LEARN2 CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q
(Mark one)

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

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

For the transition period from ____________to_____________________

Commission file number 000-27417

LEARN2 CORPORATION
(Exact name of registrant as specified in its charter)

Delaware 76-0518568
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)

111 High Ridge Road
Stamford, CT 06905
(Address of principal executive office and zip code)
(203) 975-9602
(Registrant's telephone number, including area code)

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 filing requirements
for the past 90 days. Yes /X/ No / /

As of August 14, 2002, 75,576,764 shares of the Registrant's common stock
were outstanding.

LEARN2 CORPORATION
FORM 10-Q
For the Quarterly Period Ended June 30, 2002
INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LEARN2 CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

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

3

LEARN2 CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

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

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LEARN2 CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
(in thousands)

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

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LEARN2 CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. INCORPORATION, NATURE OF BUSINESS AND BASIS OF PRESENTATION

Incorporation and Nature of Business

Learn2 Corporation (formerly known as E-Stamp Corporation), a Delaware
corporation (the "Company" or "Learn2"), was incorporated on August 23, 1996.
The Company originally provided an Internet postage service. On September 25,
2001, the Company acquired all of the outstanding shares of Learn2.com Inc.,
changed its name to Learn2 Corporation and assumed the on-going operations of
Learn2.com's e-learning and permission e-mail marketing businesses. In
connection with its then proposed merger with Learn2.com, the Company announced
that it would discontinue its existing transportation management business prior
to completion of the merger.

On August 9, 2002, the Company sold the assets of its e-learning
business. In connection with the sale, the Company announced that it would focus
its efforts on its permission e-mail marketing business.

Basis of Presentation

The condensed consolidated financial statements of the Company as of
and for the three and six months ended June 30, 2002 and 2001 included herein
are unaudited, but include all adjustments that the management of the Company
believes are necessary for a fair presentation of the financial position as of
the reported dates and the results of operations for the respective periods
presented. Interim financial statements are not necessarily indicative of
results for the full year. The condensed consolidated financial statements
should be read in conjunction with the audited financial statements and related
notes included in the Company's Form 10-K for the year ended December 31, 2001.
The Company has incurred significant net losses and negative cash flows from
operations since its inception. At June 30, 2002, the Company had an accumulated
deficit of approximately $226.0 million.

The operating results for future periods are subject to numerous
uncertainties. Management believes that if the Company meets its revenue and
cash collection targets on a timely basis, receives its earn-out payments
related to the sale of its e-learning business, receives its payments from
the sale of its inventories associated with the discontinued e-learning
business, sells its building in Pryor, Oklahoma and favorably and timely
resolves certain litigation matters, the Company will have sufficient
resources for its operating requirements and for the next twelve months.
However, if each of the assumptions described in the preceding sentence are
not actualized and the Company is unable to restructure its obligations, it
is unlikely that the Company will continue as a going concern.

In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of," and the
accounting and reporting

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provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business (as previously defined in that Opinion).
The provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144
in the first quarter of 2002. The Company has reported the discontinuance of its
transportation management business under the provisions of APB No. 30 and the
discontinuance of the e-learning segments in accordance with SFAS No. 144.

Accordingly, the Company's condensed consolidated financial statements
and notes included herein reflect the discontinued operations of the
transportation business through September 25, 2001 and e-learning segments
through June 30, 2002. The results of discontinued operations do not include any
interest income, interest expense or allocation of corporate expenses.

The audit opinion regarding our 2001 financial statements expressed
substantial doubt as to our ability to continue as a going concern. The
accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates the
realization of assets and settlement of liabilities in the normal course of
business. The financial statements did not include any adjustments that might
result from the outcome of this uncertainty. However, the Company's ability
to achieve positive cash flow depends upon the continued market success of
the Company's services, the costs of developing, producing, and marketing
these services, new laws and regulations, general economic conditions and
various other factors, some of which may be beyond the Company's control.
Many of the Company's costs are fixed and are based on anticipated revenue
levels. The Company may be unable to adjust its spending quickly enough to
offset any unexpected shortfall in cash collections or revenues. If the
Company has a shortfall in cash collections or in revenues in relation to
expenses, or if the Company's expenses continue to exceed revenues, it would
need to raise additional funds or restructure its obligations. Because the
Company has never earned a profit, current liabilities exceed current assets
and the current stock price, management believes that it will be extremely
difficult to raise additional funds. If the Company cannot raise additional
funds or restructure its obligations, it is unlikely that the Company will
continue as a going concern.

MANAGEMENT USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures 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.

PER SHARE

Loss per share has been computed in accordance with Statement of
Financial Accounting SFAS No. 128, "Earnings Per Share," which requires
disclosure of basic and diluted earnings per share. Basic earnings per share
excludes any dilutive effects of options, shares subject to repurchase,
warrants, and convertible securities. The Company's potentially dilutive
securities were antidilutive and therefore were not included in the computation
of weighted-average shares used in computing diluted loss per share. Therefore,
the Company's basic and diluted loss per share are the same.

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The following table presents the calculation of basic and diluted loss per share
(in thousands, except per share amounts):

The Company has outstanding warrants to exercise approximately
1,442,000 shares of its common stock with exercise prices ranging from $1.98
to $15.61 per share. The warrants expire at various dates through June of
2005.

RECLASSIFICATIONS

Certain prior-year amounts have been reclassified to conform to
current year's presentation.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145").
SFAS 145 rescinds the automatic treatment of gains or losses from
extinguishments of debt as extraordinary unless they meet the criteria for
extraordinary items as outlined in APB No. 30. In addition, SFAS 145 also
requires sale-leaseback accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions and makes
various technical corrections to existing pronouncements. SFAS 145 is
effective for the Company for all financial statements issued in fiscal 2003.
The Company does not expect the adoption of SFAS 145 to have a material
effect on its consolidated financial position or results of operations.

NOTE 2. DISPOSITIONS/ACQUISITIONS

DISPOSITION

On August 9, 2002, the Company and its subsidiaries ViaGrafix
Corporation, Panmedia Corporation, and Street Technologies, Inc. sold their
respective e-learning assets. The consideration consists of (i) an initial
payment to the Company of $325,000 and (ii) earn-out payments to the Company
and its subsidiaries of up to $3.71 million. The earn-out payments are to be
made monthly commencing on September 9, 2002, in each case, subject to
reduction until the earlier of sixty (60)

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months from August 9, 2002 or the date on which the aggregate amount of the
earn-out payments paid to the Company and its subsidiaries totals $3.71 million.

The loss on the sale of the e-learning business was approximately
$6.2 million and is included in the loss from discontinued operations for the
three months ended June 30, 2002.

ACQUISITION

On September 25, 2001, the Company acquired all of the outstanding
stock of Learn2.com, changed its name to Learn2 Corporation and assumed the
ongoing operations of Learn2.com. Under the terms of the merger agreement, the
Company issued approximately 37.7 million shares of its common stock. Each share
of Learn2.com common stock outstanding immediately prior to the completion of
the merger automatically converted into the right to receive 0.4747 shares of
common stock of the Company, resulting in the stockholders of the Company
immediately prior to the consummation of the merger owning approximately 50.1%
of the outstanding stock of the combined company. The former stockholders of
Learn2.com, including Learn2.com's $10.0 million convertible debenture holder,
received approximately 49.9% of the combined company. The total value of the
transaction was approximately $19.2 million including approximately $6.6 million
of assumed liabilities, transaction costs totaling approximately $5.2 million
and a pre-closing payment of $1.0 million to Learn2.com's $10.0 million
convertible debenture holder.

The transaction was accounted for using the purchase method of
accounting pursuant to SFAS 141, Business Combinations. The results of
Learn2.com for the period from September 25, 2001 through December 31, 2001 are
included in the consolidated statement of operations for the year ended December
31, 2001.

NOTE 3. DISCONTINUED OPERATIONS

2002 Discontinued Operations

As discussed in Note 2, on August 9, 2002, the Company and its
subsidiaries sold the assets of its e-learning segments. In connection with the
sale, the Company announced that it would focus its efforts and operate in its
existing permission e-mail marketing segment. In accordance with SFAS No. 144,
all operations that have been sold have been reflected as discontinued
operations for all periods presented in the Company's condensed consolidated
financial statements. All prior period

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financial information has been restated to reflect the discontinued operations.
The Company expects to record a loss on the sale of the discontinued
operations of approximately $5.6 million in the third quarter of 2002.

Revenues and net loss generated by the e-learning segments were as
follows:

Included in the $6.1 million impairment of long-lived assets for the
three months ended June 30, 2002 is $4.7 million related to the write-down of
certain capitalized software and other intangible assets and $1.4 million
related to fixed assets.

Included in the $7.1 million impairment of long-lived assets for the
six months ended June 30, 2002 is $4.7 million related to the write-down of
certain capitalized software and other intangible assets and $2.4 million
related to fixed assets.

Included in the $3.3 million and the $7.5 million of other costs and
expenses for the three and six months ended June 30, 2002, respectively, are
costs related to operating the discontinued e-learning segments such as
research and development, sales and marketing, and administrative expenses.

The results of discontinued operations do not include any interest
income, interest expense or allocation of general corporate expenses. General
corporate expenses consist of general and administrative overhead expenses,
including expenses associated with the general responsibilities of a public
company, and exclude those costs associated with the Company's e-learning
business.

2001 Discontinued Operations

Until April 19, 2001, the Company operated under a single reportable
segment consisting of two product lines, Internet postage and transportation
management solutions. In November 2000, the Company phased out its Internet
postage business. On April 19, 2001, the Company entered into a merger agreement
under which it would merge with Learn2.com and announced it would phase-out its
existing transportation management solutions business prior to the completion of
the merger. Accordingly, the Company's financial statements and notes included
herein reflect its businesses as discontinued operations in accordance with APB
No. 30.
Revenues and net loss generated by the discontinued operations were as
follows:

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Doubtful accounts 132 132
Other costs and expenses (68) (7,163)
-------------- --------------

Gain/(loss) from discontinued operations $ 903 $ (11,584)
============== ==============

The results of discontinued operations do not include any interest
income, interest expense or allocation of general corporate expenses. General
corporate expenses consist of general and administrative overhead expenses,
including expenses associated with the general responsibilities of a public
company, and exclude those costs associated with the Company's transportation
management solutions and Internet postage businesses.

NOTE 4. RESTRUCTURING COSTS

In July 2000, the Company restructured its organization to focus on
the development, marketing and sales of its transportation management
solutions and reduced its emphasis on its Internet postage business. In
November 2000, the Company restructured the organization to phase out its
Internet postage business. Remaining and unpaid obligations from these two
restructurings totaled $308,000 as of June 30, 2002.

On March 4, 2002, the Company announced that it would phase out its
production and distribution operations in Pryor, Oklahoma and close certain
field sales operations and eliminated approximately sixty positions.
Severance and related expenses attributable to the elimination of these
positions was approximately $417,000. Asset write-offs as a result of the
closing of the facility totaled approximately $637,000 related to property
and equipment, $145,000 related to software, and $268,000 related to the
write-down of the value of its Pryor, Oklahoma building to reflect its then
current estimated fair value. All of these costs are included in loss from
discontinued operations included in the condensed consolidated statement of
operations for the six months ended June 30, 2002.

Also, in March 2002, the Company's subsidiary, Street Technologies,
Inc., abandoned its office space in White Plains, New York and defaulted on
the lease relating to that space. As a result of these actions and events,
the Company recorded restructuring charges totaling $1.1 million.
Approximately $937,000 is related to the Company's remaining lease obligation
and approximately $206,000 is related to the write-off of fixed assets. These
charges are included as a restructuring charge in the condensed consolidated
statement of operations for the six months ended June 30, 2002.

The following table sets forth the restructuring activity during 2002 (in
thousands):

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NOTE 5. SEGMENT INFORMATION

As a result of the sale of its e-learning segments, the Company operates in one
principal business segment: "permission e-mail marketing."

NOTE 6. LITIGATION

On March 16, 2001, Mr. Joseph Pavel filed a purported consumer class
action suit against the Company in the Supreme Court of the State of New York,
County of Kings. The suit alleges that the Company breached its contracts with
the plaintiff and other customers. The plaintiff seeks unspecified damages and
disgorgement of monies received in connection with the sale of Internet postage
products. By agreement of the parties, the plaintiff dismissed the New York
action and refiled in Santa Clara County, California on or about May 24, 2001.
The Company filed its answer to the complaint on June 18, 2001. On February 20,
2002, the Court granted Plaintiff's motion for class certification. Trial is
currently scheduled for October 2002. The Company has reached a tentative
settlement with the Plaintiff and is awaiting court approval of the final
settlement. If approved, this settlement is not expected a material impact on
the Company's financial position or results of operations.

On August 3, 2001, Sales and Marketing Technologies, Inc. filed suit
against the Company and certain of its officers in the Superior Court of
California, San Mateo County, California. The complaint was amended on September
19, 2001. The plaintiff alleges breach of contract, breach of good faith and
fair dealing, fraud, misrepresentation alleging breach of contract, fraud and
unfair competition in connection with a consulting agreement between the
plaintiff and the Company. The plaintiff seeks unspecified general and
compensatory damages, treble damages and equitable remedies. The Company has
reached a tentative settlement with the plaintiff. The tentative settlement, if
ultimately agreed upon, is not expected to have a material impact on the
Company's financial position or results of operations.

On September 8, 2000, a former employee of ViaGrafix Corporation, a
wholly-owned subsidiary of the Company, filed suit against Learn2.com, Inc. and
ViaGrafix Corporation in the District Court of Oklahoma, Mayes County, Oklahoma.
The plaintiff alleges breach of contract and conversion in connection with a
severance agreement between the plaintiff and ViaGrafix. The plaintiff seeks
unspecified general, compensatory and punitive damages and equitable remedies.
Trial is currently scheduled for December 2002. The Company and ViaGrafix are
vigorously defending this action. Pendency of these legal proceedings can be
expected to result in expenses to ViaGrafix and the Company and the diversion of
management time and other resources.

On February 6, 2002, Morrison & Foerster, a law firm, filed suit
against Etracks.com, Inc., a consolidated subsidiary of ViaGrafix Corporation,
in the Superior Court of California, San Francisco County, California. The
complaint was amended on June 28, 2002, and added the Company as a defendant.
The plaintiff alleges a violation of California Business & Professional Code,
Section 17538.45 and 17200 et. seq., in connection with Etracks permission
e-mail marketing and tracking services. The plaintiff seeks statutory damages,
to enjoin Etracks and the Company from further violations of the specified
statutes, and costs and fees. Etracks and the Company are vigorously

12

defending this action. Pendency of these legal proceedings can be expected to
result in expenses to Etracks and the Company and the diversion of management
time and other resources.

On July 18, 2002, Joseph Rydel filed suit against Street Technologies,
Inc. d/b/a Etracks.com, Inc. and certain other parties in the Circuit Court
of Cook County in the State of Illinois. The plaintiff alleges a violation of
the Illinois Electronic Mail Act and the Consumer Fraud and Deceptive
Business Practices Act, in connection with Etracks permission e-mail
marketing and tracking service. The plaintiff seeks actual and punitive
damages, and costs and fees. Street Technologies, Etracks and the Company are
vigorously defending this action. Pendency of these legal proceedings can be
expected to result in expenses to Street Technologies, Etracks and the
Company and the diversion of management time and other resources.

In July 2002, the Company was served by MicroAge, Inc., relating to a
claim that Micro Age's payment to Learn2 of $163,800 in January 2000 is
recoverable to MicroAge as a preference in MicroAge's bankruptcy in United
States Bankruptcy Court, District of Arizona. The payment was for products
and services delivered by Learn2 to MicroAge. The Company is vigorously
defending this action. Pendency of these legal proceedings can be expected to
result in expenses to the Company and the diversion of management time and
other resources.

In addition, the Company and its subsidiaries are involved in certain
other legal proceedings and claims in the ordinary course of its business.
Certain of these proceedings and claims are with vendors and other claimants
that are demanding payments totaling approximately $400,000, which amount is
included in accounts payable at June 30, 2002 and approximately $250,000, which
amount is included in accrued liabilities at June 20, 2002. The Company and its
subsidiaries are vigorously contesting all such matters.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding our
expectations, beliefs, intentions or strategies regarding the future.
Forward-looking statements include, without limitation, statements regarding the
extent and timing of future revenues, expenses and customer demand, the
deployment of our products and services, and reliance on third parties. Our
actual results could differ materially from those in such forward-looking
statements. Factors that might cause or contribute to such a difference include,
but are not limited to, those discussed under the heading "Risk Factors" in this
Form 10-Q and the risks discussed in our other Securities Exchange Commission
filings. All forward-looking statements included in this document are based on
information available to us as of the date hereof, and we assume no obligation
to update any such forward-looking statement.

OVERVIEW

E-Stamp Corporation originally provided an Internet postage service
that enabled users to purchase, download and print Internet postage directly
from their personal computers without the need to maintain a persistent Internet
connection.

On September 25, 2001, we acquired all of the outstanding stock of
Learn2.com, a publicly traded company, changed the name of our company from
E-Stamp Corporation to Learn2 Corporation and assumed the on-going businesses of
Learn2.com. Learn2.com's offerings included engaging online and physical
learning and training products and complementary services, commonly referred to
as e-learning services, marketed to corporate, government and individual clients
and customers and permission e-mail marketing services.

On November 8, 2001, in connection with the merger, we undertook a
corporate restructuring to outsource the packaging and shipping of our retail
products to an outside fulfillment house and eliminate redundant functions. We
incurred charges of approximately $89,000 related to this restructuring.

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On March 4, 2002, we announced that we would phase out our
production and distribution operations in Pryor, Oklahoma and closed certain
field sales operations and eliminated approximately sixty positions.
Severance and related expenses attributable to the elimination of these
positions was approximately $417,000 and was included in loss from
discontinued operations included in the condensed consolidated statement of
operations for the six months ended June 30, 2002.

On July 2, 2002, we announced that we would close our facility in
Golden, Colorado and the elimination of approximately twenty positions
throughout the organization. We incurred charges of approximately $110,000
related to this workforce reduction and this amount will be included in our
loss from discontinued operations in the third quarter of 2002.

On August 9, 2002, we and our subsidiaries ViaGrafix Corporation,
Panmedia Corporation, and Street Technologies, Inc. sold our respective
e-learning assets. The consideration consists of (i) an initial payment to us
of $325,000 and (ii) earn-out payments to us and our subsidiaries of up to
$3.71 million. The earn-out payments are to be made monthly commencing on
September 9, 2002, in each case, subject to reduction until the earlier of
sixty (60) months from August 9, 2002 or the date on which the aggregate
amount of the earn-out payments paid to us and our subsidiaries totals $3.71
million. In connection with the sale of our e-learning assets, we announced
that we would focus our efforts on our permission e-mail marketing business.
We incurred approximately $500,000 in severance charges in connection with
sale of our e-learning assets and this amount will be included in our loss
from discontinued operations in the third quarter of 2002.

We provide permission e-mail marketing and tracking services. Our
services include e-mail creation, delivery, tracking and response analysis for a
high volume of client e-mail accounts in a short period of time. Our goal is to
be the preferred provider of full service and hosted, large-scale email
broadcast campaigns. As set forth in Note 2 to our condensed consolidated
financial statements, our reported results of operations for all periods prior
to September 25, 2001 do not reflect the results of Learn2.com. Consequently,
the results prior to these dates and our consolidated balance sheet at December
31, 2001 are not reflective of our operations and financial position as
presently constituted.

CRITICAL ACCOUNTING JUDGMENTS

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires estimates and
assumptions that affect the reported amounts of assets and liabilities, revenues
and expenses, and related disclosures of contingent assets and liabilities in
the consolidated financial statements and accompanying notes. The U.S.
Securities and Exchange Commission ("SEC") has defined a company's most critical
accounting policies as the ones that are most important to the portrayal of the
company's financial condition and results of operations, and which require the
company to make its most difficult and subjective judgments, often as a result
of the need to make estimates of matters that are inherently uncertain. Based on
this definition, we have identified the critical accounting policies and
judgments addressed below. We also have other key accounting policies, which
involve the use of estimates, judgments and assumptions. For additional
information see Note 1 "Summary of Significant Accounting Policies" in Item 14
of Part IV, "Exhibits, Financial Statement Schedules and Reports on Form 8-K,"
of our Annual Report on Form 10-K for the year ended December 31, 2001. Although
we believe that our estimates and assumptions are reasonable, they are based
upon information presently available. Actual results may differ significantly
from these estimates under different assumptions or conditions.
The items in our financial statements requiring significant estimates,
judgments, and accounting policies are as follows:

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ESTIMATES AND JUDGMENTS

- - BAD DEBTS AND PRODUCT RETURNS. We maintain allowances for doubtful accounts
for estimated losses resulting from either the inability of our customers to
make required payments or customer price adjustments related to services
performed. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.

- - INTANGIBLES. The value of our intangibles is determined either by management
or by an independent third-party expert, based upon estimated information and
projections prepared by management.

- - LITIGATION. We are currently involved in certain legal proceedings as
discussed in Note 6 in the Notes to Condensed Consolidated Financial
Statements. We do not believe these legal proceedings will have a material
adverse effect on our consolidated financial position or results of
operations. However, were an unfavorable ruling to occur, there exists the
possibility of a material impact that could affect our ability to continue as
a going concern.

RESULTS OF OPERATIONS

As a result of the sale of the e-learning assets, we operate in one
segment, permission email marketing. In accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, "all operations that have been sold have
been reflected as discontinued operations for all periods presented in the
Company's condensed consolidated financial statements. All prior period
financial information has been restated to reflect the discontinued operations
and the single segment.

THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001

CONTINUING OPERATIONS

REVENUES AND GROSS MARGIN

Permission e-mail marketing revenues consist primarily of permission
e-mail marketing and tracking services. For the three and six months ended June
30, 2002, two customers accounted for approximately 82.5% and 62.2%,
respectively, of the segment's revenue. Cost of revenues consists of the
expenses associated with the delivery of permission e-mail and tracking
services, including Internet access and personnel related costs incurred to
fulfill our marketing and tracking services. Net revenues for the three and six
months ended June 30, 2002 were approximately $731,000 and $1.4 million,
respectively.

OPERATING EXPENSES

RESEARCH AND PRODUCT DEVELOPMENT EXPENSES

Research and product development expenses were approximately $133,000
and $298,000 for the three and six months ended June 30, 2002, respectively.
Research and product development expenses relate to the development and
enhancement of our technologies.

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SALES AND MARKETING

Sales and marketing expenses were approximately $320,000 and $645,000
for the three and six months ended June 30, 2002, respectively. Sales and
marketing expenses consist primarily of salaries, commissions, advertising, and
advertising costs of marketing materials.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were approximately $878,000
million and $1.7 million for the three and six months ended June 30, 2002 and
2001, respectively compared to $2.4 million and $4.2 million for the three
and six months ended June 30, 2001, respectively. For the three and six
months ended June 30, 2002, general and administrative expenses consist
primarily of personnel related costs, occupancy costs, professional service
fees, and the administrative expenses of a public company. These expenses
exclude those costs associated with our e-learning business.

For the three and six months ended June 30, 2001, general and
administrative expenses consisted of expenses associated with the general
responsibilities of a public company, and excluded those costs associated with
our transportation management and Internet postage businesses. These expenses
include salaries and related costs for certain administrative functions,
professional services, including legal and accounting services, insurance and an
allocation of facilities costs.

RESTRUCTURING CHARGES

In March 2002, our subsidiary, Street Technologies, Inc., abandoned
its office space in White Plains, New York and defaulted on the lease relating
to that space. As a result of these actions and events, we recorded a charge of
approximately $1.1 million in the first quarter of 2002 for the remaining lease
obligation for the office space in White Plains, New York and the write-off
of fixed assets located in this facility.

INTEREST AND OTHER, NET

Interest and other, net for the three months ended June 30, 2002
and 2001 was an expense of $14,000. Interest and other, net for the six
months ended June 30, 2002 was income of $181,000 compared to income of
$443,000 for the six months ended June 30, 2001.

DISCONTINUED OPERATIONS

NET LOSS FROM DISCONTINUED OPERATIONS

Discontinued Operations

Fiscal Year 2002

Loss from discontinued operations for the three months ended June
30, 2002 of $8.2 million reflects the operating expenses related to our
e-learning segments, net of revenues of $1.2 million. Included in this amount
is $6.1 million relating to the write-down of the certain intangible assets
and the remaining fixed assets of the e-learning segments. This amount
included $557,000 related to property and equipment, $336,000 related to
software, $450,000 related to the write-down of our building in Pryor,
Oklahoma to reflect its current estimated fair value and $4.7 million related
to the write-down of capital software and other intangible assets of the
e-learning segments.

16

Loss from discontinued operations of $12.0 million for the six
months ended June 30, 2002 reflects the operating expenses related to our
e-learning segments, net of revenues of $2.6 million. Included in this amount
is $6.0 million relating to the write-down of the certain intangible assets
and the remaining fixed assets of the e-learning segments. This amount
included $557,000 related to property and equipment, $336,000 related to
software, $450,000 related to the write-down of our building in Pryor,
Oklahoma to reflect its current estimated fair value and $4.7 million related
to the write-down of capital software and other intangible assets of the
e-learning segments.

The loss from discontinued operations also included charges related
to our March, 2002 restructuring totaling approximately $1.5 million. The
Company eliminated approximately sixty positions, primarily in the Oklahoma
facility and certain field sales operations. Included in this amount is
$417,000 related to severance and other employee. Asset write-offs as a result
of closing of the Pyror, Oklahoma including $637,000 related to property and
equipment, $145,000 related to software and $268,000 related to the write-down
of the building in Oklahoma to reflect its then current estimated fair value.

Fiscal 2001

Gain (loss) from discontinued operations.

For the three months ended June 30, 2001, the $903,000 gain from
discontinued operations reflects the operating expenses related to our
transportation management solutions business through the measurement date of
April 17, 2001 offset by the reversal of excess restructuring reserves and
the reversal of an excess allowance for doubtful accounts recorded during the
period. There were no revenues recorded during this period.

For the six months ended June 30, 2001, the $11.6 million loss from
discontinued operations reflects the operating expenses related to our
transportation management business through the measurement date of April 17,
2001, net of revenues from that business of $0.3 million. These decreases in
operating expenses were partially offset by charges totaling $4.7 million
related to the amortization and write off of goodwill and other intangible
assets related to our transportation management solutions business. During the
first quarter of 2001 we identified possible indicators of impairment of these
assets and determined that these assets had a fair value of zero. In addition,
we wrote off property and equipment held for disposal as a result of reduced
employee headcount totaling $1.4 million.

In addition, for the six months ended June 30, 2001, loss from
discontinued operations was partially offset by the reversal of excess
restructuring accruals related to Internet postage refunds and to certain
contract terminations. We also reversed an excess allowance for doubtful
accounts. These reversals totaled $1.0 million.

Gain on disposal of discontinued operations.

Gain of disposal of discontinued operations for the three and six
months ended June 30, 2001 totaled approximately $2.1 million. In April 2001,
we sold all of our patent and patent applications and certain trademarks and
domain names related to our Internet postage business to Stamps.com, Inc. for
cash proceeds of $7.5 million. In June 2001, we sold our maintenance
contracts and trademarks related to our DigitalShipper and e-Receive products
to Data Track Technologies of California, Inc. for cash proceeds of $55,000
and a promissory note of $110,000. We recorded gains totaling approximately
$7.7 million related to these transactions.

17

This income was partially offset by costs of discontinuing the
transportation management business, including costs related to shutting down the
business's operations after the April 17, 2001 measurement date, charges for
fixed asset impairment and an accrual for lease termination costs.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through
private and public sales of equity securities. We have received net proceeds
of approximately $72.9 million in private placements of our equity securities
and net proceeds of $125.4 million from the initial public offering of our
common stock. As of June 30, 2002, we had cash and cash equivalents totaling
$1.0 million.

Net cash used in continuing operations totaled $1.1 million for the
six months ended June 30, 2002 while net cash used in continuing operations for
the six months ended June 30, 2001 totaled $1.7 million. These amounts resulted
primarily from net operating losses during those periods offset by non-cash
charges.

Net cash used in discontinued operations totaled $4.3 million for
the six months ended June 30, 2002.

Net cash used in investing activities totaled $124,000 for the six
months ended June 30, 2002 while net cash provided by investing activities
totaled $138,000 for the six months ended June 30, 2001. These amounts resulted
from the purchase of assets. Net cash provided by financing activities totaled
$200,000 for the six months ended June 30, 2002.

We have incurred significant net losses and negative cash flows from
operations since our inception. At June 30, 2002, we had an accumulated deficit
of approximately $226.0 million.

Subsequent to our merger with Learn2.com, we have taken the
following actions to reduce our cash consumption. On November 8, 2001, we
undertook a corporate restructuring to outsource the packaging and shipping
of our retail products to an outside fulfillment house and eliminate
redundant functions. On March 4, 2002, we announced that we would phase out
our remaining production and distribution operations in Pryor, Oklahoma and
eliminated approximately sixty positions, primarily in the Oklahoma facility
and certain field sales operations. On July 2, 2002, we announced that we
would close our facility in Golden, Colorado and eliminated approximately
twenty positions throughout the organization. On August 9, 2002, we and our
subsidiaries ViaGrafix Corporation, Panmedia Corporation, and Street
Technologies, Inc. sold our respective e-learning assets. In connection with
the sale of the e-learning assets, we announced that we would focus our
efforts on our permission e-mail marketing business.

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The audit opinion regarding our 2001 financial statements expressed
substantial doubt as to our ability to continue as a going concern. The
accompanying condensed consolidated financial statements have been prepared
assuming we will continue as a going concern, which contemplates the
realization of assets and settlement of liabilities in the normal course of
business. The financial statements did not include any adjustments that
might result from the outcome of this uncertainty. However, our ability to
achieve positive cash flow depends upon the continued market success of the
our services, the costs of developing, producing, and marketing these
services, new laws and regulations, general economic conditions and various
other factors, some of which may be beyond our control. Many of our costs
are fixed and are based on anticipated revenue levels. We may be unable to
adjust its spending quickly enough to offset any unexpected shortfall in cash
collections or revenues. If we have a shortfall in cash collections or in
revenues in relation to expenses, or if our expenses continue to exceed
revenues, it would need to raise additional funds or restructure its
obligations. Because we have never earned a profit, current liabilities
exceed current assets and our current stock price, management believes that
it will be extremely difficult to raise additional funds. If we cannot raise
additional funds or restructure its obligations, it is unlikely that we will
continue as a going concern.

In January 2002, a complaint was filed against us alleging certain
common law claims. In connection with the settlement of the complaint, on
January 24, 2002 we issued a promissory note in the principal amount of
$400,000 accruing interest at the rate of 10% per annum. The promissory note
is due and payable upon the earlier of (i) the completion of a Financing (as
defined in the promissory note) or (ii) any dissolution, extraordinary
dividend, recapitalization or similar transaction involving our company. At
June 30, 2002 and December 31, 2001, the principal amount of the promissory
note is included in other liabilities in the consolidated financial
statements.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2002, the FASB issued SFAS 145. SFAS 145 rescinds the
automatic treatment of gains or losses from extinguishments of debt as
extraordinary unless they meet the criteria for extraordinary items as
outlined in APB No. 30. In addition, SFAS 145 also requires sale-leaseback
accounting for certain lease modifications that have economic effects that
are similar to sale-leaseback transactions and makes various technical
corrections to existing pronouncements. SFAS 145 is effective for us for all
financial statements issued in fiscal 2003. We do not expect the adoption of
SFAS 145 to have a material effect on its consolidated financial position or
results of operations.

RISK FACTORS

AN INVESTMENT IN OUR COMMON STOCK IS VERY RISKY. YOU SHOULD CONSIDER
CAREFULLY THE RISKS DESCRIBED BELOW TOGETHER WITH ALL OF THE OTHER
INFORMATION IN THIS AND OTHER SEC FILINGS. IF ANY OF THE FOLLOWING RISKS
ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS
COULD BE AFFECTED MATERIALLY AND ADVERSELY; THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.

WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT; WE MAY CONTINUE TO
EXPERIENCE LOSSES.

For the three months ended June 30, 2002, we incurred a net loss of
$9.1 million and for the six months ended June 30, 2002, we incurred a net
loss of $14.9 million. At June 30, 2002, we had an accumulated deficit of
approximately $226.0 million. We expect to continue to incur losses for the
foreseeable future. These losses could be substantial, and we may never
become profitable.

OUR AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE
AS A GOING

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CONCERN; AS OF JUNE 30, 2002 OUR CURRENT LIABILITIES EXCEED OUR CURRENT
ASSETS.

Our auditors have expressed substantial doubt as to our ability to
continue as a going concern. As of June 30, 2002, our current liabilities
exceeded our current assets by approximately $2.2 million. Our financial
statements have been prepared on a going concern basis, which contemplates
the realization of assets and settlement of liabilities in the normal course
of business. The operating results for future periods are subject to numerous
uncertainties. Management believes that if we meet its revenue and cash
collection targets on a timely basis, receive its earn-out payments related
to the sale of its e-learning business, receives its payments from the sale
of its inventories associated with the discontinued e-learning business,
sells its building in Pryor, Oklahoma and favorably and timely resolves
certain litigation matters, we will have sufficient resources for its
operating requirements at least for the next twelve months. However, if each
of the assumptions described in the preceding sentence, are not actualized
and we are unable to restructure its obligations, it is not likely that we
will continue as a going concern.

Our ability to achieve positive cash flow depends upon the continued
market success of our services, the costs of developing, producing, and
marketing these services, new laws and regulations, general economic
conditions and various other factors, some of which may be beyond our
control. Many of our costs are fixed and are based on anticipated revenue
levels. We may be unable to adjust its spending quickly enough to offset any
unexpected shortfall in cash collections or revenues. If we have a shortfall
in cash collections or in revenues in relation to expenses, or if our
expenses continue to exceed revenues, it would need to raise additional funds
or restructure its obligations. Because we have never earned a profit,
current liabilities exceed current assets and our current stock price,
management believes that it will be extremely difficult to raise additional
funds. If we cannot raise additional funds or restructure its obligations, it
is unlikely that we will continue as a going concern.

WE MAY NOT REALIZE THE INTENDED BENEFITS OF THE SALE OF OUR E-LEARNING
BUSINESS.

We have completed the sale of our e-learning business. The
consideration includes earn-out payments to our Company of up to $3.71
million. The earn-out payments are subject to reduction on account of any set
off right that the buyer may have against us and termination upon certain
events. In addition, we are entitled to payments for the sale of certain
accounts receivable. Failure to collect the earn-out payments, and/or
payments for the receivables could have a material adverse effect on our
ability to continue as a going concern.

WE ARE DEPENDENT ON TWO CUSTOMERS FOR A SIGNIFICANT PORTION OF REVENUES

For the three and six months ended June 30, 2002, two of our
customers accounted for approximately 82.5% and 62.2%, respectively, of our
revenues. If either of these customers was to stop utilizing our services,
we may be unable to replace the lost revenue.

OUR RECENT WORKFORCE REDUCTIONS AND POOR FINANCIAL PERFORMANCE WILL PLACE
ADDITIONAL STRAIN ON OUR RESOURCES AND MAY HARM THE MORALE AND PERFORMANCE OF
OUR EMPLOYEES AND OUR ABILITY TO HIRE NEW ONES.

In connection with our efforts to streamline our operations, reduce
costs and bring our staffing and structure in line with our expected revenue
base, in November 2001, March 2002, July 2002, and August 2002, we restructured
our organization and reduced our workforce by more than 125 employees. There
have been and may continue to be substantial costs associated with the workforce
reductions related to severance and other employee-related costs, as well as
material charges for reduction of excess facilities. Our restructuring plan may
yield unanticipated consequences, such as attrition beyond that which we
planned. These workforce reductions have placed significant strain on our
administrative, operational and financial resources. As a result, our ability to
respond to unexpected challenges may be impaired and we may be unable to take
advantage of new opportunities. In addition, employees who were terminated
possessed specific knowledge or

20

expertise, and that knowledge or expertise may prove to have been important to
our continuing operations. In that case, their absence may create significant
difficulties. Further, the reduction in workforce may reduce employee morale and
may create concern among potential and existing employees about their job
security, which may lead to difficulty in hiring and increased turnover in our
current workforce, and divert management's attention. In addition, these
headcount reductions may subject us to the risk of litigation, which could
result in substantial costs to us and would divert our time and attention away
from business operations.

CHANGES IN LAWS RELATING TO DATA COLLECTION AND USE PRACTICES AND THE PRIVACY OF
INTERNET USERS AND OTHER INDIVIDUALS COULD HARM OUR BUSINESS.

Websites usually place certain information called "cookies" on a
user's hard drive usually without the user's knowledge or consent. Websites use
cookies for a variety of reasons. We employ the use of cookies on our Websites.
Certain Internet browsers allow users to modify their browser settings to remove
cookies at any time or to prevent cookies from being stored on their hard drive.
In addition, some Internet commentators, privacy advocates and governmental
bodies have suggested limiting or eliminating the use of cookies. The
effectiveness of our technology and products could be limited by any reduction
or limitation in the use of cookies. In this regard, there are a large number of
legislative proposals before the United States Congress, foreign governments and
other international regulatory agencies regarding privacy issues and the
regulation and use of cookies. It is not possible to predict whether or when
such legislation may be adopted, and certain proposals, if adopted, could
adversely affect our business. This could be caused by, among other possible
provisions, the requirement that permission be obtained before we use cookies.

WE FACE LEGAL UNCERTAINTIES RELATING TO THE INTERNET IN GENERAL AND TO OUR
INDUSTRY IN PARTICULAR AND MAY BECOME SUBJECT TO COSTLY GOVERNMENT REGULATION.

The applicability to the Internet of existing laws is uncertain and
developing with regard to many issues, including sales tax, intellectual
property ownership and infringement, copyright, trademark, trade secret,
obscenity, libel, export of encryption technology, solicited and unsolicited
e-mail and personal privacy. There are an increasing number of laws and
regulations pertaining to liability for information received from or
transmitted over the Internet, online content regulation, user privacy,
taxation and quality of products and services. In addition, it is possible
that more laws and regulations may be adopted with respect to the Internet,
such as laws or regulations relating to user privacy, taxation, e-mail,
pricing, Internet access, content, copyrights, distribution and
characteristics and quality of products and services. Changes in existing
laws and the adoption of additional laws or regulations may decrease the
popularity or limit expansion of the Internet. A decline in the growth of the
Internet could decrease demand for our services and increase our cost of
doing business. We are currently defending claims that Etracks has violated
certain statutes relating to the distribution of unsolicited e-mail. We can
give no assurance that the defense of these actions will be successful or
that we will not be subject to further similar actions.

California and several other states have enacted legislation regulating the
sending of unsolicited commercial e-mail. We cannot assure you that existing or
future legislation regarding commercial e-mail will not harm our permission
e-mail marketing services business. The federal government, foreign governments
and several other states are considering, or have considered, similar
legislation. These provisions generally limit or prohibit both the transmission
of unsolicited commercial e-mails and the use of forged or fraudulent routing
and header information. California also requires that unsolicited e-mails
include opt-out instructions and that senders of these e-mails honor any opt-out
requests.

21

IF THE DELIVERY OF ETRACKS' EMAIL MESSAGES IS LIMITED OR BLOCKED, THEN ITS
CLIENTS MAY DISCONTINUE THEIR USE OF ETRACKS' SERVICES.

We rely on our ability to deliver permission-based e-mails through Internet
service providers such as America Online and free email providers such as
Yahoo and Hotmail. A significant percentage of our permission-based e-mails
sent on behalf of our clients are sent to AOL, Yahoo, and Hotmail e-mail
accounts. We do not have, and are not required to have agreements with these
e-mail providers to deliver permission-based e-mails to their members. In
addition, these e-mail providers and other Internet service providers are
able to halt the delivery of our permission-based e-mails without prior
warning or cause. If we are unable to deliver permission e-mails sent on
behalf of our clients then we may lose certain clients and our business will
be adversely and materially impacted.

OUR STOCK PRICE HAS HISTORICALLY BEEN VOLATILE, WHICH MAY MAKE IT MORE
DIFFICULT FOR YOU TO RESELL SHARES WHEN YOU WANT TO DO SO AND AT PRICES YOU
FIND ATTRACTIVE.

The trading price of our common stock can fluctuate significantly.
For example, during the 52 week period ended August 14, 2002, the market
price of our common stock ranged from $0.03 to $0.28 per share. Our stock
price may fluctuate in response to a number of events and factors including:

- The seasonal variations in our operating results.

- Announcements of technological innovations or new products and
services by our competitors or us.

- The operating and stock price performance of other companies that
investors may deem comparable.

- The introduction of new laws and regulations relating to email
marketing techniques

- News reports relating to trends in our markets.

In addition, the stock market in general and the market prices for
Internet-related companies in particular, have experienced extreme volatility
that often has been unrelated to the operating performance of those companies.
These broad market and industry fluctuations may affect adversely the price of
our common stock, regardless of operating performance.

WE MAY LOSE OUR LISTING ON THE NASDAQ SMALLCAP MARKET THAT COULD RESULT IN YOUR
BEING UNABLE TO SELL OUR COMMON STOCK READILY OR AT ALL.

Shares of our common stock are currently listed on the Nasdaq
SmallCap Market. Under Nasdaq Marketplace Rules, in order to maintain the
listing of our common stock on the Nasdaq SmallCap Market the bid price per
share of our common stock must close at or above $1.00. We have been notified
by Nasdaq that we have not met Nasdaq's minimum $1.00 per share requirement.
Our common stock has previously been delisted and has traded on the OTC
Bulletin Board. If our common stock is delisted from the Nasdaq SmallCap
Market, your ability to trade in our common stock may be impacted adversely,
not only in the number of shares which could be bought or sold, but also
through delays in the timing of transactions and a reduction in media
coverage. This may reduce the demand of our common stock and thus the trading
price. A delisting may further impair our ability to raise additional working
capital.

22

If our common stock is delisted from the Small Cap Market, our common
stock may be eligible to trade on the OTC Bulletin Board. In that event, our
common stock may become subject to regulation as a "penny stock." The SEC has
adopted regulations which generally define "penny stock" to be any equity
security that has a market price or exercise price of less than $5.00 per share,
subject to certain exceptions, including listing on the Nasdaq National Market
or the Nasdaq SmallCap Market. For transactions covered by these rules,
broker-dealers must make a special suitability determination for the purchase of
such securities and must have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction involving a
penny stock, unless exempt, the rules require the delivery, prior to the
transaction, of a risk disclosure document mandated by the SEC relating to the
penny stock market. The broker-dealer is also subject to additional sales
practice requirements. Consequently, the penny stock rules may restrict the
ability of broker-dealers to sell our securities and may affect the ability of
holders to sell these securities in the secondary market and the price at which
such holders can sell any such securities.

FUTURE SALES OF OUR COMMON STOCK BY OUR STOCKHOLDERS COULD HAVE AN ADVERSE
EFFECT ON THE MARKET PRICE OF OUR COMMON STOCK.

In connection our acquisition of Learn2.com, certain current and
former directors and officers of our company and Learn2.com's $10 million
convertible debenture holder were restricted from selling their shares of our
common stock until March 25, 2002. For the six-month period beginning March 25,
2002 until September 25, 2002, those parties are subject to certain trading
limitations. Since March 25, 2002, the market price of our common stock has
declined from $0.13 to $0.03. This decline could be a result of sales by those
and other existing stockholders or the perception that these sales may occur.

WE OPERATE IN A RAPIDLY CHANGING, COMPETITIVE MARKET AND WE MAY NOT HAVE
ADEQUATE RESOURCES TO COMPETE SUCCESSFULLY.

The permission e-mail market is evolving quickly and is subject to
rapid technological change shifts in customer demands and evolving industry
standards. To succeed, we must continue to upgrade our technologies. We may not
be able to do so successfully. If we fail to anticipate or respond adequately to
changes in technology and customer preferences, or we have any significant
delays in development or introduction of new products, our competitors may be
able to attract and maintain a greater customer base. The permission e-mail
market is characterized by significant price competition. This has resulted in
reduced revenues, operating margins, and market share. Although the market is
highly fragmented with no single competitor accounting for a dominant market
share, competition is intense. Our competitors vary in size and in the scope and
breadth of their offerings and services. Several of our competitors have longer
operating histories and most have significantly greater financial, technical and
marketing resources.

OUR FUTURE GROWTH DEPENDS ON OUR ABILITY TO RETAIN KEY, AND WE MAY BE UNABLE TO
HIRE AND RETAIN THE SKILLED PERSONNEL WE NEED TO SUCCEED.

Our future growth and success depends to a significant extent on the
continued service of Marc E. Landy, Executive Vice President, Chief Financial
Officer, Secretary and Treasurer of our company, Jerry Sandoval, President of
Etracks and other key employees. Competition for highly skilled personnel is
intense. We may not be successful in recruiting new personnel or in retaining
existing personnel. Additionally, our recent workforce

23

reductions and poor financial performance has and will continue to place
additional strain on our people and may harm the morale and performance of our
employees and our ability to hire new ones. The loss of one or more key or other
employees or our inability to attract additional qualified employees or retain
other employees could have a material adverse effect on our business, results of
operations or financial condition.

WE FACE A RISK OF SYSTEM FAILURE.

Our operations depend to a significant extent on our ability to
maintain our computer and telecommunications systems. We must also protect our
systems against damage from fire, natural disaster, power loss,
telecommunications failure or similar events. In addition, growth of our
customer base may strain the capacity of our computer operations center and
telecommunications systems and/or lead to degradations in performance or system
failure. Any damage to or loss of our computer and telecommunications networks
including our operations center could affect adversely the performance of our
business. To date, we have not experienced system failures that have adversely
and materially affected operations.

UNAUTHORIZED BREAK-INS TO OUR SERVICE COULD HARM OUR BUSINESS.

Our servers are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions, which could lead to interruptions, delays,
loss of data or the inability to complete customer transactions. In addition,
unauthorized persons may improperly access our data, which could harm us.
Actions like these may be very expensive to remedy and could damage our
reputation and discourage new and existing users from purchasing our products
and services. To date, we have not experienced an unauthorized break-in or
similar disruption that has adversely and materially affected operations.

WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS, WHICH ARE COSTLY
TO DEFEND AND COULD LIMIT OUR ABILITY TO USE CERTAIN TECHNOLOGIES IN THE FUTURE.

Many parties are developing and improving technologies that compete
with our proprietary technologies. We believe that these parties will continue
to take steps to protect these technologies, including seeking patent
protection. As a result, disputes regarding the ownership of these technologies
could arise in the future. To date, claims against us alleging infringement of
certain proprietary rights have not been material. Third parties may assert
further claims against us alleging infringement of patents, copyrights,
trademark rights, trade secret rights or other proprietary rights or alleging
unfair competition. In the event that we determine that licensing patents or
other proprietary rights is appropriate, we may not be able to license
proprietary rights on reasonable terms or at all. As the number of products in
our target markets increase and the functionality of these products further
overlap, we have become subject to further infringement claims. We may incur
substantial expenses in defending against third-party infringement claims
regardless of the merit of those claims. In the event that there is a
determination that we have infringed third-party proprietary rights, we could
incur substantial monetary liability and be prevented from using the rights in
the future.

OUR INTELLECTUAL PROPERTY RIGHTS ARE COSTLY AND DIFFICULT TO PROTECT.

We have a patent pending for our AdaptiveProxy Tracking technologies. At some
point in the future, any patents that we have may be deemed to be invalid or
unenforceable, or otherwise not provide us with any meaningful protection. Our
success and ability to compete effectively will depend, in part, on our ability
to protect our intellectual property, which we protect through a combination of
patent,

24

trade secret, copyright, trademark, nondisclosure agreements and other
contractual provisions and technical measures. None of these protections may be
adequate to prevent our competitors from copying or reverse engineering our
products, concepts, trade names and trade dress. Furthermore, none of these
protections prohibit our competitors from independently developing technologies
that are substantially equivalent or superior to our technologies.

WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.

Third parties may infringe or misappropriate our patents, trademarks
or other proprietary rights, which could have a material adverse effect on our
business, results of operations or financial condition. While we enter into
confidentiality agreements with many of our employees, consultants and strategic
partners and generally control access to and distribution of our proprietary
information, the steps we have taken to protect our proprietary rights may not
prevent misappropriation. We also attempt to register our trademarks and service
marks. However, we may not receive approval on all of our trademark
registrations or patent applications. Even if they are approved, such trademarks
or patents may be challenged by others or invalidated. In addition, we do not
know whether we will be able to defend our proprietary rights because the
validity, enforceability and scope of protection of proprietary rights in
Internet-related industries is uncertain and still evolving.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

DISCLOSURES ABOUT MARKET RISK

The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially as a result of a number of
factors, including those set forth under caption "Risk Factors" set forth in
Item 2.

INTEREST RATE RISK

As of June 30, 2002, we had cash and cash equivalents of approximately
$974,000 invested in short term investments. Due to the short-term
nature of these investments and our investment policies and procedures, we
have determined that the risk associated with interest rate fluctuations
related to these financial instruments does not pose a material risk to us.
As of June 30, 2002, we did not have any outstanding short or long-term debt.
Increases in interest rates could, however, increase the interest expense
associated with our future borrowings, if any. We do not hedge against
interest rate increases.

FOREIGN CURRENCY EXCHANGE RATE RISK

We do not believe we have any significant direct foreign currency exchange rate
risk. We do not hedge against foreign currency exchange rate changes.

25

PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may be a party to litigation and claims incident to the
ordinary course of our business. Although the results of litigation and claims
cannot be predicted with certainty, we believe that the final outcome of such
matters will not have a material adverse effect on the business, results of
operations, or financial condition of our Company. However an unfavorable result
in any one of these lawsuits could have a material adverse effect on our ability
to continue as a going concern.

On March 16, 2001, Mr. Joseph Pavel filed a purported consumer class action
suit against us in the Supreme Court of the State of New York, County of
Kings. The suit alleges that we breached our contract with the plaintiff and
other customers. The plaintiff seeks unspecified damages and disgorgement of
monies received in connection with the sale of Internet postage products. By
agreement of the parties, the plaintiff dismissed the New York action and
refiled in Santa Clara County, California on or about May 24, 2001. We filed
our answer to the complaint on June 18, 2001. On February 20, 2002, the Court
granted Plaintiff's motion for class certification. Trial is currently
scheduled for October 2002. We have reached a tentative settlement with the
Plaintiff and are awaiting court approval of the final settlement. If
approved, this settlement is not expected to have a material impact on our
financial position or results of operations.

On August 3, 2001, Sales and Marketing Technologies, Inc. filed suit against us
and certain of our officers in the Superior Court of California, San Mateo
County, California. The complaint was amended on September 19, 2001. The
plaintiff alleges breach of contract, breach of good faith and fair dealing,
fraud, misrepresentation alleging breach of contract, fraud and unfair
competition in connection with a consulting agreement between the plaintiff and
us. The plaintiff seeks unspecified general and compensatory damages, treble
damages and equitable remedies. We have reached a tentative settlement with the
plaintiff. The tentative settlement, if ultimately agreed upon, is not expected
to have a material impact on our financial position or results of operations.

On September 8, 2000, a former employee of ViaGrafix Corporation, which is now a
wholly owned subsidiary of ours, filed suit against Learn2.com, Inc. and
ViaGrafix Corporation in the District Court of Oklahoma, Mayes County, Oklahoma.
The plaintiff alleges breach of contract and conversion in connection with a
severance agreement between the plaintiff and ViaGrafix. The plaintiff seeks
unspecified general, compensatory and punitive damages and equitable remedies.
We and ViaGrafix are vigorously defending this action. Pendency of these legal
proceedings can be expected to result in expenses to ViaGrafix and the Company
and the diversion of management time and other resources.

On February 6, 2002, Morrison & Foerster, a law firm, filed suit against
Etracks.com, Inc., a consolidated subsidiary of ViaGrafix Corporation, in the
Superior Court of California, San Francisco County, California. The plaintiff
alleges a violation of California Business & Professional Code, Section 17538.45
and 17200 et. seq., in connection with Etracks permission e-mail marketing and
tracking services. The plaintiff seeks statutory damages, to enjoin Etracks from
further violations of the specified statutes, costs and fees. Etracks is
vigorously defending this action. Pendency of these legal proceedings can be
expected to result in expenses to Etracks and us and the diversion of management
time and other resources.

On July 18, 2002, Joseph Rydel filed suit against Street Technologies,
Inc. d/b/a Etracks.com, Inc. and certain other parties in the Circuit Court of
Cook County in the State of Illinois. The plaintiff alleges a violation of the
Illinois Electronic Mail Act and the Consumer Fraud and Deceptive Business
Practices Act, in connection with Etracks permission e-mail marketing and
tracking service. The plaintiff seeks actual and punitive damages, and costs and
fees. We, Street Technologies, and Etracks are vigorously defending this action.
Pendency of these legal proceedings can be expected to result in expenses to us,
Street Technologies, and Etracks and the diversion of management time and other
resources.

In July 2002, we were served by MicroAge, Inc., relating to a claim
that Micro Age's payment to us of $163,800 in January 2000 is recoverable to
MicroAge as a preference in MicroAge's bankruptcy in United States Bankruptcy
Court, District of Arizona. The payment was for products and services delivered
by us to MicroAge. We are vigorously defending this action. Pendency of these
legal proceedings can be expected to result in expenses to us and the diversion
of management time and other resources.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits.

99.1 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley act of 2002 for Robert Ewald, Chairman of the
Board and Acting Chief Executive Officer of our Company.
99.2 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley act of 2002 for Marc E. Landy, Executive Vice
President, Chief Financial Officer, Secretary and Treasurer of our Company.

(b) Reports on Form 8-K

A Current Report on Form 8-K was filed with the Securities and Exchange
Commission by Learn2 Corporation on May 10, 2002 to report under Item 7 the
change in its certifying accountant.

A Current Report on Form 8-K/A was filed with the Securities and Exchange
Commission by Learn2 Corporation on May 20, 2002 to report under Item 7 the
change in its certifying accountant.

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SIGNATURE

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

Dated: August 19, 2002

LEARN2 CORPORATION

By: /s/ MARC E. LANDY
-----------------

Marc E. Landy
Executive Vice President, Chief Financial Officer,
Secretary and Treasurer (Principal Financial and
Accounting Officer)

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