreement dated August 30, 1999
          between SkillSoft and James Adkisson.
  10.18*+ Restricted Stock Purchase Agreement dated September 1, 1999
          between SkillSoft and William T. Coleman, Trustee of the
          Coleman Family Trust.
  10.19+  Preferred Stock Purchase Agreement dated January 8, 1999
          among SkillSoft, G-Fund LLC, Warburg, Pincus Ventures, LP
          and the Purchasers.
  11.01+  Computation of Net Loss per Share.
  21.01+  Subsidiaries of SkillSoft.
  23.01   Consent of Arthur Andersen LLP.
  27.01   Financial Data Schedule for fiscal year ended January 31,
          2000.
</TABLE>

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

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