SKILLSOFT PUBLIC LIMITED CO - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

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

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

FOR THE FISCAL YEAR ENDED JANUARY 31, 2004

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE: 0-25674

SKILLSOFT PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)

REPUBLIC OF IRELAND NONE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

107 NORTHEASTERN BOULEVARD 03062
NASHUA, NEW HAMPSHIRE (Zip Code)
(Address of principal executive offices)

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)
ORDINARY SHARES, E0.11
SUBSCRIPTION RIGHTS

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]

Indicate by check mark whether registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

The approximate aggregate market value of voting shares held by
non-affiliates of the registrant as of July 31, 2003 was $466,094,399

On March 31, 2004, the registrant had outstanding 103,524,579 Ordinary
Shares (issued or issuable in exchange for the registrant's outstanding American
Depository Shares ("ADSs")).

DOCUMENTS INCORPORATED BY REFERENCE

The registrant intends to file with the Securities and Exchange Commission
a definitive proxy statement with respect to the Annual General Meeting of
Shareholders for the fiscal year ended January 31, 2004. Portions of such proxy
statement are incorporated by reference into Part III of this Form 10-K.
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SKILLSOFT PUBLIC LIMITED COMPANY

FORM 10-K

TABLE OF CONTENTS

1

PART I

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

As used in this Form 10-K, "we", "us", "our", "SkillSoft" and "the Company"
refer to SkillSoft Public Limited Company and its subsidiaries.

ITEM 1. BUSINESS

GENERAL

SkillSoft is a leading global provider of e-learning content and technology
products for business and information technology (IT) professionals primarily
within the Global 5000. SkillSoft's SkillChoice multi-modal learning solutions
support and enhance the speed and effectiveness of both formal and informal
learning processes and integrate SkillSoft's in-depth courseware-learning
content, learning management platform technology and support services. Content
offerings include our SkillChoice Multi-Modal Learning Solutions, Business
Skills Library and IT Skills and Certification Library; ITPro, BusinessPro,
FinancePro, and OfficeEssentials Referenceware collections by Books24x7; and
health and safety compliance courseware by GoTrain.

We focus on a variety of business and professional effectiveness and IT
topics that we believe represent the critical skills required of employees in
increasingly dynamic and complex work environments. We partner with some of the
world's technology leaders to co-develop sound, standardized content that
delivers rich, comprehensive learning and performance support experiences. Our
IT skills courses give learners the ability to gain the technical knowledge they
need to perform their jobs. Our business skills (also known as soft skills)
courses concentrate on the skills and knowledge that are relevant to the various
areas of functional responsibility in today's business organizations. These
skills are important to a business professional's ability to work better with
business associates and customers, make better business decisions, and more
effectively achieve his or her most important work-related and career oriented
objectives. Our products and services are designed to accelerate the ability of
today's workforce to master the business and technology skills required for
competitive success, enable our customers to address training and performance
support issues that support their business objectives and provide a system of
continuous support to working employees. Our solutions are based on open
standards Web technologies and flexible, low bandwidth architecture, enabling
users to access the material they need via computer, with the specificity or
breadth that they require, anytime or anywhere that they may need it.

We currently have thousands of customers worldwide spanning business,
government and education, and more than 5.0 million licensed users. We focus on
meeting the comprehensive business skills and IT learning needs of professionals
in Global 5000 organizations through a comprehensive range of content-centered,
e-learning solutions. The integration of our e-learning offerings delivers a
comprehensive Multi-Modal Learning (MML) solution that includes the following
major content modalities:

SkillChoice Multi-Modal Learning Solutions: These solutions provide a
rich array of resources (including courseware, Referenceware, online
mentoring, test preparation exams, SkillSimulations and Blended Learning
Toolkits) to support formal training and informal performance support
needs. Available as four offerings (Complete, IT, Business and Desktop),
SkillChoice Solutions provide the necessary depth and breadth to encompass
a wide range of corporate learning objectives.

SkillPort: SkillPort, our learning management platform, provides a
reliable, flexible and cost-effective way for organizations to deploy and
manage their e-learning programs. Using SkillPort, customers can leverage
the benefits of the multi-modal learning approach and deploy complex
solutions rapidly, on a global basis. With Search-and-Learn, employees view
all e-learning assets on the system

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with a single, unified search. SkillPort is available as a hosted solution,
supporting the growing demand for reliable, scalable and secure e-learning
with a low-cost, low IT-burden model. Alternatively, customers may choose
to deploy SkillPort on their own intranet infrastructure.

Business Skills Library: This includes more than 2,100 courseware
titles and simulations encompassing professional effectiveness,
management/leadership, project management, sales and customer-facing
skills, business strategy/operations, finance, human resources,
safety/health and financial services. Our courses feature strong visual
design; a focus on instructional objectives at the application and analysis
levels; learner interactivity; reinforcement through RolePlays,
SkillSimulations, and case studies; and transfer of learning through online
Job Aids, Follow-On Activities and SkillBriefs.

IT Skills and Certification Library: This includes more than 2,000
courseware titles encompassing software development, operating systems and
server technologies, Internet and network technologies, enterprise database
systems, Web design, and desktop computer skills. Our IT skills library
also supports more than 70 current industry certification exams. The IT
courses also feature strong visual design, interactivity, and reinforcement
of learning transfer via frequent practice questions, simulations and
mentored and self-assessed exercises.

Online Mentoring: This service is offered for over 70 current major
certification exams for IT professionals, end user technologies and project
management skills. Our approximately 50 on-staff mentors, averaging over 20
certifications each, are available 24 hours a day, 7 days a week. Through
online chats and e-mail, learners can ask questions, receive clarification,
and request additional information to help them get the answers and
understanding they need.

Books24x7 Referenceware: This includes more than 5,500 unabridged IT
and business books and reports that are available to online subscribers
through our subsidiary, Books24x7. A unique, patent-pending search engine
gives subscribers the ability to perform multi-level searches to pinpoint
information needed for on-the-job performance support and problem-solving.

We were incorporated in Ireland on August 8, 1989. On September 6, 2002, we
completed a merger with SkillSoft Corporation, a Delaware corporation, and, on
November 19, 2002, changed our corporate name from SmartForce PLC to SkillSoft
PLC. Our registered office is located at Belfield Office Park, Clonskeagh,
Dublin 4, Ireland, and our telephone number at that address from the United
States is (011) 353-1-2181000. Our principal office in the United States is
located at 107 Northeastern Boulevard, Nashua, New Hampshire 03062, USA, and our
telephone number at that address is (603) 324-3000.

We maintain a Web site with the address www.skillsoft.com. We are not
including the information contained on our Web site as part of, or incorporating
it by reference into, this annual report on Form 10-K. We make available free of
charge through our Web site our annual reports on Form 10-K, quarterly reports
on Form 10-Q and current reports on Form 8-K, and amendments to these reports,
as soon as reasonably practicable after we electronically file these materials
with, or otherwise furnish them to, the Securities and Exchange Commission.

INDUSTRY BACKGROUND

The corporate training market is large. We believe that a substantial
majority of the corporate training market is comprised of business skills and IT
skills training. We believe that the growth in corporate training in general and
business skills training in particular is being driven by:

- the evolution of our economy to a service-based and knowledge-based
economy, in which the skills of the workforce often represent the most
important corporate assets;

- the increasing recognition by businesses that it is imperative to
continually improve the skills of their employees in order to remain
competitive;

- the rapidly evolving business environment, which necessitates continual
training and education of the employee base; and

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- the increased competition in today's economy for skilled employees and
the recognition that effective training can be used to recruit and retain
employees.

Although corporate training has historically been dominated by traditional
classroom instruction, e-learning solutions are changing the manner in which
business enterprises improve the skills of their workforce. By providing
real-time accessibility and user-focused specificity, we believe that e-learning
is changing the training and education process from a distinct event -- often
off-site and limited in scope -- to a process of continuous learning for
employees. With the rising need for training in increasingly complex working
environments, we believe that properly designed and deployed e-learning
solutions can effectively address the needs of business organizations seeking to
provide comprehensive, enterprise-wide learning resources to their employees.
These solutions can support both the planned formal learning priorities and the
day-to-day informal learning activities that comprise the primary means by which
business professionals learn the skills needed to do their job and grow their
careers.

We believe that e-learning solutions present a significant opportunity for
business organizations to effectively train and support the productivity of
their workforce. Like traditional technology-based training solutions, such as
CD-ROMs and client/server applications, e-learning solutions alleviate the
inefficiencies associated with classroom training, including travel costs,
scheduling difficulties and the opportunity costs of employees' time. In
addition, e-learning provides benefits beyond other technology-based training
methods that make it more flexible, effective and cost-efficient. For example,
e-learning solutions provide more timely and simplified deployment, the
flexibility of self-directed and personalized learning, improved ease of use,
and enhanced product/user support and administrative functionality. Furthermore,
through the use of Web-based technologies, e-learning solutions provide access
via computer to content anytime, anywhere over the Internet and in the exact
amount required.

PRODUCTS

PRODUCT LIBRARY OVERVIEW

With over 4,100 courses spanning IT, cross-functional business skills,
functional area expertise and workplace compliance subjects, we are an industry
leader in e-learning content solutions for today's critical business and IT
skills. Through our focus on these critical skills and our track record in fast
and effective execution, we strive to deliver e-learning content that excels in
terms of depth, breadth, up-to-date relevance, interactive learning design and
Web deployment flexibility. Also, through our Books24x7 professional
Referenceware offering, we offer users over 5,500 unabridged IT and business
titles from more than 100 of the world's best-known publishing companies.
Together, these multi-modal e-learning components offer organizations an array
of both formal and informal learning based on user needs -- whether students
need to immerse themselves in the subject matter or need to quickly reference
content for five to ten minutes of on-the-job performance support.

We regularly add new courses to cover new skills and technologies and new
subjects requested by our customers or that we believe our customers will want.
We also regularly retire courses from our active library as certain skills,
subjects or technologies become outdated or used less frequently by our
customers, and as we replace older courses with newer and higher quality
versions. This combination of adding and retiring courses, which is part of our
continuous effort to ensure the currency, relevancy and high quality of our
active library, will cause the overall active library size to fluctuate.

BUSINESS SKILLS COURSEWARE AND SIMULATIONS

Our comprehensive business skills library of e-learning courses,
simulations and learning objects encompasses a wide array of professional
effectiveness skills and business topics. As of January 31, 2004, our

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business skills library included over 2,100 business skills course and
simulation offerings. Our business skills courses and simulations are divided
into the following major Solution Areas:

Professional Effectiveness Business Strategy & Operations
Management & Leadership Safety & Health
Project Effectiveness Workplace Compliance
Sales & Customer-Facing Skills Financial Services Industry
Finance, HR & Administration

We have more than 800 current English language business skills courses, and
over 1,300 business skills courses that have been localized into a number of
languages including UK English, Italian, German, French, Castilian Spanish,
Japanese, Mandarin Chinese, Traditional Chinese, Cantonese and Latin American
Spanish to support other geographic markets.

IT SKILLS COURSEWARE

Our comprehensive IT skills library of e-learning courses and learning
objects encompasses a wide array of technologies used by IT professionals and
business end-users. As of January 31, 2004, our IT skills library included over
2,000 IT skills course offerings that are divided into six major Solution Areas:

Software Development Operating Systems & Server Technologies
Internet & Network Technologies Enterprise Database Systems
Web Design Desktop Computer Skills

The courseware in these Solution Areas address over 70 of the current
technical certification programs sought by technical professionals and
enterprises providing technical products and services to their customers,
including:

MICROSOFT COMPTIA LOTUS NOTES ORACLE
MOS A+ R5 CLS Admin OCA 9i
MCP Net+ R5 CLS Developer OCP 9i
MCSA 2000 INet+ R5 CLP Admin.
MCSE 2000 Server+ R5 CLP Developer
MCSD VB 6.0 Linux+
MCSD .NET (VB)
MCDBA
MCSA 2003 MCSE 2003 CICSO SECURITY CIW
CCNA Sans Geac CIW Associate
CCDA CompTIA Security+ Master Enterprise Developer
CCNP CISSP (ISC(2)) CIW Site Designer
CCDP

MACROMEDIA ECDL PROJECT MGMT INSTITUTE
Coldfusion MX Developer ECDL PMP
Dreamweaver MX Developer ICDL
Flash MX Developer

We have more than 1,200 current English language IT skills courses, and
over 900 IT skills course titles that have been localized into a number of
languages including German, French, Spanish, Italian, Japanese, Dutch, Greek,
Portuguese and Korean to support other geographic markets.

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BOOKS24X7

Books24x7, a SkillSoft company, offers a suite of core, unabridged and
topically organized Referenceware collections that provide online subscribers
the ability to perform multi-level searches to pinpoint information needed for
on-the-job performance support and problem-solving. Referenceware products draw
upon leading professional reference books, journals, research reports and
documentation. Books24x7 delivers Referenceware via a Web-based platform that
enables paying subscribers to browse, read, search, and collaborate anytime,
anywhere with a simple Web connection. The Referenceware collections include:

ITPRO COLLECTION is geared toward technology professionals including
developers, network administrators, technology executives, information
services managers and technical support representatives. This collection
consists of content from dozens of IT publishers including industry leaders
such as Apress, Microsoft Press, MIT Press, Osborne/McGraw-Hill, Sybex and
John Wiley & Sons.

BUSINESSPRO COLLECTION is geared toward professionals whose role
requires exercising strong business judgment. This collection contains over
30 business skills and professional development publishers including
industry leaders such as AMACOM, ASTD, Berrett-Koehler, Harvard Business
School Press, Jossey-Bass, Oxford University Press, and John Wiley & Sons.

OFFICEESSENTIALS COLLECTION is a specialty collection geared toward
non-technical users who require occasional real-time assistance with common
office applications. This collection contains award winning content,
including the "for Dummies" series, is written in a comfortable, easy-to-
understand tone and can be deployed to desktops to relieve Help Desk
congestion, or provided as an end-user "safety-net" during migration to new
applications such as Microsoft Office 2003.

FINANCEPRO COLLECTION offers professionals access to relevant
information on a variety of financial and accounting topics. FinancePro
delivers fully searchable, online content from popular publishers such as
AMACOM, John Wiley & Sons, McGraw-Hill and Oxford University Press, and is
an essential tool for anyone needing immediate access to financial
reference materials including such topics as GAAP, International Accounting
Standards, operations management, planning and taxation.

EXPRESS GUIDES

Our Express Guides are targeted at IT professionals who need information
immediately upon release of new technologies. Express Guides complement other
learning options, such as e-learning courses and books, both of which require
longer development cycles to bring to market. Express Guides can be searched,
launched and managed through SkillPort 6, SkillSoft's learning management
platform, as well as other third-party learning management systems.

Our initial focus for the development of Express Guides has been for Cisco
Systems technologies, with 24 Express Guides for Cisco Systems certification
program support introduced in the first quarter of fiscal 2005. Based on Cisco's
own instructional materials, these electronically-delivered instructional guides
support new and enhanced Cisco technologies and the corresponding new
certification requirements. Included in the first set of Express Guides are
titles to support changes in Cisco's CCNA, CCNP, CCDA, CCDP, CCIE, and CCSP
certification programs. SkillSoft currently plans to deliver additional Express
Guides for Cisco, as well as those supporting other technology vendors, in the
future. Currently, 8 Express Guides to support MCSA and MCSE certification
programs for Microsoft Windows Server 2003 are also available.

GOTRAIN

Acquired in June 2003, GoTrain provides an extensive library of
compliance-based e-learning solutions that address standards mandated by the
occupational Safety and Health Administration (OSHA), Environmental Protection
Agency (EPA), and the Department of Transportation (DOT). As a cost-effective
alternative to traditional instructor-led training, GoTrain courses help reduce
the risks and liability for non-compliance in the workplace. In addition, they
also reduce risks associated with worker's compensation claims, lawsuits and the
expense of increased insurance costs.

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GoTrain specializes in delivering effective Environmental Safety and Health
(ES&H) courses for the "hardhat and safety glasses" industries. As such, courses
are based on sound adult-learning principles, with an easy-to-use interface that
is designed for the needs of persons with a range of PC literacy and reading
proficiencies. In addition, GoTrain's learning management system allows training
administrators to track learner status, run up-to-the-minute training compliance
reports and set consistent training and re-training requirements.

THE SKILLSOFT INSTRUCTIONAL DESIGN MODEL

Our instructional design model, which we have used in designing our
business and IT skills courses, is based primarily on the concepts of
performance-oriented instruction, mastery and the sequencing of instructional
activities and strategies. The model draws heavily from adult learning
principles that emphasize learner initiative, self-management, experiential
learning and transfer of learning into the workplace. The design of each of our
courses starts with the definition of user-focused performance objectives and
then proceeds to the selection and implementation of instructional strategies
and learning activities appropriate for those objectives. Frequent practice
questions or exercises along with assessments measure users' achievement of
those objectives. This robust, yet flexible, design methodology creates an
instructionally sound framework for the design and development of highly
interactive, engaging and instructionally effective courses -- regardless of the
content focus or level of learning.

Our instructional design model is intended to meet the challenge of
creating effective and engaging instruction that is easily deployed on our
corporate customers' global computer networks or over the Internet. Our design,
development and quality assurance standards and processes are all geared toward
insuring each course meets our expectations for the best instruction possible.

Our instructional design model is focused on producing courses in all
content areas with:

- learning outcomes specified by performance goals and objectives;

- content and learning activities based on specified objectives;

- assessment based on the knowledge and skills specified in the objectives;

- options to take assessments in either pre- or post-test mode;

- instructional strategies and multimedia elements tailored to the specific
course content;

- tools to promote the transfer of learning into the workplace, such as
online Job Aids and Follow-On Activities;

- instructional strategies appropriate for the content and learning level,
such as examples, behavior modeling, guided practice, and simulations;
and

- levels of learning appropriate for the content and the target audience.

The theories and principles embedded within our instructional design model
are actualized via:

- friendly, intuitive graphical user interface;

- course structure and navigation that supports self-paced, user-controlled
instruction;

- unlimited access to instruction and assessments;

- standardized templates to create unified and predictable functionality;

- a variety of presentation, practice, and assessment templates supporting
high levels of user interactivity and engagement; and

- standardized, yet flexible, flow of instruction.

Starting from this set of common elements and attributes, our courses then
include the instructional strategies most suitable for the content and specified
objectives. For instance, the approach to teaching

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communication skills is different from the approach to teaching finance or
accounting skills, and the strategies used to teach these two business content
areas differ from those used to teach computer and software skills.

LEARNING DESIGN FOR BUSINESS SKILLS

Our business skills courses cover a broad range of business and
professional effectiveness curriculum areas. Some content is factual with
predictable, non-variable outcomes, such as finance; other content areas, such
as communication skills, are "softer", or more behavioral-oriented, and have
highly variable implementation options and outcomes that require a different set
of instructional presentation and practice strategies. In addition, we have a
strong commitment to reach the highest possible levels of learning in each
course -- including as much application and analysis level content as possible,
supported by strong foundational learning at the knowledge and comprehension
levels.

The key instructional features and strategies in our business skills
courses and library are:

ROLEPLAY EXERCISES -- RolePlay exercises present users with
opportunities for realistic practice of varying aspects of course content
within everyday workplace scenarios. RolePlay exercises have multiple
possible outcomes based on users' responses to the simulation's
interactions. When integrated into course topics, RolePlay exercises allow
users to freely explore the impact of handling realistic work situations in
different ways. SkillSoft's RolePlay design allows users to experience the
exercise in "score" mode or "explore" mode. Using score mode lets learners
assess their level of skill within the targeted content area. Using explore
mode allows the learner to dynamically explore alternative responses to see
the impact of those choices. This user-driven exploration is the key to
real learning. People learn as much, or more, from their mistakes as from
the things they do correctly. RolePlay brings this principle home to
e-learning. With over 1,400 RolePlay simulations integrated into our
courseware library, we are an industry leader in delivering
simulation-enriched e-learning solutions.

AUDIO-ENABLED LEARNING -- Our business skills instruction is
audio-enabled. This feature can easily be turned on or off based on user
preference and greatly enhances engagement and retention for many users.
Audio can be especially key to the instructional effectiveness of behavior
modeling, RolePlay exercises and SkillSimulations.

SIMULATED DIALOGS -- The ability to observe behaviors and their
outcomes (positive and negative) is a key strategy for teaching
professional and behavioral skills. The simulated dialog strategy gives
users an opportunity to observe and listen to the conversations of two or
more people. The inclusion of "character" audio enhances the emotional and
tonal qualities of the conversation, while the varying facial expressions
and body language offer another layer of interpretation. These features,
combined with the spoken words of the characters, provide realistic
vignettes or scenarios in which varying aspects of a behavioral skill can
be presented.

CASE STUDIES -- A case study strategy describes a complex situation,
often in the form of a story or scenario, and then asks the user to explore
its characteristics and possible resolutions. Complexity is the primary
difference between case studies and examples that can be easily presented
and practiced through other types of strategies, such as multiple choice
and matching. Case studies are used to achieve learning at the application
and analysis levels and to present examples of content within appropriate
business contexts.

ANIMATIONS -- Animations are an important element of our leading
visual design. We use animations when movement is an important part of the
teaching point, when the content requires that the user's eye be drawn to a
specific area of the screen or when a key concept can be best presented via
animated visuals. Examples of content areas where animations can enhance
learning effectiveness include instruction on process and dataflow
diagrams, hierarchical and dependency relationships and changes in state or
perspective.

ONLINE JOB AIDS -- All of our business skills courses include online
Job Aids that help support the use of newly learned skills and knowledge in
the workplace. Job Aids are courseware "take-aways" that can be used as-is,
or tailored to meet a user's needs. Each Job Aid can easily be edited to
reflect a
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user's organization-specific information, and users can add
organization-specific Job Aids that they have independently developed.

LEARNING AIDS -- Learning aids are tools or documents used in support
of course content presentation and practice. They are designed to support
specific course context or content, and, therefore, are not available for
use outside of the course. Learning aids could appear as worksheets
(interactive or passive), reference documents too large to include in a
standard template, complex charts or graphs or a variety of other formats.
Only the content and the chosen instructional strategies limit the
variations.

SKILLBRIEFS -- SkillBriefs are one- to two- page text-based HTML
documents that summarize the content in each topic of a course. SkillBriefs
are now available as part of course content, as well as through SkillPort.
SkillBriefs can be used to quickly "refresh" a learner's memory of key
teaching points, as instant, "just-in-time" non-interactive learning when
time doesn't allow for more typical instruction and/or as valuable
take-aways from a course to support transfer of learning into the
workplace. There are currently SkillBriefs for over 5,500 topics.

PRE- AND POST-TESTING ASSESSMENTS -- Assessments are available for use
in both pre-and post-testing modes. When Assessments are used in pre-test
mode, learners can use the results to tailor their initial path of
instruction based on those results. Post-test Assessments can be used to
help learners identify areas where review or remediation is necessary.

SKILLSIMULATIONS -- SkillSimulations are instructional strategies that
extend the learning advantages of RolePlay into larger, more complex
e-learning experiences. SkillSimulations are designed to give users an
opportunity to practice new skills in realistic work situations. Each
SkillSimulation, typically 20-to-40 minutes in duration, provides users
with an opportunity to practice application level skills based on content
drawn from multiple courses within one of our learning paths or series (a
collection of related courses). Users practice these skills by navigating
through different scenarios in which they encounter a variety of business
problems. As in real life, users have the opportunity to select different
courses of action, and the scenario unfolds according to the users' choice
of actions. Events such as telephone calls, meetings and interruptions add
to the reality of each scenario.

SkillSimulations, with integrated links to their corresponding
SkillSoft course series, provide a powerful learning experience that allows
the user to immediately apply newly gained knowledge to challenging
business situations. This results in engaging learning experiences and real
skill transfer.

BLENDED LEARNING TOOLKITS -- Blended Learning Toolkits are our latest
product offering in the business skills curriculum. Like SkillSimulations,
the Blended Learning Toolkits are based on content drawn from multiple
courses within a single learning path or series. However, this product is
designed to provide our customers with tools for blending and/or
transferring e-learning into the workplace as well as the classroom. Each
Blended Learning Toolkit consists of multiple layers of content including a
Users Guide, approximately 30 activities or tools, PowerPoint presentations
that summarize the key teaching points from each lesson in all the courses
within the learning path and short text-based summaries (SkillBriefs) of
all the topic content. Blended Learning Toolkits are delivered
electronically and can be used "as is" or customized to meet individual
customer requirements. Customers have the freedom to "blend" the tools into
traditional classroom settings, instructional events delivered via
collaborative learning platforms, or to hand them over to managers,
supervisors, facilitators, and anyone else interested in transferring
learning into the workplace. The Blended Learning Toolkit provides multi-
layered content with many options for use and implementation. It is
adaptable and flexible to support a variety of audiences, content areas,
and implementation environments and platforms. The goal of the Blended
Learning Toolkit is to effectively reinforce the application of knowledge
and skills from our courses. Most of all, it provides our customers with
another opportunity to enhance and leverage their investment in e-learning.

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LEARNING DESIGN FOR IT SKILLS

Like our business skills courses, the instructional strategies chosen for
use in an IT skills course are largely dependent on the course content and
objectives. Learning the use or function of buttons, menu items and other
familiar software elements is largely a knowledge and comprehension task.
Learning the steps to complete a specific task is very procedural and best
achieved via observation or guided practice, followed by opportunities for more
independent practice, with varying degrees of guidance, feedback and support. In
support of these and other IT skills-related learning goals, our IT skills
courses include static and interactive explanations, step-by-step demonstrations
of how to perform specific procedures, guided practice activities and sample
coding solutions. Inclusion of frequent review questions in the instructional
topics reinforces key teaching points. The availability of Assessments at both
the topic and course level provides the learner with an option to assess their
performance across the entirety of a course, or with more focused concentration
on individual topic level content and objectives.

The key instructional features and strategies in the IT skills courses and
library are:

TEXT AND GRAPHICS -- Our IT skills courses use a variety of text and
graphic-based strategies to present and explain software features and
functions. Interactive text and graphics are particularly useful to explain
buttons, menu items, coding or tagging parameters, and syntax. This
strategy is also an effective method to break down complex concepts into
smaller, graphically represented parts, or to separate lines of code into
smaller sections. Clicking or selecting graphically portrayed "parts"
produces additional information or explanation about that specific part.
Another feature, "drill-downs", allow learners to navigate vertically in a
topic by clicking meaningful graphics and icons. Drill-downs are a useful
departure from the "page turning" linear approach to representation that
characterizes much e-learning. All these features allow learners to review
information as often as they want and to ignore something if they choose
to.

DEMONSTRATIONS AND GUIDED PRACTICE -- "Demos" in our IT skills courses
are demonstrations of software procedures and tasks. Most typically, the
demonstration will divide the procedure or task into specific steps and
then sequentially "show" those steps to the user. As the demo moves from
one step to the next, a simulated representation of the software shows what
happens next and additional text provides commentary. In addition, learners
are frequently given the option of performing the salient steps of the
procedure. This feature, called a "Try-It", prompts the user to perform
specific steps, or enter code that achieves a specified end result. If
learners decide not to perform the step, they can click forward, which
launches an animated sequence of the correct step. A special animation
feature, called a "Show Me", is used to demonstrate a specific sequence
step or user action. The steps are outlined in advance, and then the
learner is given the option of reviewing those steps in an animated
sequence. The automated playback of the demo is optional -- the learner can
opt to view the demo or continue to the next section of instruction.

PROMPTED ANIMATIONS -- The purpose of these is to help the learner
visualize processes -- to draw his or her attention to an area on an
interface or conceptual graphic. Because these animations are prompted
(that is, after the learner is told about a process, he or she is prompted
to launch an animation of it), they help to avoid split attention, which
occurs when text displays and an animation initiates at the same time, with
the result that the learner does not know what to concentrate on.

INTERACTIVE EXERCISES -- There are many types of interactive practice
questions and exercises used in our IT skills courses.

SkillChecks are a key practice strategy in GUI-based content where
it is important for the learner to be able to "use" the software
application. SkillChecks present learners with a task to perform on a
simulated interface. If a learner performs all the required steps in the
task correctly, the interface responds as it would in the real
application. If learners decide not to perform the question, they can
click forward or click a "Show-me" button, both of which launch an
animated sequence of the correct step.

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User-input questions enable learners to complete a statement or
segment of code by typing the answer into a blank area in the code or
statement.

Multiple-choice, matching, and ranking questions are used to
reinforce newly learned skills and knowledge within an instructional
topic, and to practice or assess the huge body of conceptual information
related to a complete understanding and implementation of many IT
subject areas. Learners are "debriefed" on their performance on these
questions via detailed feedback for every answer choice, regardless of
whether they got the question right or wrong.

ONLINE MENTORING -- Is available for over 70 current major
certification exams for IT professionals, end user technologies and project
management skills. We have approximately 50 on-staff mentors, averaging
over 20 certifications apiece, that are available 24 hours a day, 7 days a
week. Through on-line chats and e-mail, learners can ask questions, receive
clarification, and request additional information to help them get the
answers and understanding they need.

TESTPREP CERTIFICATION PRACTICE EXAMS -- Addressing over 45 of the
most popular current certification exams from Microsoft, Cisco, Oracle and
CompTIA, TestPrep practice exams allow learners to test their knowledge in
a simulated certification-testing environment. Tests can be taken in two
modes -- study and certification. The un-timed study mode is designed to
maximize learning by providing feedback and mapping back to appropriate
SkillSoft courses for further study, while the against-the-clock
certification mode is designed to mimic a certification exam.

SIMULATIONS -- Our IT skills courses contain standalone topics that
give learners the opportunity to independently practice or consolidate the
most critical procedures and learning taught in the preceding instruction.
There are four types of simulations, each focused on developing different
skills:

- Software simulations, which consist of a series of tasks that
learners perform in a simulated version of the application being
discussed in the course.

- Coding simulations, which give learners the opportunity to analyze
and write code or commands.

- Hardware simulations, which simulate hardware setup problems.

- Case-Studies, which consist of an interactive review of concepts and
information, presented in a "real-world" scenario.

All of these exercises provide the learner with the opportunity to practice
his or her skills at higher learning levels. All types of exercises typically
build on skills practiced previously in the course and are designed to cover
multiple learning objectives.

MENTORED EXERCISES AND SELF-ASSESSMENT EXERCISES. These exercises are
designed to provide the user with an opportunity to apply new knowledge and
skills within a live software application. Mentored exercises are designed to
allow learners to carry out complex tasks and exercises and submit them to a
mentor for review. Self-assessment exercises afford learners the opportunity to
carry out similar tasks and exercises, on which they can then assess themselves
from a provided solution. Both of these exercises involve the presentation of a
real-world scenario requiring the learner to provide a solution or complete a
series of tasks. After completing a series of these activities, users will have
a set of documents or products demonstrating proficiency with the skills taught
by the course.

WEB-BASED ARCHITECTURE AND DEPLOYMENT

Our Web-based architecture and deployment strategy enables us to provide a
number of features to support users in their learning.

- Learning Management Platforms are a key enabling technology that permit
users to access a wide variety of e-learning resources over the Web,
including courseware, simulations, Referenceware, Online Mentoring,
SkillBriefs, Job Aids and TestPrep Certification Practice Exams. Our
SkillPort Learning Management System provides a rich feature set to
support the full range of corporate learning needs with a high degree of
reliability and scalability. Available as a hosted solution, SkillPort
offers
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our customers a low-cost, low IT-burden option with fast
"time-to-learning." We are currently migrating our customers using the
MySmartForce platform and other SkillSoft platforms to SkillPort. In
addition to our own platform, we continue to strive for convenient, easy
integration of our content into third-party learning management systems
through ongoing support of industry standards and business partnerships.

- SkillPort Search-and-Learn technology, a key component of SkillPort,
allows the users to search and access learning resources topically with a
single, unified search. For example, a learner searching for resources on
Cisco networks can discover the various SkillSoft courses, books,
TestPreps, Express Guides and online mentoring services available to the
learner with a single search query. From the identified results, the
learner can then choose the resource that best meets his or her specific
needs, time requirements and learning preferences.

- SkillPort Extended Content Support allows customers to track, manage and
search custom courses created by SkillSoft's authoring tools, as well as
Microsoft Word, PowerPoint and Excel and Adobe PDF documents. This gives
organizations the ability to incorporate important information resources
such as white papers, launch plans, budget templates, and customized
training within a comprehensive learning database. SkillPort also
supports off-the-shelf and custom courseware from third-party providers,
as long as the content is designed according to open standards and meets
SkillSoft's custom content support guidelines.

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

- Assistive Technology Support is designed to address the requirements of
Section 508 of the Rehabilitation Act Amendments of 1998, which provides
that as of June, 2001 computer software applications purchased or
developed by federal agencies must be designed for accessibility by
people who are blind, deaf or have poor motor skills. We have
aggressively worked to adapt our online IT and business skills courseware
to meet the requirements established by Section 508. This development
work is consistent with our general corporate philosophy to help
organizations "democratize" training and give all employees access to
training and development opportunities anywhere, anytime through
computers. Our North American English IT and business skills courseware
now provides any user in a government or commercial organization with
sight, hearing and/or mobility limitations, equal access to our courses
through the use of assistive technologies such as screen readers.

Our products incorporate high performing Web technologies that we believe
substantially improve our product performance. Our courses and support tools are
developed using cross-platform technologies such as HTML, XML, Java, JavaScript,
Macromedia Flash and ColdFusion. Our products employ advanced compression and
database management techniques, which allow our products to deliver high-quality
performance within our customers' bandwidth constraints. This enables us to
provide our e-learning solutions to most users, not just those with the most
powerful computers, quickest modems and highest resolution monitors.

We also offer a fully hosted model as a deployment option for companies
that prefer to have users access courses from SkillSoft-managed servers via the
Internet rather than host the courses on the customer's own intranet. For many
customers, this option can significantly simplify and shorten the implementation
process.

PRODUCT PRICING

The pricing for our courses varies based upon the number of course titles
or the courseware bundle licensed by a customer, the number of users and the
length of the license agreement (generally one, two or three years). Our license
agreements permit customers to exchange course titles, generally on the contract
anniversary date. Some product features, such as SkillPort, the Course
Customization Toolkit and course hosting, are separately licensed for an
additional fee.

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The pricing for our SkillChoice Solution license varies based on the
content offering selected by the customer, the number of users within the
customer's organization and the length of the license agreement. Our SkillChoice
Solution license provides customers access to a full range of learning products
including courseware, Referenceware, simulations, mentoring and prescriptive
assessment.

A Referenceware license gives users access to the full library within one
or more collections (ITPro, BusinessPro, FinancePro and OfficeEssentials) from
Books24x7. The pricing for our Referenceware licenses varies based on the
collections specified by a customer, the number of users within the customer's
organization and the length of the license agreement.

SALES AND MARKETING

In the fiscal year ended January 31, 2004, our products were sold in over
51 countries. We use a multi-prong sales strategy, consisting of

- a direct sales force for larger accounts;

- a telesales force to support the field sales organization

- a telesales organization (SmartCertify Direct, based in Clearwater,
Florida) for selling directly to consumers; and

- resellers to address certain opportunities in the United States and some
international markets.

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

As of January 31, 2004, we employed 227 sales professionals and sales
operations, telesales, sales management and corporate development personnel (not
including SmartCertify). Each account executive reports to either a regional
sales director or a regional sales vice president who is responsible for revenue
growth and expense control for his or her area. Our sales professionals have
significant sales experience, as well as extensive contacts with the corporate
customers that we target. 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 our organization.

In addition to the telesales personnel located in Nashua and the United
Kingdom, we also engage in selling efforts through our telesales organization
located in Clearwater, Florida, SmartCertify Direct, Inc. As of January 31,
2004, SmartCertify Direct employed 221 people in telesales, sales operations,
sales management and marketing.

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

We have an office in the United Kingdom that serves as the hub of our
Europe and Middle East operations. We also have an office in Sydney, Australia
that serves as the hub for our Asia-Pacific operations. In order to accelerate
our worldwide market penetration, our sales strategy includes developing
relationships to access indirect sales channels such as reseller and distributor
partners. Our indirect sales channels give us access to a more diverse client
base, which we otherwise would not be able to reach in a cost-effective manner
through our direct sales force. At January 31, 2004, we employed 11 indirect
sales channel employees. Our

13

development and marketing partners also generally have the right to resell
products developed under their alliances with us.

Our marketing organization utilizes a variety of programs to support our
global sales team. As of January 31, 2004, our marketing organization (excluding
SmartCertify) consisted of 25 employees. Our marketing programs include:

- Customer Advisory Forum and user group events;

- product and strategy updates with industry analysts;

- public relations activities and speaking engagements;

- articles in the trade press;

- printed promotional materials;

- promotional materials and events on our Web sites; and

- Events, "roadshow" tours, seminars and trade shows.

No customer accounted for more than 10% of our revenue for the fiscal year
ended January 31, 2004. See Note 11 of the Notes to the Consolidated Financial
Statements for a discussion of our revenue by geographic area.

CUSTOMER SERVICE AND SUPPORT

We offer a broad range of support and services to our customers across the
e-learning lifecycle through our customer service and support organization. We
believe that providing a high level of customer service and support is necessary
to achieve rapid product implementation, customer satisfaction and continued
revenue growth.

Installation support -- We have application engineers available to assist
customers with the technical aspects of installing and deploying our 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.

Account consulting -- We employ account consultants to assist customers in
planning and implementing best practices for e-learning program success. These
individuals assist with the implementation of pilot programs and offer expertise
in establishing training success criteria, planning internal marketing programs
and communicating with e-learning end users. Our account consultants work in
close coordination with our application engineers and sales representatives and
are an important component of our efforts to monitor and ensure customer
satisfaction and success.

Customer support. We also provide Web-based, telephone, e-mail and chat
support to our customers through our customer service and support organization.
They are available to assist customers 7 days per week, 24 hours per day.

As of January 31, 2004, our customer service and support organization
(excluding SmartCertify) consisted of 214 people globally

STRATEGIC ALLIANCES

We have entered into, and will continue to expand, our relationships with
leading content partners, vendors of software products and learning partners in
the markets of e-Business, business, interpersonal and professional skills,
vertical education, training and IT.

We have entered into alliances with Cisco, PeopleSoft, Oracle, SAP, IBM
Project Management Institute and the Wharton School of the University of
Pennsylvania. These alliances encompass content co-development arrangements,
platform integration programs and distribution partnerships through
complimentary channels.

14

We believe our development alliances offer a number of advantages, which
may include early access to business and IT content and partners pre-released
products as well as software engineers and technical advisors for assistance in
developing our learning solutions. With the approval of the development partner,
products developed under the relationship can be identified as authorized by
that content partner, which we believe may improve the marketability of such
courses. In addition, these alliances may result in increased distribution
channels for us by allowing each party to distribute courses to its respective
customer base. We believe that these alliances also provide significant benefits
to the content partner by allowing them to achieve additional market penetration
generated by increasing the base of trained users.

COMPETITION

The market for corporate education and training products is fragmented and
highly competitive. We expect that competition in this market will remain
intense in the future for the following reasons:

- The expected growth of this market.

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

- Our course content providers are often not prohibited from developing
courses on similar topics for other companies, provided that they do not
use our toolkit or templates.

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

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

- Providers of traditional classroom instruction. Many of the companies in
this category are attempting to adapt their courses to e-learning formats
suitable for access via Web browsers and, in general, compete for the
same training dollars in the customer's budget.

- Providers of CD-ROM training courses.

- suppliers of online corporate education and training courses, including
Thomson Learning (through subsidiaries such as NETg and Course
Technologies), Element K, KnowledgeNet and MindLeaders. Our Books24x7
business competes with companies such as Safari, a joint venture between
Pearson Technology Group and O'Reilly & Associates, which offers
aggregated content primarily restricted to its own titles on a
subscription basis.

We believe that the principal competitive factors in the corporate
education and training market include:

- the breadth, depth, currency and instructional design quality of the
course content;

- informal performance support and other features of the training solution;

- adaptability, flexibility, reliability, scalability and performance of
technology platforms offered;

- standards compliance and ease-of-integration with third party systems;

- the deployment options offered to customers, such as hosted, intranet and
low bandwidth access;

- customer service and support;

- price/value relationship;

- relationships with the customer; and

- corporate reputation.

Although we believe that we currently compete favorably with respect to
those factors, we may not be able to maintain or improve our competitive
position. Some of our current and potential competitors have
15

greater financial resources than we do. Increased competition may result in lost
sales and may force us to lower prices, which may adversely affect our business
and financial performance.

PRODUCT DEVELOPMENT

We believe that the development of an effective training product requires
the convergence of source material, instructional design and computer
technology. When developing a new learning path or product, we first obtain
content from our content partners or other subject matter experts, existing
courses and product reference materials. Our design and development teams then
define the user-focused performance objectives and select the content,
instructional strategies, learning activities, and assessments appropriate for
the intended learning outcomes. This process includes the creation of design
documents, scripts, and in some cases storyboards to document the planned
content sequence, instructional flow, and interactive presentation and practice
strategies. The design and development team includes subject matter experts,
learning designers, technical writers and developers, graphic designers,
animators, and content editors and quality assurance reviewers. After final
assembly or integration of all course components into a completed course, we
test to ensure all functional capabilities work as designed and deliver the
desired learning experience and result.

The core element of our learning solution development process is our design
and development process and the tools we use to support that process. Our
design, development and production tools are comprised of our own proprietary
software and off-the-shelf tools. Our combination of development toolsets allows
us to quickly and efficiently create and continually update modular learning
events and enhance, on an ongoing basis, the multimedia content of such learning
events. Our research and development goal is to further enhance our product
development process and tools to facilitate the continual evolution of our
offerings and ensure that our instructional products incorporate a wide variety
of meaningful and effective instructional elements. We use internal developers
as well as external content development partners to produce content for our
business and IT skills curriculums. Our current network of external content
development partners use the same methods, processes, and tools to develop
content as our internal developers, and are held to the same set of
instructional design and content quality standards. Course content is supplied
by us, by other companies from which we have licensed content, or by the
developer, based on an outline jointly defined by us and the developer.

Our research and development efforts also include a focus on the design,
development and integration of other key product elements, including online IT
mentoring by certified content experts 24 hours a day, 7 days a week, task-based
IT simulations and labs, business skills focused SkillSimulations, Certification
TestPrep for IT, and online Referenceware for business and IT skills.

Our approach to technology begins with the understanding that the ability
of our customers to deploy our e-learning applications and content is a critical
factor in their success with our products. To meet our customers' varied needs,
we strive to enable our courses to be able to be delivered on-line, using
standard Web browsers downloaded for off-line usage, or distributed via CDROM.

Through careful technology selection, product design, and exhaustive
compatibility testing, we ensure our products can be deployed on the vast
majority of corporate desktop computers and without requiring the installation
of specialized plug-ins whenever possible, and can be delivered over the varied
and complex network infrastructures in existence today. As technologies and
standards evolve, we continuously review those changes and consider adapting our
products when possible to ensure compatibility.

We employ compression technologies for our media components and design our
products to operate effectively over low bandwidth network environments. In this
way, we reach a broader number of users with our products and minimize the load
on our customers' networks.

Deployment flexibility is also achieved by adhering to industry standards
such as AICC and SCORM. Our e-learning course content is designed for
integration with third party learning management systems as well as with our
e-learning platform products.

The majority of the content for our Referenceware is licensed from third
party publishers.

16

Most of our research and development activities are conducted by internal
teams located in our main product development centers in Dublin, Ireland;
Nashua, New Hampshire; Belfast, Northern Ireland; and Fredericton, New
Brunswick, Canada.

As of January 31, 2004, the number of employees in our product development
organization totaled 415. We intend to continue to make substantial investments
in research and development. Product development expenses were $17.7 million,
$29.1 million, and $53.6 million for the fiscal years ended January 31, 2002,
2003 and 2004, respectively.

PROPRIETARY RIGHTS

We do not believe that proprietary technology forms an important or
valuable part of most of our business skills and IT skills courseware offerings.
We believe that the creative skills of our personnel in developing new products
and technologies, our ability to develop and introduce new products rapidly and
our responsiveness to customer demands are more important than the availability
of legal protections for proprietary rights. We nonetheless protect our
technology by various means, including entering into agreements with employees
to protect against disclosure of sensitive business information. We have one
United States patent and 23 foreign patents with respect to computer-based
training technologies and methods and 17 United States and foreign patent
applications pending with respect to computer-based training technologies and
methods. In addition, we currently have one patent application pending with
respect to our Books24x7 product offerings.

We attempt to avoid infringing upon intellectual property and proprietary
rights of third parties in our product development efforts. However, we do not
conduct comprehensive patent searches to determine whether the technology used
in our 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, some of
which are confidential when filed, with regard to similar technologies. If our
products violate third-party proprietary rights, we could be liable for
substantial damages. In addition, we may be required to reengineer our products
or seek to obtain licenses to continue offering the products, and those efforts
may not be successful.

We currently license certain technologies from third parties -- including
data compression technologies and tools for developing Web applications -- and
some course content that we incorporate into our products. We also license
content for our Referenceware from third party publishers. This technology and
content may not continue to be available to us on commercially reasonable terms.
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 our business and financial performance. Moreover, we
may face claims from others that the third-party technology or content
incorporated in our products violates proprietary rights held by those
claimants. We may also face claims for indemnification from our customers
resulting from infringement claims against them based on the incorporation of
third-party technology or content in our products. Although we are generally
indemnified against such claims, in some cases the scope of that indemnification
is limited. Even if we receive broad indemnification, third party indemnitors
are not always well capitalized and may not be able to indemnify us 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 our business.

SkillSoft, SkillPort, RolePlay, Search-and-Learn and Referenceware are
registered trademarks or service marks of SkillSoft. SkillChoice is a trademark
of SkillSoft.

EMPLOYEES

As of January 31, 2004, we employed 1,282 people. Of these employees, 473
were engaged in sales, sales operations, sales management, marketing and
corporate development, 180 in management, MIS, administration and finance, 214
in customer service and support and 415 in product development and fulfillment.
As of January 31, 2004, 729 employees were located in the United States and 553
in our international locations.

17

None of our employees are subject to a collective bargaining agreement and we
have not experienced any work stoppages. We believe that our employee relations
are good.

Our future success will depend in large part on the continued service of
our key management, sales, product development and operational personnel and on
our ability to attract, motivate and retain highly qualified employees. We also
depend on writers, programmers and graphic artists. We expect to continue to
hire additional product development, sales and marketing, information services,
accounting staff and other resources as we deem appropriate to meet our business
objectives.

ITEM 2. PROPERTIES

Our United States headquarters are located in an aggregate of 49,183 square
feet of office space in Nashua, New Hampshire, of which 23,783 square feet of
space is subject to a lease that currently runs on a month-to-month basis and
25,400 square feet of space is subject to a lease that expires in June 2006. In
addition, we conduct our operations primarily out of facilities located in
Dublin, Ireland; Norwood, Massachusetts; Fredericton, New Brunswick, Canada; and
Clearwater, Florida.

In Ireland, we currently lease and occupy a 68,034 square foot facility in
Dublin, which primarily houses our main product development center. Our
SmartCertify direct sales group also leases a sales office in Dublin. In
addition, we currently lease two other facilities in Dublin totaling
approximately 25,000 square feet. These spaces have been vacated and the
operations previously performed in these facilities have been consolidated into
the 68,034 square foot facility.

In Norwood, Massachusetts and Clearwater, Florida, we currently lease and
occupy 10,137 square feet and 22,129 square feet, respectively. The Clearwater
facility houses our SmartCertify direct telesales operation and the lease
expires in June 2004. The operations of our Books24x7.com subsidiary are located
in Norwood under a lease that expires in December 2005. In addition, we
currently lease approximately 41,000 square feet in Redwood City, California
that is vacant. Operations previously performed in this location have been
consolidated with our Nashua operations.

In Canada, we currently lease a total of 47,906 square feet in Fredericton,
New Brunswick between two buildings. One building, totaling 17,706 square feet,
is vacant. The Fredericton facility primarily houses our mentoring operations
and certain customer service and support personnel and expires in August 2008.

We also lease sales offices in a number of other countries including the
United Kingdom, Australia, the Benelux and Scandinavian countries, and Germany
and a development office in Belfast, Northern Ireland. We believe that our
existing facilities are adequate to meet our current needs and that suitable
additional or substitute space will be available on commercially reasonable
terms when needed. We are currently in negotiations to extend our lease in
Clearwater and to secure additional space in Nashua, New Hampshire.

ITEM 3. LEGAL PROCEEDINGS

SEC INVESTIGATION

On or about February 4, 2003, the Securities Exchange Commission (SEC)
informed us that we are the subject of a formal order of private investigation
relating to our November 19, 2002 announcement that we would restate the
financial statements of SmartForce PLC for the period 1999 through June 2002. We
understand that the SEC's investigation concerns SmartForce's financial
disclosure and accounting during that period, other related matters, compliance
with rules governing reports required to be filed with the SEC, and the conduct
of those responsible for such matters. We continue to cooperate with the SEC in
this matter.

CLASS ACTION LAWSUITS

Following the November 19, 2002 announcement of our intent to restate the
SmartForce financial statements for 1999, 2000, 2001, and the first two quarters
of 2002, several class action lawsuits were filed against us and certain of our
current and former officers and directors in the United States District Court
for the District of New Hampshire. These lawsuits alleged, that we
misrepresented or omitted to state material

18

facts in our SEC filings and press releases regarding our revenues and earnings
and failed to correct such false and misleading SEC filings and press releases,
which are alleged to have artificially inflated the price of our ADSs. These
lawsuits were assigned to Chief Judge Paul J. Barbadoro. On March 26, 2003,
Judge Barbadoro consolidated the lawsuits under the caption "In re SmartForce
Securities Litigation," Civil Action No. 02-544-B, appointed as lead plaintiffs
the Teacher's Retirement System of Louisiana and the Louisiana Sheriff's Pension
& Relief Fund, and approved the lead plaintiffs' choice of lead counsel and
local counsel. On October 31, 2003, lead plaintiffs filed two amended complaints
in this consolidated action, one on behalf of a purported class of purchasers of
our ADSs between April 27, 1999 through November 18, 2002, naming as defendants
SkillSoft PLC, Gregory M. Priest, Patrick E. Murphy, David C. Drummond and Jack
Hayes; and another on behalf of a purported class of SkillSoft Corporation
shareholders who acquired our ADSs in connection with the merger, naming as
defendants SkillSoft PLC, Gregory M. Priest, Patrick E. Murphy, Ronald C.
Conway, John M. Grillos, James S. Krzywicki, Patrick J. McDonough, Dr. Ferdinand
von Prondzynski, Stewart K.P. Gross, William T. Coleman, P. Howard Edelstein and
Charles E. Moran, as well as some additional entities. The complaints allege
that we misrepresented or omitted to state material facts, which are alleged to
have artificially inflated the price of our ADSs. In March 2004, we reached a
settlement, subject to court approval, of this litigation for total settlement
payments of $30.5 million, with one-half to be paid soon after preliminary
approval by the court (which may occur in approximately 30 days) and the balance
in approximately one year. We are in discussions with our insurers to determine
how much, if any, of this settlement amount will be paid by them. We have
recorded the aggregate settlement as a charge in our fiscal 2004 fourth quarter;
any reimbursement from our insurers will be recorded in the period in which it
is finalized.

As previously disclosed in our Quarterly Report on Form 10-Q for the
quarter ended October 31, 2003, we reached a settlement of the class action
litigation filed in 1998 in the United States District Court for the Northern
District of California against us, one of our subsidiaries and certain of our
former and current officers and directors alleging violations of the federal
securities laws. Under the terms of the settlement, we made a $10 million cash
payment in January 2004 and will make an additional $6 million payment in
mid-2004. Our insurance carriers paid an additional $16 million for total
settlement payments of $32 million. The court granted final approval of the
settlement and the litigation was dismissed with prejudice on February 27, 2004.

We are not a party to any other material legal proceedings.

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

We did not submit any matters to a vote of our shareholders during the
fiscal quarter ended January 31, 2004.

EXECUTIVE OFFICERS OF SKILLSOFT

Our executive officers are as follows:

Charles E. Moran has served as our President and Chief Executive Officer
since our merger with SkillSoft Corporation in September 2002. Mr. Moran is a
founder of SkillSoft Corporation and served as its Chairman of the Board,
President and Chief Executive Officer from January 1998 until September 2002.

19

Gregory M. Priest was appointed Chairman of the Board of Directors on
November 13, 2000. Mr. Priest has served as our Chief Strategy Officer since our
merger with SkillSoft Corporation in September 2002. Mr. Priest served as our
President and Chief Executive Officer from December 1998 to September 2002. From
February 1998 until December 1998, Mr. Priest was President and Chief Executive
Officer of Knowledge Well Group Limited and of Knowledge Well Limited. Mr.
Priest served as SmartForce's Vice President, Finance and Chief Financial
Officer from December 1995 to January 1998. Mr. Priest has been a director since
June 1996. Prior to joining SmartForce, Mr. Priest was an attorney with Wilson
Sonsini Goodrich & Rosati, Professional Corporation, a private law firm
representing technology companies, where he was elected to the partnership in
1995. From June 1989 to July 1990, Mr. Priest served as a law clerk to Justice
Thurgood Marshall of the United States Supreme Court.

Thomas J. McDonald has served as our Chief Financial Officer and Executive
Vice President, Operations, Assistant Secretary and Treasurer since our merger
with SkillSoft Corporation in September 2002. Mr. McDonald is a founder of
SkillSoft Corporation and served as its Chief Financial Officer, Vice President,
Operations, Treasurer and Secretary since February 1998.

Jerald A. Nine, Jr. has served as our Chief Operating Officer since
February 2004. Mr. Nine served as our Executive Vice President, Global Sales &
Marketing and General Manager, Content Solutions Division from our merger with
SkillSoft Corporation in September 2002 to February 2004. Mr. Nine is a founder
of SkillSoft Corporation and served as its Executive Vice President, Sales and
Marketing and General Manager, Books Division from December 2001 to February
2004. From April 1998 to December 2001, Mr. Nine served as Vice President,
Worldwide Sales and Marketing.

Mark A. Townsend has served as our Executive Vice President, Technology
since our merger with SkillSoft Corporation in September 2002. Mr. Townsend is a
founder of SkillSoft Corporation and served as its Vice President, Product
Development since January 1998.

Colm M. Darcy has served as our Executive Vice President, Content
Development since our merger with SkillSoft Corporation in September 2002. From
April 8, 2002 to September 6, 2002, Mr. Darcy served as our Executive Vice
President, Research and Development. From January 2002 to April 7, 2002, Mr.
Darcy served as Vice President of Solutions Management. From January 2001 to
December 2001, Mr. Darcy served as Vice President, Strategic Alliances. From
January 1999 to December 2000, he served as our Vice President, Content
Solutions and from January 1997 to December 1998, he served as Director,
Curriculum Development. Prior to joining us, Mr. Darcy held positions in
Finance, Human Resources, Training and Information Technology in the Irish
Government's Department of Health and Child Welfare.

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

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PART II

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

Our ADSs are listed on the NASDAQ National Market under the symbol "SKIL".
The following table sets forth, for the periods indicated, the high and low
intraday sale prices per share of our ADSs as reported on the NASDAQ National
Market between January 1, 2002 and January 31, 2004.

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

* As of the closing of our merger with SkillSoft Corporation, we changed our
fiscal year end from December 31 to January 31.

As of March 31, 2004, there were 11 holders of ordinary shares of record.

We have not paid any cash dividends on our ordinary shares and do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to fund the growth of our business.
Dividends may only be declared and paid out of profits available for
distribution determined in accordance with accounting principles generally
accepted in Ireland and applicable Irish Company Law. There are no additional
material restrictions on the distribution of income or retained earnings by our
consolidated group companies. Any dividends, if and when declared, will be
declared and paid in United States dollars.

IRISH STAMP DUTY

Stamp duty, which is a tax on certain documents, is payable on all
transfers of ordinary shares in companies registered in Ireland wherever the
instrument of transfer may be executed. In the case of a transfer on sale, stamp
duty will be charged at the rate of E1 for every E100 (or part thereof) of the
amount or value of the purchase price. Where the consideration for the sale is
expressed in a currency other than Euro, the duty will be charged on the Euro
equivalent calculated at the rate of exchange prevailing on the date of the
transfer. In the case of a transfer by way of gift, subject to certain
exceptions, or for considerations less than the market value of the shares
transferred, stamp duty will be charged at the above rate on such market value.

A transfer or issue of ordinary shares for deposit under the deposit
agreements among us, The Bank of New York, as Depositary, and the registered
holders and the owners of a beneficial interest in book-entry American
Depositary Receipts, or ADRs, in return for ADRs will be similarly chargeable
with stamp duty as will a transfer of ordinary shares from the Depositary or the
custodian under the deposit agreements upon surrender of an ADR for the purpose
of the withdrawal of the underlying ordinary shares in accordance with the terms
of the Deposit Agreement.

We received a ruling from the Irish Revenue Commissioners that transfers of
ADRs issued in respect of our shares will not be chargeable with Irish stamp
duty for so long as the ADRs are dealt in and quoted on the NASDAQ National
Market. It has been confirmed in Section 207, Finance Act 1992 that transfers of
ADRs will be exempt from stamp duty where the ADRs are dealt with in a
recognized stock exchange. The NASDAQ National Market is regarded by the Irish
authorities as a recognized stock exchange for these purposes.

21

The person accountable for payment of stamp duty is the transferee or, in
the case of a transfer by way of gift or for a consideration less than the
market value, both parties to the transfer. Stamp duty is normally payable
within 30 days after the date of execution of the transfer. Late payment of
stamp duty will result in liability to interest, penalties and fines.

PART II

ITEM 6. SELECTED FINANCIAL DATA

Incorporated by reference from Appendix A attached hereto.

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

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

OVERVIEW

We are the result of the merger of SmartForce PLC (SmartForce or SmartForce
PLC) and SkillSoft Corporation. The new combined SkillSoft PLC is a global
leader in corporate e-learning and brings together SmartForce's leading
portfolio of information technology (IT) e-learning content with SkillSoft
Corporation's extensive suite of business skills e-learning courseware, as well
as its IT and business Referenceware libraries.

The merger of SmartForce and SkillSoft Corporation (the Merger) closed on
September 6, 2002. For accounting purposes, the Merger was accounted for as a
reverse acquisition, with SkillSoft Corporation as the accounting acquirer. The
historical financial statements of SkillSoft Corporation have become our
historical financial statements, and the results of operations of SkillSoft PLC
(formerly known as SmartForce PLC) are included in our results of operations
only from September 6, 2002. For accounting purposes, the purchase price was
approximately $371.7 million which consisted of the value of stock and options
issued, and transaction and merger costs. The excess purchase price over the net
tangible assets was primarily allocated to goodwill, content and customer base.

A primary reason for the increase in our revenue and operating expenses
from the fiscal year ended January 31, 2003 to the fiscal year ended January 31,
2004 is the inclusion of the operating results of SkillSoft PLC for the
full-year ended January 31, 2004. We operate as two reporting segments:
multi-modal learning and retail certification. These reporting units are not
discussed separately as the impact on the comparison of financial results from
period to period is not significant.

We are a leading global provider of comprehensive, multi-modal e-learning
content and software products for business and IT professionals. Multi-modal
learning (MML) solutions offer powerful tools to support and enhance the speed
and effectiveness of both formal and informal learning processes. MML solutions
integrate our in-depth courseware, learning management platform technology and
support services to meet our customers' learning needs.

We primarily derive revenue from license agreements under which customers
license our products and services. The pricing for our courses varies based upon
the number of course titles or the courseware bundle 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). Our license agreements permit
customers to exchange course titles, generally, on the contract anniversary
date. Additional product features, such as hosting and on-line mentoring
services, are separately licensed for an additional fee.

The pricing for our MML licenses varies based on the choice of MML, content
offering selected by the customer, the number of users within the customer's
organization and the length of the license agreement.

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Our MML license provides customers access to a full range of learning products
including courseware, Referenceware, simulations, mentoring and prescriptive
assessment.

A Referenceware license from our subsidiary, Books24x7.com (Books) gives
users access to the full library within one or more collections (ITPro,
BusinessPro, FinancePro and OfficeEssentials). The pricing for our Referenceware
licenses varies based on the collections specified by a customer, the number of
users within the customer's organization and the length of the license
agreement.

We offer discounts from our ordinary pricing, and purchasers of licenses
for larger numbers of courses, for larger user bases or for longer periods
generally receive discounts. Generally, customers may amend their license
agreements, for an additional fee, to gain access to additional courses or
product lines and/or to increase the size of the user base. We also derive
revenue from hosting fees for clients that use our solutions on an application
service provider (ASP) basis, on-line mentoring services and professional
services. In selected circumstances, we derive revenue on a pay-for-use basis
under which some customers are charged based on the number of courses accessed
by users. Revenue derived from pay-for-use contracts has been minimal to date.

We recognize revenue ratably over the license period if the number of
courses that a customer has access to is not clearly defined, available, or
selected at the inception of the contract, or if the contract has additional
undelivered elements for which we do not have vendor specific objective evidence
(VSOE) of the fair value of the various elements. This may occur if the customer
does not specify all licensed courses at the outset, the customer chooses to
wait for future licensed courses on a when and if available basis, the customer
is given exchange privileges that are exercisable other than on the contract
anniversaries, or the customer licenses all courses currently available and to
be developed during the term of the arrangement. Nearly all of our contractual
arrangements result in the recognition of revenue ratably over the license
period; consequently, substantially all of our revenue is recognized on a
ratable basis.

We also derive revenue from extranet hosting/ASP services and online
mentoring services. We recognize revenue related to extranet hosting/ASP
services and online mentoring services on a straight-line basis over the period
the services are provided.

We generally bill the annual license fee for the first year of a multi-year
agreement in advance and license fees for subsequent years of multi-year license
arrangements are billed on the anniversary date of the agreement. In some
circumstances, we offer payment terms of up to six months from the initial
shipment date or anniversary date for multi-year agreements to our customers. To
the extent that a customer is given extended payment terms, revenue is
recognized as cash becomes due, assuming all of the other elements of revenue
recognition have been satisfied.

We recognize revenue on Referenceware and MML licenses ratably over the
term of the agreement, which matches the period the future products or services
are delivered.

We commence the recognition of revenue from resellers upon both the final
sale to the end user and the receipt of cash from the reseller. With respect to
reseller agreements with minimum commitments, we recognize revenue related to
the portion of the minimum commitment that exceeds end user sales at the
expiration of the commitment period provided we have received payment.

We provide professional services, including instructor-led training,
customized content, websites and implementation services. We recognize
professional service revenue as the services are performed.

We record deferred revenue when amounts have been billed in advance of
products or services provided. Deferred revenue includes the unrecognized
portion of revenue associated with license fees for which we have received
payment or for which amounts have been billed and are currently due for payment
in 90 days or less for resellers and 180 days or less for direct customers. In
addition, deferred revenue includes amounts, which have been billed and not
collected, for which revenue is being recognized ratably over the license
period. In addition, in connection with the Merger, we acquired approximately
$47 million of deferred revenue which was valued based upon the estimated cost
to fulfill the remaining contractual and performance obligations plus

23

a normal operating profit on fulfilling such obligations. The remaining amount
of the acquired deferred revenue as of January 31, 2004 was approximately
$749,000.

Cost of revenue includes the cost of materials (such as storage media),
packaging, shipping and handling, CD duplication, the cost of online mentoring
and hosting services, royalties and certain infrastructure and occupancy
expenses. We generally recognize these costs 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. We account for software development costs in accordance with
SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed," 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 we have expensed all software development
costs 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, other public company costs and certain infrastructure and
occupancy expenses.

Deferred compensation consists of two components: (1) the value of unvested
options assumed in the Books acquisition and the Merger, and (2) the aggregate
difference between the exercise or sale price of common stock options granted or
restricted common stock sold during the year ended January 31, 2000 and the fair
market value of the common stock as determined for accounting purposes. The
deferred compensation is amortized over the vesting period of the underlying
stock option or stock.

Amortization of intangibles represents the amortization of intangibles,
such as customer value and content, from the Books acquisition, the Merger and
the acquisition of GoTrain Corp.

Restructuring and other non-recurring charges consist of compensation costs
of severed SmartForce employees for services rendered from the date of the
Merger through January 31, 2003 and prior to such employees' termination dates
and certain other non-recurring compensation costs to terminated and continuing
employees. In addition, in fiscal 2003 and 2004, these charges related primarily
to the restatement of SmartForce's historical financial statements and related
SEC investigation (See "Risks Related to Legal Proceedings" section) and consist
primarily of professional fees, including legal, accounting and consulting fees.
See Note 4 of the Notes to the Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are more fully described in Note 2 of
the Notes to the Consolidated Financial Statements. However, we believe the
accounting policies described below are particularly important to the portrayal
and understanding of our financial position and results of operations and
require application of significant judgment by our management. In applying these
policies, management uses its judgment in making certain assumptions and
estimates.

REVENUE RECOGNITION

We recognize revenue in accordance with American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) No. 97-2 "Software
Revenue Recognition," as amended by SOP No. 98-4 and SOP No. 98-9. Additionally,
for agreements under which we are selling licenses and services, we recognize
revenue under EITF 00-3 "Application of AICPA Statement of Position 97-2 to
Arrangements That Include the Right to Use Software Stored on Another's
Hardware" and Staff Accounting Bulletin (SAB) No. 104 "Revenue Recognition".
These statements require that four basic criteria must be satisfied before
revenue can be recognized:

- Persuasive evidence of an arrangement between us and a third party
exists;

- Delivery of our product has occurred;

24

- The sales price for the product is fixed or determinable; and

- Collection of the sales price is probable.

Our management uses its judgment concerning the satisfaction of these
criteria, particularly the criteria relating to the determination of when
delivery has occurred and the criteria relating to the collectibility of the
receivables relating to such sales. Should changes and conditions cause
management to determine that these criteria are not met for certain future
transactions, revenue recognized for any period could be adversely affected.
However, this is mitigated by the fact that the majority of our revenue is
recognized ratably over the term of the respective license. Please see the
discussion under the "Overview" section concerning how we recognize revenue.

IMPAIRMENT OF GOODWILL

We review the carrying value of goodwill on an annual basis based upon the
expected future discounted operating cash flows of our business. Our cash flow
estimates are based on historical results adjusted to reflect our best estimate
of future markets and operating conditions. Actual results may differ materially
from these estimates. The timing and size of impairment charges involves the
application of management's judgment and could significantly affect our
operating results. As a result of the Merger, one of our largest assets is
goodwill. In response to several factors in the fourth quarter of fiscal 2003,
under FAS 142 we evaluated the fair value of the goodwill established in
connection with the Merger and the Books acquisition and recorded an impairment
charge of approximately $250.1 million as part of our annual impairment test. In
the fourth quarter of fiscal 2004, we evaluated the fair value of goodwill and
determined that there was no further impairment. See Note 5 of the Notes to the
Consolidated Financial Statements.

LEGAL CONTINGENCIES

We are currently involved in certain legal proceedings. In connection with
these legal proceedings, which we discuss in Part I -- Item 3, and in Note 8 of
the Notes to the Consolidated Financial Statements, management periodically
reviews estimates of potential costs to be incurred by us in connection with the
adjudication or settlement, if any, of these proceedings. These estimates are
developed in consultation with our outside counsel and are based on an analysis
of potential litigation outcomes and settlement strategies. In accordance with
SFAS No. 5, "Accounting for Contingencies", loss contingencies are accrued if,
in the opinion of management, an adverse outcome is probable and such outcome
can be reasonably estimated. In accordance with SFAS No. 5, gain contingencies
are accrued if, in the opinion of management, a favorable outcome is probable
and such outcome can be reasonably estimated. We note that legal costs are
expensed as incurred.

25

RESULTS OF OPERATIONS

COMPARISON OF THE FISCAL YEARS ENDED JANUARY 31, 2004 AND 2003

REVENUE

Revenue increased $92.0 million, or 91% to $193.5 million in the fiscal
year ended January 31, 2004 from $101.5 million in the fiscal year ended January
31, 2003. This increase was due to the addition of revenue from SmartForce's
historical customer base as well as revenue generated from new business. As
combined company revenue is only included after the closing of the Merger the
fiscal year ended January 31, 2003 does not include a full year of combined
company revenue. For the fiscal year ended January 31, 2004 renewal rates
improved reflecting increased customer satisfaction, partially offset by a
cautious corporate spending environment. We exited the year ended January 31,
2004 with noncancellable backlog, consisting of deferred revenue and committed
contracts, of approximately $170 million as compared to $135 million a year ago.
The increase in noncancellable backlog is due primarily to improved renewal
rates, expanded offerings for multi-modal learning customers and new customers.

26

Revenue increased by 93% and 82% in the year ended January 31, 2004 in the
United States and internationally, respectively, as compared to the year ended
January 31, 2003. The United States represented 81% and 80% of revenue for the
years ended January 31, 2004 and 2003, respectively.

The multi-modal learning segment represented 93% of revenues for both the
year ended January 31, 2004 and 2003, respectively.

COSTS AND EXPENSES

Cost of revenue increased $6.8 million, or 59% to $18.4 million in the
fiscal year ended January 31, 2004 from $11.5 million in the fiscal year ended
January 31, 2003. Cost of revenue as a percentage of total revenue was 10% in
the fiscal year ended January 31, 2004 versus 11% in the fiscal year ended
January 31, 2003. The increase in absolute dollars was primarily due to the
increase in revenue from fiscal 2003 to fiscal 2004, increased costs of
supporting the legacy SmartForce hosting business and royalty fees associated
with the legacy SmartForce IT product line. The decrease in percentage of
revenue was primarily due to cost efficiencies, primarily from reduced
infrastructure costs, achieved as a result of the Merger.

Research and development increased $24.5 million, or 84% to $53.6 million
in the fiscal year ended January 31, 2004 from $29.1 million in the fiscal year
ended January 31, 2003. This increase was due in part to the addition of
SmartForce's research and development organization. In addition, we incurred
$10.4 million in incremental costs associated with modifying the SmartForce
content to be compliant with SkillSoft standards and practices and $5.3 million
in incremental research and development costs associated with our initiatives
related to content offerings and improvements and platform improvements. We
believe that these incremental costs are substantially complete at January 31,
2004. We believe our outsourcing strategy for some of our courses, which allows
us to offer a broader set of content, provides us significant flexibility to
control these costs. Research and development expenses as a percentage of total
revenue decreased to 28% in the fiscal year ended January 31, 2004 from 29% in
the fiscal year ended January 31, 2003. With the substantial completion of the
incremental investment in research and development we expect research and
development expenses to decrease in both absolute dollars and as a percentage of
total revenue in the fiscal year ending January 31, 2005.

Selling and marketing expenses increased $34.8 million, or 66% to $87.5
million in the fiscal year ended January 31, 2004 from $52.7 million in the
fiscal year ended January 31, 2003. Selling and marketing expenses increased due
to the addition of SmartForce's sales and marketing organization and related
costs. Selling and marketing expenses as a percentage of total revenue decreased
to 45% in the fiscal year ended January 31, 2004 from 52% in the fiscal year
ended January 31, 2003. The large percentage decrease was primarily due to the
significant increase in revenue from fiscal 2003 to fiscal 2004. We believe that
a significant investment in selling and marketing to expand our distribution
channels worldwide is required to remain competitive, and we therefore expect
selling and marketing expenses to increase in absolute dollars, but decrease as
a percentage of total revenue over the next twelve months.

General and administrative expenses increased $10.0 million, or 56% to
$27.9 million in the fiscal year ended January 31, 2004 from $17.9 million in
the fiscal year ended January 31, 2003. General and administrative expenses as a
percentage of total revenue decreased to 14% in the fiscal year ended January
31, 2004 from 18% in the fiscal year ended January 31, 2003. General and
administrative expenses increased in absolute dollars primarily due to
approximately $5.3 million of increased costs associated with being a public
company, including legal, audit, insurance and Sarbanes-Oxley Act compliance.
The remainder of the

27

increase was primarily due to the impact of a full year of additional personnel
related costs due to the Merger. The large percentage decrease from fiscal 2003
to fiscal 2004 was mainly due to a significant increase in revenue in fiscal
2004. We anticipate that general and administrative expenses will continue to
increase in absolute dollars due primarily to increases in the costs of
operating as a public company partially offset by a decrease in litigation
related legal expenses over the next twelve months.

Litigation settlement expenses were $93.8 million in the fiscal year ended
January 31, 2004. This related primarily to the settlements of the 1998
securities class action litigation ($16.0 million), the NETg litigation ($44.0
million), the 2002 class action litigation ($31.5 million) and the IPLearn
litigation ($2.0 million).

Stock-based compensation expense increased $352,000, or 22% to $2.0 million
in the fiscal year ended January 31, 2004 from $1.6 million in the fiscal year
ended January 31, 2003. The expense relates to amortization of deferred
compensation resulting from granting of stock options to employees at exercise
prices below the fair market value of the stock and the sales of restricted
common stock with sales prices below the fair market value of the stock. The
stock options granted and restricted stock sold at prices below fair market
value of the stock were granted by SkillSoft Corporation prior to its initial
public offering and by Books prior to its acquisition by SkillSoft Corporation
in December 2001. In addition we recorded a one time compensation charge of
$274,000 in the fiscal year ended January 31, 2004 due to the extension of
certain option agreements until the Registration Statement on Form S-8 covering
such option agreements, which was suspended as a result of our delay in filing a
Form 8-K/A containing the historical SmartForce financial statements, was again
available for use.

Amortization of intangible assets increased $5.4 million, or 115%, to $10.1
million in the fiscal year ended January 31, 2004 from $4.7 million in the
fiscal year ended January 31, 2003. See Note 5 of the Notes to the Consolidated
Financial Statements

Restructuring and other non-recurring charges decreased $1.1 million, or
5%, to $18.2 million in the year ended January 31, 2004 from $19.3 million in
the fiscal year ended January 31, 2003. The restructuring and non-recurring
charges relate to the Merger. The restructuring costs primarily consist of
compensation costs for certain terminated SmartForce employees. The other
non-recurring charges primarily consist of costs directly related to the
restatement of the SmartForce historical financial statements which was
completed in the fiscal year ended January 31, 2004. In addition, other
non-recurring charges include costs related to the ongoing SEC investigation and
the 2002 securities class action lawsuits. See Note 4 of the Notes to the
Consolidated Financial Statements.

In the fourth quarter of fiscal 2004, we evaluated the fair value of
goodwill related to the Merger. We prepared a cash flow analysis by reporting
segment comparing the discounted cash flows to the net book values of the direct
assets, goodwill and intangibles associated with the two reporting units:
multi-modal learning and retail certification. The discounted cash flows
supported the direct assets, goodwill and intangibles of the multi-modal
learning business unit and the retail certification reporting unit. At January
31, 2004, we concluded there was no additional impairment of goodwill.

INTEREST INCOME/(EXPENSE), NET

Interest income, net decreased to $787,000 in the year ended January 31,
2004 from $2.2 million in the year ended January 31, 2003. This decrease was
primarily due to less funds available for investment and lower interest rates on
our cash and cash equivalents and investments.

OTHER INCOME/(EXPENSE), NET

Other income/(expense), net increased to $786,000 in the year ended January
31, 2004 from $(282,000) in the year ended January, 31, 2003. This increase was
primarily due to foreign currency fluctuations and secondarily due to gains on
sales of certain capital assets. Due to our multinational operations, our
business is subject to fluctuations based upon changes in the exchange rates
between the currencies we do business in.

28

GAIN ON SALE OF INVESTMENTS, NET

Gain on sale of investments, net, was $3.7 million in the fiscal year ended
January 31, 2004. This was primarily related to a gain of $3.6 million from the
sale of an equity investment.

PROVISION FOR INCOME TAXES

The provision for income taxes was $529,000 and $383,000 in the fiscal
years ended January 31, 2004 and 2003, respectively. The provision consists of
income taxes payable in certain foreign locations, which cannot be offset
through net operating loss carryforwards.

COMPARISON OF THE FISCAL YEARS ENDED JANUARY 31, 2003 AND 2002

REVENUE

Revenue increased $57.2 million, or 129% to $101.5 million in the fiscal
year ended January 31, 2003 from $44.3 million in the fiscal year ended January
31, 2002. This increase was due primarily to the addition of revenue from
SmartForce's historical customer base. To a lesser extent, this increase
resulted from our new customers and increased revenue from our existing
customers and a full year of revenues from Books.

Revenue increased by 108% and 286% in the year ended January 31, 2003 in
the United States and internationally, respectively, as compared to the year
ended January 31, 2002. The United States represented 80% and 88% of revenue for
the years ended January 31, 2003 and 2002, respectively primarily due to the
historical SmartForce company's more significant international presence.

The multi-modal learning segment represented 93% and 100% of revenues for
the years ended January 31, 2003 and 2002, respectively. The year ended January
31, 2003 included the combined company revenues post Merger.

COSTS AND EXPENSES

Cost of revenue increased $9.0 million, or 35.3%, to $11.5 million in the
fiscal year ended January 31, 2003 from $2.6 million in the fiscal year ended
January 31, 2002. Cost of revenue as a percentage of total revenue was 11% in
the fiscal year ended January 31, 2003 versus 6% in the fiscal year ended
January 31, 2002. These increases were primarily due to increased costs of
supporting the SmartForce hosting business and royalty fees associated with
SmartForce's IT product line and, to a lesser extent, our Referenceware product
line.

Research and development increased $11.4 million, or 64%, to $29.1 million
in the fiscal year ended January 31, 2003 from $17.7 million in the fiscal year
ended January 31, 2002. This increase was primarily due to the addition of
SmartForce's research and development organization. Research and development
expenses in the fiscal year ended January 31, 2003 include charges of $1.5
million which represent expenses to modify

29

the MySmartForce platform and content. Research and development expenses as a
percentage of total revenue decreased to 29% in the fiscal year ended January
31, 2003 from 40% in the fiscal year ended January 31, 2002. This decrease was
due to the lower research and development expenses as a percentage of revenues
of SmartForce's research and development group compared to SkillSoft
Corporation's.

Selling and marketing expenses increased $25.1 million, or 91% to $52.7
million in the fiscal year ended January 31, 2003 from $27.6 million in the
fiscal year ended January 31, 2002. Selling and marketing expenses increased due
to the addition of SmartForce's sales and marketing organization and related
costs. Selling and marketing expenses as a percentage of total revenue decreased
to 52% in the fiscal year ended January 31, 2003 from 62% in the fiscal year
ended January 31, 2002. The large percentage decrease was primarily due to the
significant increase in revenue year over year.

General and administrative expenses increased $10.7 million, or 149% to
$17.9 million in the fiscal year ended January 31, 2003 from $7.2 million in the
fiscal year ended January 31, 2002. General and administrative expenses as a
percentage of total revenue increased to 18% in the fiscal year ended January
31, 2003 from 16% in the fiscal year ended January 31, 2002. General and
administrative expenses increased in absolute dollars and as a percentage of
revenue primarily due to the Merger and related integration costs. These
expenses also increased as a result of higher litigation costs in the quarter
ended January 31, 2003.

Stock-based compensation expense increased $800,000, or 100% to $1.6
million in the fiscal year ended January 31, 2003 from $800,000 in the fiscal
year ended January 31, 2002. The increase reflects additional deferred
compensation expense as a result of the Merger and the Books acquisition in
December 2001. The remaining expense was primarily the result of amortization of
deferred compensation resulting from granting of stock options to employees at
exercise prices below the fair market value of the stock and the sale of
restricted stock with sales prices below the fair market value of the stock. The
stock options granted at exercise prices below fair market value of the stock
were granted by SkillSoft Corporation prior to its initial public offering and
by Books prior to it being acquired in December 2001.

Amortization of intangible assets increased to $4.7 million in the fiscal
year ended January 31, 2003 from $27,000 in the fiscal year ended January 31,
2002. The increase was primarily due to the intangible assets acquired in the
Merger and the Books acquisition in December 2001. See Note 5 of the Notes to
the Consolidated Financial Statements.

Restructuring and other non-recurring charges were $19.3 million for the
year ended January 31, 2003. The restructuring and non-recurring charges were
recorded in connection with the Merger and the Books acquisition. The
restructuring costs primarily consist of compensation costs for certain
terminated SmartForce employees. The other non-recurring charges primarily
consist of costs directly related to the restatement of the SmartForce
historical financial statements. See Note 4 of the Notes to the Consolidated
Financial Statements.

In response to several factors in the fourth quarter of fiscal 2003 and as
part of our annual impairment test, we re-evaluated the fair value of the
goodwill established in connection with the Merger and the Books acquisition. We
prepared a cash flow analysis by reporting segment comparing the discounted cash
flows to the net book values of the direct assets, goodwill and intangibles
associated with the two reporting units: multi-modal learning and retail
certification. The discounted cash flows did not support the direct assets,
goodwill and intangibles of the multi-modal learning reporting unit. However,
the discounted cash flows did support the value of the retail certification
reporting unit.

The enterprise value of the two reporting units and the identifiable
intangible assets were based on valuations prepared by a third party appraisal
firm using assumptions provided by management. The enterprise value was based
upon a discounted cash flow analysis prepared by our management. The discounted
cash flow analysis included many factors including a reduction in expected
revenues for the fiscal year ended January 31, 2004 due to the elimination of
three non-core businesses -- Telcom, Prokoda Services and Custom Global Services
and to a lesser extent, lower than anticipated revenues. Although market
analysts continue to indicate strong growth in the e-learning sector, we have
assumed it to be a lower growth rate than originally considered at the time of
the Merger. We have also valued our current customer base, including the
synergies from cross-

30

selling our products, content, technology, trademarks and net operating loss
carryforwards. The cash flow analysis indicated the discounted cash flows were
not sufficient to recover the assets. Accordingly, we have recorded a $250.1
million impairment to goodwill in the fourth quarter of fiscal 2003.

In connection with the Merger, we decided to exit the Telcom business and
sold the business as of January 31, 2003. As more fully described in Note 3(c)
of the Notes to the Consolidated Financial Statements, other income (expense)
includes the results of operations for the period from September 6, 2002 through
January 31, 2003 of the Telcom business.

INTEREST INCOME/(EXPENSE), NET

Interest income (expense), net, increased to $2.2 million, or by 20% in the
fiscal year ended January 31, 2003 from $1.8 million in the fiscal year ended
January 31, 2002. This increase was primarily due to additional investments
acquired in the Merger.

OTHER INCOME/(EXPENSE), NET

Other income/(expense), net, decreased to $(282,000) in the year ended
January 31, 2004 from $150,000 in the year ended January, 31, 2003. This
decrease was primarily due to foreign currency fluctuations.

PROVISION FOR INCOME TAXES

The provision for income taxes of $383,000 consists of income taxes payable
in certain foreign locations, which cannot be offset through loss carryforwards.

31

QUARTERLY OPERATING RESULTS FOR FISCAL YEARS ENDED JANUARY 31, 2004 AND 2003

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

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

(1) Includes reclassification of Telcom results to other income (expense), net.
(See Note 3(c) of the Notes to the Consolidated Financial Statements.)

32

LIQUIDITY AND CAPITAL RESOURCES

As of January 31, 2004, our principal source of liquidity was our cash and
cash equivalents and short-term investments, which totaled $61.3 million. This
compares to $125.0 million at January 31, 2003. In addition, we have $25.0
million in restricted cash securing our line of credit, against which no
borrowings are outstanding; however letters of credit totaling $6.5 million at
January 31, 2004 reduce availability under the line of credit.

Net cash used in operating activities was $41.1 million and $38.8 million
for the fiscal years ended January 31, 2004 and 2003, respectively. Our net cash
used for the fiscal year ended January 31, 2004 reflects primarily our net loss
of $113.3 million, partially offset by an increase of $45.9 million in accrued
expenses primarily as a result of litigation settlements, and an increase in
deferred revenue of $23.5 million and the net impact of various other operating
activities.

Net cash provided by investing activities was $17.8 million and $61.9
million for the fiscal years ended January 31, 2004 and 2003, respectively.
Maturity and sales of investments, net of purchases (short and long-term),
generated a net cash inflow of approximately $51.3 million in the fiscal year
ended January 31, 2004. This was offset by the designation of $25.0 million as
restricted cash to secure a line of credit, $5.2 million used to purchase
GoTrain and purchases of capital assets totaling $3.6 million.

Net cash provided by financing activities was $7.4 million and $1.9 million
for the fiscal years ended January 31, 2004 and 2003, respectively. For the
fiscal year ended January 31, 2004, these proceeds related to the exercise of
stock options and purchases under our 1995 Employee Stock Purchase Plan, as well
as payments on notes receivable related to restricted stock.

Working capital was approximately ($49.1) million and $31.8 million as of
January 31, 2004 and 2003, respectively. The decrease in working capital in the
fiscal year ended January 31, 2004 was primarily due to the net loss of $113.3
million, offset by $17.7 million of depreciation and amortization, net of
capital purchases, and $15.3 million of litigation settlement expense for
amounts due greater than 12 months. Total assets were approximately $342.4
million and $378.1 million as of January 31, 2004 and 2003, respectively. As of
January 31, 2004, goodwill and separately identifiable intangible assets were
$125.9 million and $25.7 million, respectively.

On June 24, 2003 we executed a $25 million one year, secured line of credit
from a bank. Under the terms of the line of credit, the facility is to be
initially secured by $25 million in cash held in a certificate of deposit, plus
a first security interest in all domestic business assets. All borrowings under
the line of credit bear interest at the lesser of the bank's prime rate or the
30 or 60 day LIBOR rate plus 1.25%. The facility was subject to a commitment fee
of $75,000 to secure the line of credit and unused commitment fees of 0.05%
based upon the daily average of un-advanced amounts under the revolving line of
credit. We have paid approximately $6,300 in unused commitment fees for the
fiscal year ended January 31, 2004. In addition, the line of credit contains
certain financial and non-financial covenants. At January 31, 2004, we were in
compliance with all financial and non-financial covenants. As of January 31,
2004 there were no borrowings on the line of credit; however we had outstanding
letters of credit of $6.5 million that reduced the availability under the line
of credit. Letters of credit are subject to commission fees of 0.9% as well as
administrative costs. We have paid approximately $60,000 in letters of credit
fees for the fiscal year ended January 31, 2004. We are in the process of
negotiating certain terms of the line of credit with the bank in anticipation of
the June 23, 2004 expiration of the existing line of credit.

As of January 31, 2004, we had U.S. federal net operating loss
carryforwards of approximately $350.1 million, which are subject to potential
limitations based upon change in control provisions of Section 382 of the
Internal Revenue Code, available to reduce future income taxes, if any. We also
had U.S. federal tax credit carryforwards of approximately $3.0 million at
January 31, 2004. Additionally, we had approximately $86.7 million of net
operating loss carryforwards in jurisdictions outside of the U.S. If not
utilized, these carryforwards expire at various dates through the year ending
January 31, 2024. Included in the $350.1 million are approximately $217.7
million of U.S. net operating loss carryforwards and $365,000 of U.S. tax credit
carryforwards that were acquired in the Merger and the purchase of Books. In
addition, included in the $86.7 million is approximately $62.7 million of net
operating loss carryforwards in jurisdictions

33

outside the U.S. acquired in the Merger and the purchase of Books. We will
realize the benefits of these acquired net operating losses through reductions
to goodwill and non-goodwill intangibles during the period that the losses are
utilized. At January 31, 2004, we have approximately $3.4 million of net
operating loss carryforwards in the United States resulting from disqualifying
dispositions. We will realize the benefit of these losses through increases to
stockholder's equity in the periods in which the losses are utilized to reduce
tax payments.

We lease certain of our facilities and certain equipment and furniture
under operating lease agreements that expire at various dates through 2023.
Future minimum lease payments, net of estimated rentals, under these agreements
are as follows (in thousands):

We have entered into agreements to settle certain litigation matters,
future minimum commitments under these agreements are as follows (in thousands):

We expect to continue to experience growth in capital expenditures and
operating expenses, particularly sales and marketing, in the fiscal year ending
January 31, 2005 as compared to the fiscal year ended January 31, 2004 in order
to execute our business plan and achieve expected revenue growth. To the extent
that our execution of the business plan results in increased sales, we expect to
experience corresponding increases in deferred revenue, cash flow and prepaid
expenses. In addition, we are required to make litigation settlement payments
totaling $44.3 million. We are in discussions with our insurers to determine how
much, if any, of the settlement related to the 2002 Securities Class Action
Lawsuits will be paid by them (See Item 3. Legal Proceedings). Capital
expenditures for the fiscal year ending January 31, 2005 are expected to be
approximately $5.5 million. Also, we expect to disburse approximately $6.9
million throughout the fiscal year ending January 31, 2005 against exit and
restructuring plan accruals recorded in the fiscal years ended January 31, 2003
and 2004. We expect that the principal sources of funding for our operating
expenses, capital expenditures, litigation settlement payments and other
liquidity needs will be a combination of our available cash and cash equivalents
and short-term investments (which totaled approximately $61.3 million as of
January 31, 2004), our bank credit agreement and funds generated from
operations. We believe our current funds, available borrowings and expected cash
flows from operating activities will be sufficient to fund our operations for at
least the next 12 months. However, there are a number of factors that may
negatively impact our available sources of funds. In addition, our cash needs
may increase due to factors such as unanticipated developments in our business
or significant acquisitions. The amount of cash generated from operations will
be dependent upon the successful execution of our business plan and worldwide
economic conditions. Although we do not foresee the need to raise additional
capital, any unanticipated economic or business events could require us to raise
additional capital to support operations.

34

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46 (FIN No. 46),
"Consolidation of Variable Interest Entities," which requires the consolidation
of a variable interest entity, as defined, by its primary beneficiary. Primary
beneficiaries are those companies that are subject to a majority of the risk of
loss or entitled to receive a majority of the entity's residual returns, or
both. In determining whether it is the primary beneficiary of a variable
interest entity, an entity with a variable interest shall treat variable
interests in that same entity held by its related parties as its own interests.
We are currently evaluating the existence of variable interest entities, if any,
and the impact of adopting the interpretation on the consolidated financial
statements. On December 24, 2003, the FASB deferred FIN No. 46. We will fully
adopt FIN No. 46 in the quarter end April 30, 2004.

In January 2003, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," an amendment of SFAS No. 123, which
provides alternative methods of transition for a voluntary change to fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in annual financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. We have elected to continue to account for stock-based
compensation under APB No. 25, and related Interpretations under FIN 44 and
elect the disclosure-only alternative under SFAS No. 123 and the enhanced
disclosures as required by SFAS No. 148. See Note 2(p) of the Notes to the
Consolidated Financial Statements.

In November 2002, the FASB issued Interpretation No. 45 (FIN No. 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires a guarantor
to record certain guarantees at fair value and to make significant new
disclosures, even when the likelihood of making any payments under the guarantee
is remote. The interpretation and its disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The interpretation's initial recognition and initial measurement
provisions are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The guarantor's previous accounting for
guarantees issued prior to December 31, 2002 should not be revised or restated
due to the adoption of this interpretation. The adoption of FIN No. 45 did not
have a material impact on our financial condition or results of operations.

In February 2003, the FASB issued Emerging Issues Task Force 00-21 ("EITF
00-21"), "Revenue Arrangements with Multiple Deliverables." EITF 00-21 requires
revenue arrangements with multiple deliverables to be divided into separate
units of accounting. If the deliverables in the arrangement meet certain
criteria, arrangement consideration should be allocated among the separate units
based on their relative fair values. Applicable revenue recognition criteria
should be considered separately for each unit. The guidance in EITF 00-21 is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption of EITF 00-21 did not have a material impact
on our financial position or results of operations.

In May 2003, the FASB issued FAS No. 150 ("FAS No. 150"), "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." FAS No. 150 establishes standards for an issuer to classify and measure
certain financial instruments with characteristics of both liabilities and
equity. It requires an issuer to classify a financial instrument that meets
certain characteristics as a liability (or an asset in some circumstances). FAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of FAS No. 150 did not have a
material impact on our financial position or results of operations.

In August 2003, the FASB issued Emerging Issues Task Force 03-05 ("EITF
03-05"), "Applicability of AICPA Statement of Position 97-2, Software Revenue
Recognition, to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software." EITF 03-05 provides guidance on whether non-
software deliverables (e.g., non-software related equipment or services)
included in an arrangement that contains software that is more than incidental
to the products or services as a whole are included within the scope of AICPA
Statement of Position 97-2, Software Revenue Recognition. The guidance in EITF
03-05 is
35

effective for arrangements entered into in the first reporting period (annual or
interim) beginning after August 13, 2003. The adoption of EITF 03-05 did not
have a material impact on our financial position or results of operations.

RISKS RELATED TO LEGAL PROCEEDINGS

IN CONNECTION WITH OUR RESTATEMENT OF THE HISTORICAL FINANCIAL STATEMENTS OF
SMARTFORCE, CLASS ACTION LAWSUITS HAVE BEEN FILED AGAINST US AND ADDITIONAL
LAWSUITS MAY BE FILED, AND WE ARE THE SUBJECT OF A FORMAL ORDER OF PRIVATE
INVESTIGATION ENTERED BY THE SEC.

While preparing the closing balance sheet of SmartForce as at September 6,
2002, the date on which we closed our merger with SkillSoft Corporation, certain
accounting matters were identified relating to the historical financial
statements of SmartForce (which, following the Merger, are no longer our
historical financial statements -- see Note 1 of the Notes to the Consolidated
Financial Statements). On November 19, 2002, we announced our intent to restate
the SmartForce financial statements for 1999, 2000, 2001 and the first two
quarters of 2002. Following this announcement, several lawsuits claiming to be
class actions were commenced against us and certain of our current and former
directors and officers, by or on behalf of persons claiming to be our
shareholders and persons claiming to have purchased or otherwise acquired our
securities at specified periods beginning as early as October 19, 1999 and
continuing after September 6, 2002. These lawsuits have been consolidated. On
October 31, 2003, plaintiffs filed two amended complaints in the consolidated
lawsuit, one on behalf of a purported class of purchasers of our ADSs between
April 27, 1999 through November 18, 2002, and another on behalf of a purported
class of SkillSoft Corporation shareholders who acquired our ADSs in connection
with the Merger. In March 2004, we reached a settlement of these class action
lawsuits for total settlement payments to the plaintiffs of $30.5 million. The
settlement is subject to court approval. Additional lawsuits may be filed
against us.

We are the subject of a formal order of private investigation entered by
the SEC. We are cooperating with the SEC in connection with this investigation.
We will likely incur substantial costs in connection with the SEC investigation,
which could cause a diversion of management time and attention. In addition, we
could be subject to substantial penalties, fines or regulatory sanctions, which
could adversely affect our business.

CLAIMS THAT WE INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS COULD
RESULT IN COSTLY LITIGATION OR ROYALTY PAYMENTS TO THIRD PARTIES, OR REQUIRE US
TO REENGINEER OR CEASE SALES OF OUR PRODUCTS OR SERVICES.

Third parties have in the past and could in the future claim that our
current or future products infringe their intellectual property rights. Any
claim, with or without merit, could result in costly litigation or require us to
reengineer or cease sales of our products or services, any of which could have a
material adverse effect on our business. Infringement claims could also result
in an injunction in the use of our products or require us to enter into royalty
or licensing agreements. Licensing agreements, if required, may not be available
on terms acceptable to the combined company or at all.

From time to time we learn of parties that claim broad intellectual
property rights in the e-learning area that might implicate our offerings. These
parties or others could initiate actions against us in the future.

WE COULD INCUR SUBSTANTIAL COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS
RELATING TO OUR CUSTOMERS' USE OF OUR PRODUCTS AND SERVICES.

Many of the business interactions supported by our products and services
are critical to our customers' businesses. Any failure in a customer's business
interaction or other collaborative activity caused or allegedly caused in the
future by our products and services could result in a claim for substantial
damages against us, regardless of our responsibility for the failure. Although
we maintain general liability insurance, including coverage for errors and
omissions, there can be no assurance that existing coverage will continue to be
available on reasonable terms or will be available in amounts sufficient to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim.

36

WE COULD BE SUBJECTED TO LEGAL ACTIONS BASED UPON THE CONTENT WE OBTAIN FROM
THIRD PARTIES OVER WHOM WE EXERT LIMITED CONTROL.

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

RISKS RELATED TO THE MERGER BETWEEN SKILLSOFT CORPORATION AND SMARTFORCE

WE HAVE IDENTIFIED SIGNIFICANT DEFICIENCIES IN OUR DISCLOSURE CONTROLS AND
PROCEDURES AND INTERNAL CONTROLS.

During the process of integrating the business processes, human resources,
disclosure controls and procedures and internal controls of SmartForce PLC and
SkillSoft Corporation following the Merger, significant deficiencies in
disclosure controls and procedures and internal controls were identified
predominantly with respect to financial and regulatory compliance reporting at
non-U.S. subsidiaries of the former SmartForce PLC and our ability to process
the consolidated financial closing cycle. Our independent auditors have informed
us that they believe we have these two reportable conditions in internal
controls in certain of these areas. These deficiencies have resulted in a
significant strain to the internal resources and on the infrastructure of the
finance organization and adversely impacted both the year-end and quarter-end
financial closing processes. While permanent resources and accounting process
improvements have been and will continue to be added and implemented to improve
the non-U.S. finance operations, the financial closing process and the overall
internal control environment, additional changes to the disclosure controls and
procedures and internal controls will be on-going. Our independent auditors have
informed us that they believe we have no material weaknesses at this time.

RISKS RELATED TO THE OPERATION OF OUR BUSINESS

SOME OF OUR INTERNATIONAL SUBSIDIARIES HAVE NOT COMPLIED WITH REGULATORY
REQUIREMENTS RELATING TO THEIR FINANCIAL STATEMENTS AND TAX RETURNS.

We operate our business in various foreign countries through subsidiaries
organized in those countries. Due to our restatement of the historical
SmartForce financial statements, some of our subsidiaries have not filed their
audited statutory financial statements and have been delayed in filing their tax
returns in their respective jurisdictions. As a result, some of these foreign
subsidiaries may be subject to regulatory restrictions, penalties and fines.

WE AND SKILLSOFT CORPORATION HAVE EXPERIENCED NET LOSSES IN THE PAST, AND WE MAY
BE UNABLE TO ACHIEVE OR MAINTAIN PROFITABILITY.

SmartForce incurred substantial net losses both recently and in the past,
including net losses of $50.2 million in the six months ended June 30, 2002.
SkillSoft Corporation incurred substantial net losses in every fiscal quarter
prior to its fiscal quarter ended January 31, 2002. In addition, the combined
company recorded a net loss of $284 million for the fiscal year ended January
31, 2003 and $113.3 million for the fiscal year ended January 31, 2004. We
expect to incur significant expenses in connection with the completion of the
migration to a unified platform and the continued expansion of this combined
business, and, as a result, the business will need to generate significant
revenues to achieve and maintain profitability. We cannot guarantee whether our
combined business will achieve or sustain profitability in any future period.

37

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. THIS LIMITS YOUR
ABILITY TO EVALUATE HISTORICAL FINANCIAL RESULTS AND INCREASES THE LIKELIHOOD
THAT OUR RESULTS WILL FALL BELOW MARKET ANALYSTS' EXPECTATIONS, WHICH COULD
CAUSE THE PRICE OF OUR ADSS TO DROP RAPIDLY AND SEVERELY.

We have in the past experienced fluctuations in our quarterly operating
results, and we anticipate that these fluctuations will continue. As a result,
we believe that our quarterly revenue, expenses and operating results are likely
to vary significantly in the future. If in some future quarters our results of
operations are below the expectations of public market analysts and investors,
this could have a severe adverse effect on the market price of our ADSs.

Our operating results have historically fluctuated, and our operating
results may in the future continue to fluctuate, as a result of factors, which
include (without limitation):

- the size and timing of new/renewal agreements and upgrades;

- royalty rates;

- the announcement, introduction and acceptance of new products, product
enhancements and technologies by us and our competitors;

- the mix of sales between our field sales force, our other direct sales
channels and our telesales channels;

- general conditions in the U.S. or the international economy;

- the loss of significant customers;

- delays in availability of new products;

- product or service quality problems;

- seasonality -- due to the budget and purchasing cycles of our customers,
we expect our revenue and operating results will generally be strongest
in the second half of our fiscal year and weakest in the first half of
our fiscal year;

- the spending patterns of our customers;

- litigation costs and expenses, including the costs related to the
restatement of the SmartForce financial statements;

- non-recurring charges related to acquisitions;

- growing competition that may result in price reductions; and

- currency fluctuations.

Most of our 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 our expectations, we could
not proportionately reduce operating expenses for that quarter. Any such revenue
shortfall would, therefore, have a disproportionate effect on our expected
operating results for that quarter.

DEMAND FOR OUR PRODUCTS AND SERVICES MAY BE ESPECIALLY SUSCEPTIBLE TO ADVERSE
ECONOMIC CONDITIONS.

Our business and financial performance may be damaged by adverse financial
conditions affecting our target customers or by a general weakening of the
economy. Companies may not view training products and services as critical to
the success of their businesses. 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 or in conjunction
with lowering other expenses.

38

WE RELY ON A LIMITED NUMBER OF THIRD PARTIES TO PROVIDE US WITH EDUCATIONAL
CONTENT FOR OUR COURSES AND REFERENCEWARE, AND OUR ALLIANCES WITH THESE THIRD
PARTIES MAY BE TERMINATED OR FAIL TO MEET OUR REQUIREMENTS.

We rely on a limited number of independent third parties to provide us with
the educational content for a majority of our courses based on learning
objectives and specific instructional design templates that we provide to them.
We do not have exclusive arrangements or long-term contracts with any of these
content providers. If one or more of our third party content providers were to
stop working with us, we would have to rely on other parties to develop our
course content. In addition, these providers may fail to develop new courses or
existing courses on a timely basis. We cannot predict whether new content or
enhancements would be available from reliable alternative sources on reasonable
terms. In addition, Books relies on third party publishers to provide all of the
content incorporated into its Referenceware products. If one or more of these
publishers were to terminate their license with us, we may not be able to find
substitute publishers for such content. In addition, we may be forced to pay
increased royalties to these publishers to continue our licenses with them.

In the event that we are unable to maintain or expand our current
development alliances or enter into new development alliances, our operating
results and financial condition could be materially adversely affected.
Furthermore, we will be required to pay royalties to some of our development
partners on products developed with them, which could reduce our gross margins.
We expect that cost of revenues may fluctuate from period to period in the
future based upon many factors, including the revenue mix and the timing of
expenses associated with development alliances. In addition, the collaborative
nature of the development process under these alliances may result in longer
development times and less control over the timing of product introductions than
for e-learning offerings developed solely by us. Our strategic alliance partners
may from time to time renegotiate the terms of their agreements with us, which
could result in changes to the royalty or other arrangements, adversely
affecting our results of operations.

The independent third party strategic partners we rely on for educational
content and product marketing may compete with us, harming our results of
operations. Our agreements with these third parties generally do not restrict
them from developing courses on similar topics for our competitors or from
competing directly with us. As a result, our competitors may be able to
duplicate some of our course content and gain a competitive advantage.

WE RELY ON STRATEGIC ALLIANCES FOR MARKETING, WHICH ALLIANCES ARE NOT EXCLUSIVE,
MAY BE TERMINATED OR MAY FAIL TO MEET OUR REQUIREMENTS IN THE FUTURE.

We have developed strategic alliances to market many of our products.
However, these relationships are not exclusive, and our marketing partners could
market other products in preference to, and in competition with, those developed
by us. In addition, we may be unable to continue to market future products
through these alliances or may be unable to negotiate additional alliances in
the future on acceptable terms, if at all. The marketing efforts of our
strategic partners may also disrupt our direct sales efforts.

OUR SUCCESS DEPENDS ON OUR ABILITY TO MEET THE NEEDS OF THE RAPIDLY CHANGING
MARKET.

The market for education and training software is characterized by rapidly
changing technology, evolving industry standards, changes in customer
requirements and preferences and frequent introductions of new products and
services embodying new technologies. New methods of providing interactive
education in a technology-based format are being developed and offered in the
marketplace, including intranet and Internet offerings. In addition, multimedia
and other product functionality features are being added to educational
software. Our future success will depend upon the extent to which we are able to
develop and implement products which address these emerging market requirements
in a cost effective and timely basis. Product development is risky because it is
difficult to foresee developments in technology, coordinate technical personnel
and identify and eliminate design flaws. Any significant delay in releasing new
products could have a material adverse effect on the ultimate success of our
products and could reduce sales of predecessor products. We may not be
successful in introducing new products on a timely basis. In addition, new
products introduced by us may fail to achieve a significant degree of market
acceptance or, once accepted, may fail to sustain

39

viability in the market for any significant period. If we are unsuccessful in
addressing the changing needs of the marketplace due to resource, technological
or other constraints, or in anticipating and responding adequately to changes in
customers' software technology and preferences, our business and results of
operations would be materially adversely affected.

THE E-LEARNING MARKET IS A DEVELOPING MARKET, AND OUR BUSINESS WILL SUFFER IF
E-LEARNING IS NOT WIDELY ACCEPTED.

The market for e-learning is a new and emerging market. Corporate training
and education have historically been conducted primarily through classroom
instruction and have traditionally been performed by a company's internal
personnel. Many companies have invested heavily in their current training
solutions. Although technology-based training applications have been available
for several years, they currently account for only a small portion of the
overall training market.

Accordingly, our future success will depend upon the extent to which
companies adopt technology-based solutions for their training activities, and
the extent to which companies utilize the services or purchase products of
third-party providers. Many companies that have already invested substantial
resources in traditional methods of corporate training may be reluctant to adopt
a new strategy that may compete with their existing investments. Even if
companies implement technology-based training or e-learning solutions, they may
still choose to design, develop, deliver or manage all or part of their
education and training internally. If technology-based learning does not become
widespread, or if companies do not use the products and services of third
parties to develop, deliver or manage their training needs, then our products
and service may not achieve commercial success.

THE SUCCESS OF OUR E-LEARNING STRATEGY DEPENDS ON THE RELIABILITY AND CONSISTENT
PERFORMANCE OF OUR INFORMATION SYSTEMS AND INTERNET INFRASTRUCTURE.

The success of our e-learning strategy is highly dependent on the
consistent performance of our information systems and Internet infrastructure.
If our Web site fails for any reason or if it experiences any unscheduled
downtimes, even for only a short period, our business and reputation could be
materially harmed. We have in the past experienced performance problems and
unscheduled downtime, and these problems could recur. We currently rely on third
parties for proper functioning of computer infrastructure, delivery of our
e-learning applications and the performance of our destination site. Our systems
and operations could be damaged or interrupted by fire, flood, power loss,
telecommunications failure, break-ins, earthquake, financial patterns of hosting
providers and similar events. Any system failures could adversely affect
customer usage of our solutions and user traffic results in any future quarters,
which could adversely affect our revenues and operating results and harm our
reputation with corporate customers, subscribers and commerce partners.
Accordingly, the satisfactory performance, reliability and availability of our
Web site and computer infrastructure is critical to our reputation and ability
to attract and retain corporate customers, subscribers and commerce partners. We
cannot accurately project the rate or timing of any increases in traffic to our
Web site and, therefore, the integration and timing of any upgrades or
enhancements required to facilitate any significant traffic increase to the Web
site are uncertain. We have in the past experienced difficulties in upgrading
our Web site infrastructure to handle increased traffic, and these difficulties
could recur. The failure to expand and upgrade our Web site or any system error,
failure or extended down time could materially harm our business, reputation,
financial condition or results of operations.

BECAUSE MANY USERS OF OUR E-LEARNING SOLUTIONS WILL ACCESS THEM OVER THE
INTERNET, FACTORS ADVERSELY AFFECTING THE USE OF THE INTERNET OR OUR CUSTOMERS'
NETWORKING INFRASTRUCTURES COULD HARM OUR BUSINESS.

Many of our customer's users access our e-learning solutions over the
Internet or through our customers' internal networks. Any factors that adversely
affect Internet usage could disrupt the ability of those users to access our
e-learning solutions, which would adversely affect customer satisfaction and
therefore our business.

40

For example, our ability to increase the effectiveness and scope of our
services to customers is ultimately limited by the speed and reliability of both
the Internet and our customers' internal networks. Consequently, the emergence
and growth of the market for our products and services depends upon the
improvements being made to the entire Internet as well as to our individual
customers' networking infrastructures to alleviate overloading and congestion.
If these improvements are not made, and the quality of networks degrades, the
ability of our customers to use our products and services will be hindered and
our revenues may suffer.

Additionally, a requirement for the continued growth of accessing
e-learning solutions over the Internet is the secure transmission of
confidential information over public networks. Failure to prevent security
breaches into our products or our customers' networks, or well-publicized
security breaches affecting the Internet in general could significantly harm our
growth and revenue. Advances in computer capabilities, new discoveries in the
field of cryptography or other developments may result in a compromise of
technology we use to protect content and transactions, our products or our
customers' proprietary information in our databases. Anyone who is able to
circumvent our security measures could misappropriate proprietary and
confidential information or could cause interruptions in our operations. We may
be required to expend significant capital and other resources to protect against
such security breaches or to address problems caused by security breaches. The
privacy of users may also deter people from using the Internet to conduct
transactions that involve transmitting confidential information.

OUR RESTRUCTURING PLANS MAY BE INEFFECTIVE OR MAY LIMIT OUR ABILITY TO COMPETE.

Since the Merger, we have recorded an aggregate of $31.4 million in merger
and exit costs and an aggregate of $37.5 million of restructuring and other
non-recurring charges. There are several risks inherent in these efforts to
transition to a new cost structure. These include the risk that we will not be
successful in restoring profitability, and hence we may have to undertake
further restructuring initiatives that would entail additional charges and
create additional risks. In addition, there is the risk that cost-cutting
initiatives will impair our ability to effectively develop and market products
and remain competitive. Each of the above measures could have long-term effects
on our business by reducing our pool of talent, decreasing or slowing
improvements in our products, making it more difficult for us to respond to
customers, limiting our ability to increase production quickly if and when the
demand for our products increases and limiting our ability to hire and retain
key personnel. These circumstances could cause our earnings to be lower than
they otherwise might be.

WE DEPEND ON A FEW KEY PERSONNEL TO MANAGE AND OPERATE THE BUSINESS AND MUST BE
ABLE TO ATTRACT AND RETAIN HIGHLY QUALIFIED EMPLOYEES.

Our success is largely dependent on the personal efforts and abilities of
our senior management. Failure to retain these executives, or the loss of
certain additional senior management personnel or other key employees, could
have a material adverse effect on our business and future prospects. We are also
dependent on the continued service of our key sales, content development and
operational personnel and on our ability to attract, train, motivate and retain
highly qualified employees. In addition, we depend on writers, programmers, Web
designers and graphic artists. We may be unsuccessful in attracting, training,
retaining or motivating key personnel. In particular, the negative consequences
(including litigation) of having to restate SmartForce's historical financial
statements, uncertainties surrounding the Merger, and our recent adverse
operating results and stock price performance could create uncertainties that
materially and adversely affect our ability to attract and retain key personnel.
The inability to hire, train and retain qualified personnel or the loss of the
services of key personnel could have a material adverse effect upon our
business, new product development efforts and future business prospects.

CHANGES IN ACCOUNTING STANDARDS REGARDING STOCK OPTION PLANS COULD LIMIT THE
DESIRABILITY OF GRANTING STOCK OPTIONS, WHICH COULD HARM OUR ABILITY TO ATTRACT
AND RETAIN EMPLOYEES, AND COULD ALSO REDUCE OUR PROFITABILITY.

The Financial Accounting Standards Board is considering whether to require
all companies to treat the value of stock options granted to employees as an
expense. The United States Congress and other
41

governmental and regulatory authorities have also considered requiring companies
to expense stock options. If this change were to become mandatory, we and other
companies would be required to record a compensation expense equal to the value
of each stock option granted. This expense would be spread over the vesting
period of the stock option. Currently, we are generally not required to record
compensation expenses in connection with stock option grants. If we were
required to expense stock option grants, it could reduce the attractiveness of
granting stock options because the additional expense associated with these
grants would reduce our profitability. However, stock options are an important
employee recruitment and retention tool, and we may not be able to attract and
retain key personnel if we reduce the scope of our employee stock option
program. Accordingly, in the event we are required to expense stock option
grants, either our profitability, or our ability to use stock options as an
employee recruitment and retention tool would be adversely impacted.

INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND FOR OUR PRODUCTS AND
SERVICES, WHICH MAY RESULT IN REDUCED REVENUES AND GROSS PROFITS AND LOSS OF
MARKET SHARE.

The market for corporate education and training solutions is highly
fragmented and competitive. We expect the market to become increasingly
competitive due to the lack of significant barriers to entry. In addition to
increased competition from new companies entering into the market, established
companies are entering into the market through acquisitions of smaller
companies, which directly compete with us, and this trend is expected to
continue. We may also face competition from publishing companies and vendors of
application software, including those vendors with whom we have formed
development and marketing alliances.

Our primary sources of direct competition are:

- third-party suppliers of instructor-led information technology, business,
management and professional skills education and training;

- suppliers of computer-based training and e-learning solutions;

- internal education and training departments of potential customers; and

- value-added resellers and network integrators.

Growing competition may result in price reductions, reduced revenue and
gross profits and loss of market share, any one of which would have a material
adverse effect on our business. Many of our current and potential competitors
have substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition, and we expect to face increasing
price pressures from competitors as managers demand more value for their
training budgets. Accordingly, we may be unable to provide e-learning solutions
that compare favorably with new instructor-led techniques, other interactive
training software or new e-learning solutions.

OUR BUSINESS IS SUBJECT TO CURRENCY FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR
OPERATING RESULTS.

Due to our multinational operations, our operating results are subject to
fluctuations based upon changes in the exchange rates between the currencies in
which revenues are collected or expenses are paid. In particular, the value of
the U.S. dollar against the euro and related currencies will impact our
operating results. Our expenses will not necessarily be incurred in the currency
in which revenue is generated, and, as a result, we will be required from time
to time to convert currencies to meet our obligations. These currency
conversions are subject to exchange rate fluctuations, and changes to the value
of the euro, pound sterling and other currencies relative to the U.S. dollar
could adversely affect our business and results of operations.

WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS. UNAUTHORIZED USE OF OUR
INTELLECTUAL PROPERTY MAY RESULT IN DEVELOPMENT OF PRODUCTS OR SERVICES THAT
COMPETE WITH OURS.

Our success depends to a degree upon the protection of our rights in
intellectual property. We rely upon a combination of patent, copyright, and
trademark laws to protect our proprietary rights. We have also entered into, and
will continue to enter into, confidentiality agreements with our employees,
consultants and third

42

parties to seek to limit and protect the distribution of confidential
information. However, we have not signed protective agreements in every case.

Although we have taken steps to protect our proprietary rights, these steps
may be inadequate. Existing patent, copyright, and trademark laws offer only
limited protection. Moreover, the laws of other countries in which we market our
products may afford little or no effective protection of our intellectual
property. Additionally, unauthorized parties may copy aspects of our products,
services or technology or obtain and use information that we regard as
proprietary. Other parties may also breach protective contracts we have executed
or will in the future execute. We may not become aware of, or have adequate
remedies in the event of, a breach. Litigation may be necessary in the future to
enforce or to determine the validity and scope of our intellectual property
rights or to determine the validity and scope of the proprietary rights of
others. Even if we were to prevail, such litigation could result in substantial
costs and diversion of management and technical resources.

OUR NON-U.S. OPERATIONS ARE SUBJECT TO RISKS WHICH COULD NEGATIVELY IMPACT OUR
FUTURE OPERATING RESULTS.

We expect that international operations will continue to account for a
significant portion of our revenues. Operations outside of the United States are
subject to inherent risks, including:

- difficulties or delays in developing and supporting non-English language
versions of our products and services;

- political and economic conditions in various jurisdictions;

- difficulties in staffing and managing foreign subsidiary operations;

- longer sales cycles and account receivable payment cycles;

- multiple, conflicting and changing governmental laws and regulations;

- foreign currency exchange rate fluctuations;

- protectionist laws and business practices that may favor local
competitors;

- difficulties in finding and managing local resellers;

- potential adverse tax consequences; and

- the absence or significant lack of legal protection for intellectual
property rights.

Any of these factors could have a material adverse effect on our future
operations outside of the United States, which could negatively impact our
future operating results.

THE MARKET PRICE OF OUR ADSS MAY FLUCTUATE AND MAY NOT BE SUSTAINABLE.

The market price of our ADSs has fluctuated significantly since our initial
public offering and is likely to continue to be volatile. In addition, in recent
years the stock market in general, and the market for shares of technology
stocks in particular, have experienced extreme price and volume fluctuations,
which have often been unrelated to the operating performance of affected
companies. The market price of our ADSs may continue to experience significant
fluctuations in the future, including fluctuations that are unrelated to our
performance. As a result of these fluctuations in the price of our ADSs, it is
difficult to predict what the price of our ADSs will be at any point in the
future, and you may not be able to sell your ADSs at or above the price that you
paid for them.

43

OUR SALES CYCLE MAY MAKE IT DIFFICULT TO PREDICT OUR OPERATING RESULTS.

The period between our initial contact with a potential customer and the
purchase of our products (not including SmartCertify) by that customer typically
ranges from three to twelve months or more. Factors that contribute to our long
sales cycle, include:

- our need to educate potential customers about the benefits of our
products;

- competitive evaluations by customers;

- the customers' internal budgeting and approval processes;

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

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

These long sales cycles make it difficult to predict the quarter in which
sales may occur. Delays in sales could cause significant variability in our
revenues and operating results for any particular period.

OUR BUSINESS COULD BE ADVERSELY AFFECTED IF OUR PRODUCTS CONTAIN ERRORS.

Software products as complex as ours contain known and undetected errors or
"bugs" that result in product failures. The existence of bugs could result in
loss of or delay in revenues, loss of market share, diversion of product
development resources, injury to reputation or damage to efforts to build brand
awareness, any of which could have a material adverse effect on our business,
operating results and financial condition.

THE CONVICTION OF ARTHUR ANDERSEN LLP ON OBSTRUCTION OF JUSTICE CHARGES MAY
ADVERSELY AFFECT ARTHUR ANDERSEN LLP'S ABILITY TO SATISFY ANY CLAIMS ARISING
FROM THE PROVISION OF AUDITING SERVICES TO SKILLSOFT CORPORATION AND MAY IMPEDE
OUR ACCESS TO CAPITAL MARKETS AFTER THE MERGER.

Arthur Andersen LLP audited SkillSoft Corporation's financial statements
for the fiscal years ended January 31, 2002, January 31, 2001 and January 31,
2000. On March 14, 2002, an indictment was unsealed charging it with federal
obstruction of justice arising from the government's investigation of Enron
Corp. On June 15, 2002, Arthur Andersen LLP was convicted of these charges. It
is possible that the effect of this conviction on Arthur Andersen LLP's
financial condition may adversely affect the ability of Arthur Andersen LLP to
satisfy any claims arising from its provision of auditing services to SkillSoft
Corporation.

Should we seek to access the public capital markets, SEC rules will require
us to include or incorporate by reference in any prospectus three years of
audited financial statements. The SEC's current rules would require us to
present audited financial statements for one or more fiscal years audited by
Arthur Andersen LLP and use reasonable efforts to obtain its consent until the
audited financial statements for the fiscal year ending January 31, 2005 become
available. If prior to that time the SEC ceases accepting financial statements
audited by Arthur Andersen LLP, it is possible that the available audited
financial statements for the fiscal years ended January 31, 2002, January 31,
2001 and January 31, 2000 audited by Arthur Andersen LLP might not satisfy the
SEC's requirements. In that case, we would be unable to access the public
capital markets unless Ernst & Young LLP, our current independent accounting
firm, or another independent accounting firm, is able to audit the financial
statements originally audited by Arthur Andersen LLP. Any delay or inability to
access the public capital markets caused by these circumstances could have a
material adverse effect on our business, profitability and growth prospects.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of January 31, 2004, we did not use derivative financial instruments for
speculative or trading purposes.

44

INTEREST RATE RISK

Our general investing policy is to limit the risk of principal loss and to
ensure the safety of invested funds by limiting market and credit risk. We
currently use a registered investment manager to place our investments in highly
liquid money market accounts and government-backed securities. All highly liquid
investments with original maturities of three months or less are considered to
be cash equivalents. Interest income is sensitive to changes in the general
level of U.S. interest rates. Based on the short-term nature of our investments,
we have concluded that there is no significant market risk exposure.

FOREIGN CURRENCY RISK

Due to our multinational operations, our business is subject to
fluctuations based upon changes in the exchange rates between the currencies in
which we collect revenues or pay expenses and the U.S. dollar. Our expenses are
not necessarily incurred in the currency in which revenue is generated, and, as
a result, we are required from time to time to convert currencies to meet our
obligations. These currency conversions are subject to exchange rate
fluctuations, in particular changes to the value of the euro, Canadian dollar,
Australian dollar, New Zealand dollar, Singapore dollar, and pound sterling
relative to the U.S. dollar, which could adversely affect our business and the
results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Incorporated by reference from Appendix B attached hereto.

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

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Following the merger of SmartForce PLC and SkillSoft Corporation on
September 6, 2002, we integrated the business processes, human resources,
disclosure controls and procedures, and internal controls of the two companies.
During this process, significant deficiencies in disclosure controls and
procedures and internal controls were identified predominantly with respect to
financial reporting at non-U.S. subsidiaries of the former SmartForce PLC and
our ability to process the consolidated financial closing cycle. These
deficiencies resulted in a significant strain to the internal resources and on
the infrastructure of the finance organization and adversely impacted both the
year-end and quarter-end financial closing process for the fiscal year ended
January 31, 2003. External resources were engaged to assist management in both
the year-end and quarter-end financial closing process and in identifying areas
for improvement for the fiscal year ended January 31, 2003. In addition, in
fiscal years ended January 31, 2003 and 2004, permanent resources and accounting
process improvements have been added and implemented to improve the non-U.S.
finance operations, the financial closing process, and the overall internal
control environment. Our independent auditors have informed us that they believe
we have no material weaknesses in internal controls at January 31, 2004. However
they have informed us of certain reportable conditions at that date, including
financial and regulatory compliance reporting at non-U.S. subsidiaries of the
former SmartForce PLC and our ability to process the financial closing cycle at
certain subsidiaries.

Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer we evaluated
the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) as of January 31, 2004. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that while we
have implemented mitigating controls and process improvements with respect to
our disclosure controls and procedures and that they are now operating
effectively, we believe that continuous monitoring of these disclosure controls
and procedures will be required.

45

No change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f)) under the Exchange Act occurred during the fiscal
quarter ended January 31, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The registrant intends to file with the Securities and Exchange Commission
a definitive proxy statement with respect to the Annual General Meeting of
Shareholders for the fiscal year ended January 31, 2004. The information under
the sections entitled "Board of Directors and Corporate Governance Information"
and "Section 16(a) Beneficial Ownership Reporting Compliance" from our
definitive proxy statement for the annual meeting of shareholders, which is to
be filed with the Securities and Exchange Commission not later than 120 days
after the close of our fiscal year ended January 31, 2004 (the "2004 Proxy
Statement"), is hereby incorporated by reference. Additional information in
response to this Item is included under the caption "Executive Officers of
SkillSoft" at the end of Part I of this Annual Report on Form 10-K.

Information required by this item pursuant to Item 401(h) and 401(i) of
Regulation S-K relating to an audit committee financial expert and
identification of the audit committee of our board of directors is contained in
the 2004 Proxy Statement under the captions "Board Committees" and is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information under the section entitled "Executive Compensation and
Related Matters" from the 2004 Proxy Statement is hereby incorporated by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information under the sections entitled "Security Ownership of Certain
Beneficial Owners and Management" and "Equity Compensation Plan Information"
from the 2004 Proxy Statement is hereby incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information under the section entitled "Certain Relationships and
Related Transactions" from the 2004 Proxy Statement is hereby incorporated by
reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information under the sections entitled "Fees Billed for Services
Rendered by Ernst & Young" and "Pre-approval Policies and Procedures" from the
2004 Proxy Statement is hereby incorporated by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Financial Statements, Financial Statement Schedules and Exhibits

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

Financial Statements:

Report of Independent Auditors

Report of Independent Public Accountants

46

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Stockholders' Equity and Comprehensive
Loss

Consolidated Statements of Cash Flows

Notes to the Consolidated Financial Statements

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

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

(b) Reports on Form 8-K.

On December 4, 2003, we furnished a Current Report on Form 8-K under Item
12 (Disclosure of Results of Operations and Financial Condition) announcing our
financial results for the fiscal quarter ended October 31, 2003.

47

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 PUBLIC LIMITED COMPANY
(Registrant)

By: /s/ CHARLES E. MORAN
------------------------------------
Charles E. Moran
President and Chief Executive
Officer

Date: April 15, 2004

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.

48

APPENDIX A

SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below should be read in
conjunction with our consolidated financial statements and notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Form 10-K. The consolidated statements
of operations data for the fiscal years ended January 31, 2003 and 2004 and the
consolidated balance sheet data as of January 31, 2003 and 2004 are derived from
our consolidated financial statements, audited by Ernst & Young LLP, independent
public accountants, which are included elsewhere in this Form 10-K. The
consolidated statements of operations data for the fiscal year ended January 31,
2002 are derived from our consolidated financial statements, audited by Arthur
Andersen LLP, independent public accountants, which are included elsewhere in
this Form 10-K. The consolidated statement of operations data for the years
ended January 31, 2000, 2001 and 2002 and the consolidated balance sheet data as
of January 31, 2000, 2001, and 2002 are derived from our consolidated financial
statements, audited by Arthur Andersen LLP, independent public accountants, not
included in this Form 10-K.

A-1

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

(1) The statement of operations data for the year ended January 31, 2003
includes the operating results of SkillSoft PLC for the post-September 6,
2002 period and a full year of operating results for Books24x7.com, Inc.

(2) See Note 2(d) of the Notes to the Consolidated Financial Statements for the
determination of shares used in computing basic and diluted net loss per
common share.

A-2

APPENDIX B

FINANCIAL STATEMENTS

INDEX

B-1

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and
Shareholders of SkillSoft PLC:

We have audited the accompanying consolidated balance sheets of SkillSoft
PLC (formerly known as SmartForce PLC) as of January 31, 2003 and 2004 and the
related consolidated statements of operations, stockholders' equity and
comprehensive loss and cash flows for the years ended January 31, 2003 and 2004.
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. The comparative financial statements as of January 31, 2002 and
the year ended January 31, 2002 were audited by other auditors who have ceased
operations and whose report dated February 20, 2002 expressed an unqualified
opinion on those statements before the restatement adjustments described in
Notes 1, 3 and 9.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SkillSoft
PLC at January 31, 2003 and 2004 and the results of its operations and its cash
flows for the years ended January 31, 2003 and 2004, in conformity with
accounting principles generally accepted in the United States.

The comparative financial statements presented as of January 31, 2002 and
for the year then ended were audited by other auditors who have ceased
operations. As described in Notes 1, 3 and 9 on September 6, 2002, the Company
completed a merger with SmartForce PLC which was treated as a reverse merger for
accounting purposes. All references to the number of shares and per share
information in the financial statements have been adjusted to reflect the
reverse merger on a retroactive basis. We audited the adjustments that were
applied to restate the number of shares and per share information reflected in
the 2002 financial statements. Our procedures included (a) agreeing the share
conversion for the merger to the Company's underlying records obtained from
management, and (b) testing the mathematical accuracy of the retroactive
restatement of the number of common shares and per share amounts. In our
opinion, such adjustments are appropriate and have been properly applied.
However, we were not engaged to audit, review, or apply any procedures to the
2002 financial statements of the Company other than with respect to such
adjustments and, accordingly, we do not express an opinion or any other form of
assurance on the 2002 financial statements taken as a whole.

/s/ ERNST & YOUNG LLP

Boston, Massachusetts
March 29, 2004

B-2

This is a copy of the audit report previously issued by Arthur Andersen LLP
in connection with the financial statements of SkillSoft Corporation as of
January 31, 2002 and 2001 and each of the three years in the period ended
January 31, 2002 included in the Annual Report on Form 10-K of SkillSoft
Corporation for the fiscal year ended January 31, 2002. This audit report has
not been reissued by Arthur Andersen LLP in connection with the filing of this
Annual Report on Form 10-K for the fiscal year ended January 31, 2004.

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, 2001 and 2002 and the
related consolidated statements of income, shareholders' equity (deficit) and
comprehensive loss and cash flows for each of the three years in the period
ended January 31, 2002. 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 audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SkillSoft Corporation as of
January 31, 2001 and 2002, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended January 31, 2002,
in conformity with accounting principles generally accepted in the United
States.

ARTHUR ANDERSEN LLP

Boston, Massachusetts
February 20, 2002

B-3

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

(1) The following summarizes the departmental allocation of the amortization of
stock-based compensation (in thousands):

The accompanying notes are an integral part of these consolidated financial
statements.
B-5

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS EXCEPT PER SHARE DATA)

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

B-6

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS EXCEPT PER SHARE DATA)

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

B-7

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
LOSS -- (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)

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

B-8

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated financial
statements.
B-9

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

SkillSoft PLC, formerly known as SmartForce PLC (the Company or SkillSoft),
was incorporated in Ireland on August 8, 1989. The Company is a provider of
web-based training resources that cover a variety of professional effectiveness,
business and information technology topics. On September 6, 2002, the Company
completed its merger with SkillSoft Corporation (the Merger). Due to a number of
factors, including composition of the board of directors, management team, and
concentrated shareholder interest, all of which had SkillSoft Corporation being
in a control or majority position, the Merger was accounted for as a reverse
acquisition, with SkillSoft Corporation as the accounting acquirer. Accordingly,
the historical financial statements of SkillSoft Corporation are the historical
financial statements of the combined company, and the assets and liabilities of
the Company are accounted for as required under the purchase method of
accounting. The results of operations and cash flow of the former SmartForce
PLC, the acquired entity for accounting purposes, are included in the financial
statements of the combined company from September 6, 2002, the date on which the
Merger was consummated. In connection with the Merger, the Company changed its
name to SkillSoft PLC and its fiscal year end to January 31 (the fiscal year end
of SkillSoft Corporation) from December 31 (the Company's historical fiscal year
end).

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements reflect the application
of certain significant accounting policies, as described in this note and
elsewhere in these notes.

(A) PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
the Company and its wholly and majority owned subsidiaries (see Note 6). All
material intercompany transactions and balances have been eliminated in
consolidation.

(B) USE OF ESTIMATES

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

(C) REVENUE RECOGNITION

The Company generates revenue from the license of products and services and
from providing hosting/ ASP services.

The Company follows the provisions of the American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-4 and SOP 98-9 to account for revenue derived
pursuant to license agreements under which customers license the Company's
products and services. The pricing for the Company's courses varies based upon
the number of course titles or the courseware bundle 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). License agreements permit
customers to exchange course titles, generally on the contract anniversary date.
Additional product features, such as hosting and on-line mentoring services, are
separately licensed for an additional fee.

The Company primarily derives revenue from license agreements under which
customers license it's products and services. The pricing for it's courses
varies based upon the number of course titles or the courseware bundle licensed
by a customer, the number of users within the customer's organization and the
B-10

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

length of the license agreement (generally one, two or three years). The
Company's license agreements permit customers to exchange course titles,
generally on the contract anniversary date. Additional product features, such as
hosting and on-line mentoring services, are separately licensed for an
additional fee.

The pricing for the Company's MML licenses varies based on the choice of
MML, content offering selected by the customer, the number of users within the
customer's organization and the length of the license agreement. A MML license
provides customers access to a full range of learning products including
courseware, Referenceware, simulations, mentoring and prescriptive assessment.

A Referenceware license gives users access to the full library within one
or more collections (ITPro, BusinessPro, FinancePro and OfficeEssentials) from
Books24x7.com, Inc. (Books). The pricing for the Company's Referenceware
licenses varies based on the collections specified by a customer, the number of
users within the customer's organization and the length of the license
agreement.

The Company offers discounts from its ordinary pricing, and purchasers of
licenses for larger numbers of courses, for larger user bases or for longer
periods generally receive discounts. Generally, customers may amend their
license agreements, for an additional fee, to gain access to additional courses
or product lines and/or to increase the size of the user base. The Company also
derives revenue from hosting fees for clients that use its solutions on an
application service provider (ASP) basis, on-line mentoring services and
professional services. In selected circumstances, the Company derives revenue on
a pay-for-use basis under which some customers are charged based on the number
of courses accessed by users. Revenue derived from pay-for-use contracts has
been minimal to date.

The Company recognizes revenue ratably over the license period if the
number of courses that a customer has access to is not clearly defined,
available, or selected at the inception of the contract, or if the contract has
additional undelivered elements for which the Company does not have vendor
specific objective evidence (VSOE) of the fair value of the various elements.
This may occur if the customer does not specify all licensed courses at the
outset, the customer chooses to wait for future licensed courses on a when and
if available basis, the customer is given exchange privileges that are
exercisable other than on the contract anniversaries, or the customer licenses
all courses currently available and to be developed during the term of the
arrangement. Nearly all of the Company's contractual arrangements result in the
recognition of revenue ratably over the license period; consequently,
substantially all of the Company's revenue is recognized on a ratable basis.

The Company also derives revenue from extranet hosting/ASP services and
online mentoring services. The Company recognizes revenue related to extranet
hosting/ASP services and online mentoring services on a straight-line basis over
the period the services are provided.

The Company generally bills the annual license fee for the first year of a
multi-year agreement in advance and license fees for subsequent years of
multi-year license arrangements are billed on the anniversary date of the
agreement. In some circumstances, the Company offers payment terms of up to six
months from the initial shipment date or anniversary date for multi-year
agreements to it's customers. To the extent that a customer is given extended
payment terms, revenue is recognized as cash becomes due, assuming all of the
other elements of revenue recognition have been satisfied.

The Company recognizes revenue on Referenceware and MML licenses ratably
over the term of the agreement, which matches the period the future products or
services are delivered.

The Company commences the recognition of revenue from resellers upon both
the final sale to the end user and the receipt of cash from the reseller. With
respect to reseller agreements with minimum commitments, the Company recognizes
revenue related to the portion of the minimum commitment that exceeds the end
user sales at the expiration of the commitment period provided the Company has
received payment.

B-11

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company provides professional services, including instructor led
training, customized content, websites, and implementation services. The Company
recognizes service revenue as the services are performed.

The Company records deferred revenue amounts have been billed in advance of
products or services provided. Deferred revenue includes the unrecognized
portion of revenue associated with license fees for which the Company has
received payment or for which amounts have been billed and are currently due for
payment in 90 days or less for resellers and 180 days or less for direct
customers. In addition, deferred revenue includes amounts which have been billed
and not collected for which revenue is being recognized ratably over the license
period. In addition, the Company acquired approximately $47 million of deferred
revenue in connection with the Merger based upon the cost to fulfill the
remaining contractual and performance obligations plus a normal operating profit
on fulfilling such obligations. The remaining balance of the acquired deferred
revenue was approximately $749,000 at January 31, 2004.

For its MML segment, the Company defers direct selling costs (commissions)
and amortizes those ratably as revenue is recognized.

(D) NET LOSS PER SHARE

As a result of the reverse acquisition, historical SkillSoft Corporation
shares have been converted into SmartForce ADSs using the Merger exchange ratio
of 2.3674 SkillSoft Corporation shares per SmartForce ADS. Historical SkillSoft
Corporation shares for all periods presented have been adjusted to reflect this
exchange ratio. See Note 9(a).

Basic and diluted net loss per common share was determined by dividing net
loss by the weighted average common shares outstanding during the period.
Weighted average shares outstanding exclude unvested restricted common shares of
75,548; 20,291 and 0 as of January 31, 2002, 2003 and 2004, respectively. Basic
and diluted net loss per share are the same, as outstanding common stock options
and warrants are anti-dilutive as the Company has recorded a net loss for all
periods presented.

The calculations of basic and diluted net loss per share are as follows (in
thousands, except per share data):

B-12

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following share equivalents, warrants, and unvested restricted shares
have been excluded from the computation of diluted weighted average shares
outstanding as of January 31, 2002, 2003 and 2004, respectively as they would be
anti-dilutive.

(E) FOREIGN CURRENCY TRANSLATION

Assets and liabilities of the foreign subsidiaries are translated in
accordance with Statement of Financial Accounting Standards (SFAS) No. 52,
"Foreign Currency Translation." The reporting currency for the Company is the
U.S. dollar (dollar). The functional currency of the Company's subsidiaries in
the United States, the United Kingdom, Canada, Germany, Australia, the
Netherlands, Sweden, Norway, Denmark, France, New Zealand and Singapore are the
currencies of those countries. The functional currency of the Company's
subsidiaries in Ireland, the Commonwealth of the Bahamas and the Grand Cayman is
the dollar. In accordance with SFAS No. 52, assets and liabilities are
translated to the dollar from the local functional currency at current exchange
rates, and income and expense items are translated to the dollar using the
average rates of exchange prevailing during the year. Gains and losses arising
from translation are recorded in other comprehensive income as a separate
component of stockholders' equity (deficit). Currency gains or losses on
transactions denominated in a currency other than an entity's functional
currency are recorded in the results of the operations. Gains/(losses) arising
from transactions denominated in foreign currencies were approximately $139,000,
($130,000), and $581,000 for the years ended January 31, 2002, 2003, and 2004,
respectively and are included in other income (expense), net in the accompanying
consolidated statement of operations.

(F) CASH, CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND LONG-TERM INVESTMENTS

The Company accounts for its investments in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS No.
115). 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. All other
securities have been classified as available for sale. 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, 2003 and 2004, cash
equivalents consisted mainly of commercial paper, short-term notes and money
market funds. The investments in short-term notes are classified as current
assets in the accompanying consolidated balance sheets as they mature within one
year.

During the year ended January 31, 2003, as a result of the sale of certain
investments classified as held-to-maturity prior to maturity, the Company
transferred all of its investments from held-to-maturity to available-for-sale.
Accordingly, the Company recorded an unrealized loss on its investments of
approximately $548,000 at the time it revised its investment policy and an
unrealized gain of approximately $2,335,000 for the remainder of the year as a
component of other comprehensive income in the Company's consolidated statement
of equity. As of January 31, 2004, the average life to maturity on short-term
investments was 56 days.

B-13

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Cash, cash equivalents, short-term investments and long-term investments
that were accounted for as available for sale as of January 31, 2003 were as
follows (in thousands).

B-14

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(G) DEPRECIATION AND AMORTIZATION

The Company records 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:

Repairs and maintenance are expensed as incurred.

(H) 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" (SFAS No. 86), requires the capitalization of
certain computer software development costs incurred after technological
feasibility is established given the Company's operations, 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. Therefore, the Company
did not capitalize software development costs during the periods presented, with
the exception of the fair value of acquired technology developed by Books that
the Company purchased in connection with its acquisition during the year ended
January 31, 2002 and the fair value of IT content purchased in connection with
the Merger during the year ended January 31, 2003 (See Note 5).

The Company expenses all research and development costs, which include
course content development fees, to operations as incurred. In addition,
historically the Company had entered into agreements with content providers
requiring the Company to make up front minimum commitments for rights to
published content. The Company no longer enters into such arrangements. The
Company's policy is to expense these costs to research and development upon
receipt of content.

(I) OTHER COMPREHENSIVE INCOME

SFAS No. 130, "Reporting Comprehensive Income" (SFAS No. 130) 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 non-owner sources. The components of accumulated
comprehensive income (loss) for the years ended January 31, 2002, 2003 and 2004
are as follows (in thousands):

(J) FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments consist mainly of cash and cash equivalents,
short-term investments, restricted cash, long-term investments, accounts
receivable and accounts payable. The Company determines fair value for
short-term and long-term investments based on quoted market values. The carrying
amounts of accounts

B-15

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

receivable is net of an allowance for doubtful accounts, which is based on
historical collections and known credit risks.

(K) CONCENTRATIONS OF CREDIT RISK AND OFF-BALANCE-SHEET RISK

For the years ended and as of January 31, 2002, 2003 and 2004, no customers
individually comprised greater than 10% of total revenue or accounts receivable.

The Company performs continuing credit evaluations of its customers'
financial condition and generally does not require collateral.

The Company has no significant off-balance-sheet or concentration of credit
risks such as foreign exchange contracts, option contracts or other foreign
hedging arrangements.

The Company's cash, cash equivalents and short-term investments are subject
to the guidelines of the Company's investment policy. The primary objective of
the policy with regard to the Company's portfolio is to provide with minimal
risk as high a level of current income as is consistent with the preservation of
capital and the maintenance of liquidity. Approved Instruments include U.S.
Government and Agency securities as well as fixed income instruments rated AAA,
A1/P1 or better. The Company also holds long-term investments of public equity
securities valued at approximately $266,000 which are subject to market risk.

(L) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE

The Company follows the provisions of SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131
established 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 established 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, Chief Financial Officer and the
Chief Operating Officer. Prior to the Merger, the Company had viewed its
operations and managed its business as principally one operating segment.
Subsequent to the Merger, the Company views its operations and manages its
business as principally two operating segments: multi-modal learning and retail
certification. Multi-modal learning content and software is an integrated
solution that supports business and information technology professionals
learning needs through its comprehensive learning management platform
technology. The retail certification segment provides direct sales and services
to individual end-users (See Note 11).

(M) LONG-LIVED ASSETS

The Company follows the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144
requires that long-lived assets be reviewed for impairment by comparing the
future undiscounted cash flows from the assets with the carrying amount. Any
write-downs are to be treated as permanent reductions in the carrying amount of
the assets.

(N) ADVERTISING COSTS

Costs incurred for producing and communicating advertising are expensed
when incurred. Advertising expenses amounted to approximately $201,000,
$1,488,000, and $971,000 for the years ended January 31, 2002, 2003 and 2004,
respectively.

B-16

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(o) GOVERNMENT GRANTS

The Company has entered into grant agreements with government agencies to
employ additional personnel. Conditions of employment are attached to these
grant agreements. Government grants are recorded when there is reasonable
assurance that the Company has complied with, and will continue to comply with,
all conditions necessary to obtain the grants. In connection with the reduction
in workforce of the SmartForce personnel resulting from the Merger, the Company
will not fulfill all the obligations associated with certain grants, and
therefore, has reflected grants subject to refund as a liability in the
accompanying consolidated balance sheet. As of January 31, 2003 and 2004, there
was $1.4 million and $1.6 million of grants subject to repayment, respectively,
of which, approximately $450,000 is included in accrued liabilities and
approximately $1.1 million is included in long-term liabilities on the
consolidated balance sheet.

(p) ACCOUNTING FOR STOCK-BASED COMPENSATION

At January 31, 2004, the Company had stock-based employee compensation
plans which are described in Note 9 to the consolidated financial statements.
The Company accounts for those plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," (APB No. 25) and related Interpretations under APB No. 25.
The Company provides pro forma disclosures of the compensation expense
determined under the fair value provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123). See Note 9 to the Consolidated
Financial Statements.

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 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 the years ended January 31, 2002, 2003 and 2004 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:

B-17

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Had compensation expense for its plans 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 (in thousands, except per
share data):

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.

(q) RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46 (FIN No. 46),
"Consolidation of Variable Interest Entities," which requires the consolidation
of a variable interest entity, as defined, by its primary beneficiary. Primary
beneficiaries are those companies that are subject to a majority of the risk of
loss or entitled to receive a majority of the entity's residual returns, or
both. In determining whether it is the primary beneficiary of a variable
interest entity, an entity with a variable interest shall treat variable
interests in that same entity held by its related parties as its own interests.
The Company is currently evaluating the existence of variable interest entities,
if any, and the impact of adopting the interpretation on the consolidated
financial statements. On December 24, 2003 the FASB deferred FIN No. 46. The
Company will fully adopt FIN No. 46 in the Quarter ended April 30, 2004.

In January 2003, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," an amendment of SFAS No. 123, which
provides alternative methods of transition for a voluntary change to fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in annual financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company has elected to continue to account for
stock-based compensation under APB No. 25, and related Interpretations under FIN
44 and elect the disclosure-only alternative under SFAS No. 123 and the enhanced
disclosures as required by SFAS No. 148. See Note 2(p).

In November 2002, the FASB issued Interpretation No. 45 (FIN No. 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires a guarantor
to record certain guarantees at fair value and to make significant new
disclosures, even when the likelihood of making any payments under the guarantee
is remote. The interpretation and its disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The interpretation's initial recognition and initial measurement
provisions are applicable

B-18

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

on a prospective basis to guarantees issued or modified after December 31, 2002.
The guarantor's previous accounting for guarantees issued prior to December 31,
2002 should not be revised or restated due to the adoption of this
interpretation. The adoption of FIN No. 45 did not have a material impact on the
Company's financial condition or results of operations.

In February 2003, the FASB issued Emerging Issues Task Force 00-21 ("EITF
00-21"), "Revenue Arrangements with Multiple Deliverables." EITF 00-21 requires
revenue arrangements with multiple deliverables to be divided into separate
units of accounting. If the deliverables in the arrangement meet certain
criteria, arrangement consideration should be allocated among the separate units
based on their relative fair values. Applicable revenue recognition criteria
should be considered separately for each unit. The guidance in EITF 00-21 is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption of EITF 00-21 did not have a material impact
on our financial position or results of operations.

In May 2003, the FASB issued FAS No. 150 ("FAS No. 150"), "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." FAS No. 150 establishes standards for an issuer to classify and measure
certain financial instruments with characteristics of both liabilities and
equity. It requires an issuer to classify a financial instrument that meets
certain characteristics as a liability (or an asset in some circumstances). FAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of FAS No. 150 did not have a
material impact on our financial position or results of operations.

In August 2003, the FASB issued Emerging Issues Task Force 03-05 ("EITF
03-05"), "Applicability of AICPA Statement of Position 97-2, Software Revenue
Recognition, to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software," provides guidance on whether non-software
deliverables (e.g., non-software related equipment or services) included in an
arrangement that contains software that is more than incidental to the products
or services as a whole are included within the scope of AICPA Statement of
Position 97-2, Software Revenue Recognition. The guidance in EITF 03-05 is
effective for arrangements entered into in the first reporting period (annual or
interim) beginning after August 13, 2003. The adoption of EITF 03-05 did not
have a material impact on our financial position or results of operations.

(r) PRIOR YEAR FINANCIAL STATEMENT RECLASSIFICATIONS

Certain amounts in the prior year financial statements were reclassified to
conform with current year presentation.

(3) ACQUISITIONS AND DISPOSITIONS

(a) SKILLSOFT CORPORATION

On September 6, 2002, the Company completed the Merger with SkillSoft
Corporation, a leading provider of e-learning courseware and Referenceware for
business and IT professionals. As a result of the Merger, each issued and
outstanding share of common stock, par value $0.001 per share, of SkillSoft
Corporation (the SkillSoft Common Stock) was automatically converted into the
right to receive 2.3674 (the Exchange Ratio) validly issued and fully paid
ordinary shares, nominal value E0.11 per share, of the Company, with each
ordinary share represented by an American Depository Share of the Company (ADS).
The Company also assumed each outstanding option to purchase SkillSoft Common
Stock, which had been granted under SkillSoft Corporation's existing stock
option plans, under the same exchange ratio. As discussed in Note 1, the Company
determined SkillSoft Corporation to be the acquirer for accounting purposes.
Therefore, SkillSoft Corporation is the accounting acquirer in the transaction,
the calculation of the stock consideration is calculated based on SmartForce
ordinary shares and options outstanding. Consequently, this

B-19

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

transaction resulted in the issuance of approximately 57.4 million ordinary
shares (represented by ADSs) of the Company with a fair value of approximately
$317.4 million, the assumption of options to purchase approximately 15.7 million
ordinary shares (represented by ADSs) with a Black-Scholes fair value of
approximately $38.9 million, and estimated direct transaction costs of $15.4
million. The number of ordinary shares issued and options assumed was fixed in
the agreement related to the Merger and was not subject to change prior to
closing. The fair value of the Company's ADSs was derived using a market price
per ADS of $5.53, which was based on an average of the closing prices for a
range of six trading days around the announcement date (June 10, 2002) of the
acquisition. Immediately following the Merger, the former stockholders of
SkillSoft Corporation owned approximately 42% of the outstanding ordinary shares
of the Company. The Company paid a premium to obtain a broader distribution
channel and a stronger presence in the e-learning sector.

Subsequent to the Merger, certain accounting matters were identified
relating to the historical financial statements of SmartForce PLC (which,
following the Merger, are no longer the Company's historical financial
statements -- see Note 1.) On November 19, 2002, the Company announced its
intent to restate the SmartForce PLC historical financial statements for 1999,
2000, 2001 and the first two quarters of 2002. On September 22, 2003, the
Company filed a Form 8-K/A with the Securities and Exchange Commission with
restated SmartForce PLC historical financial statements for 1999, 2000, 2001,
and the first two quarters of 2002.

Based on valuations prepared by a third party appraisal firm using
assumptions provided by management, the total purchase price of approximately
$371.7 million has been allocated as follows (in thousands):

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

* Includes exit costs of $30.3 million.

The components of the consideration paid are as follows (in thousands):

B-20

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The consideration was allocated to the fair value of assets acquired and
liabilities assumed as follows (in thousands):

In connection with the Merger, the Company's management approved and
initiated plans to restructure pre-acquisition SmartForce PLC to eliminate
redundant facilities and headcount, reduce cost structure and better align
operating expenses with existing economic conditions (Note 3(e)).

The Company allocated the purchase price to the tangible assets,
liabilities and intangible assets acquired, based on their estimated fair
values. The excess purchase price over those fair values was recorded as
goodwill. The fair value assigned to the intangible assets acquired was based on
valuations prepared by a third party appraisal firm using assumptions provided
by management. The goodwill recorded as a result of this acquisition is not
expected to be deductible for tax purposes. The goodwill was allocated to the
Company's two reporting units: multi-modal learning and retail certification.

In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
(SFAS No. 142) goodwill and purchased intangibles with indefinite lives acquired
after June 30, 2001 are not amortized but are reviewed periodically for
impairment. In accordance with SFAS No. 142, the Company completed a two-step
fair value based assessment of the goodwill and intangible assets for impairment
in the quarter ended January 31, 2003, its annual test date. The analysis
indicated the multi-modal learning reporting unit was impaired and the Company
recorded a $250.1 million non-cash charge (Note 5). In the fourth quarter of
fiscal 2004, the Company evaluated the fair value of goodwill related to the
Merger. The Company prepared a cash flow analysis by reporting segment comparing
the discounted cash flows to the net book values of the direct assets, goodwill
and intangibles associated with the two reporting units: multi-modal learning
and retail certification. The discounted cash flows supported the carrying value
of the direct assets, goodwill and intangibles of the multi-modal learning
business unit and the retail certification reporting unit. In the fourth quarter
of fiscal 2004, the Company concluded there was no additional impairment of
goodwill.

Amortizable Intangible Assets

Approximately $37 million of the purchase price has been allocated to
amortizable intangible assets comprised of $12 million for contractual customer
relationships and $25 million for course content. Contractual customer
relationships are existing contracts that relate to underlying customer
relationships pertaining to the services provided by the acquired company.

Deferred Revenue

At the Merger, due to the nature of the Company's business, the Company has
remaining contractual obligations to customers of SmartForce PLC. The
obligations principally involve delivery of future products and services. The
Company has recorded deferred revenue as of the Merger date based on a valuation
prepared by a third party appraisal firm using estimates and assumptions
provided by management of these estimated obligations in accordance with
Emerging Issues Task Force (EITF) 01-03, "Accounting in a Business Combination
for Deferred Revenue of an Acquiree." The Company is amortizing deferred revenue
over the average remaining term of the contracts, which reflects the estimated
period to satisfy these customer obligations. The Company assumed $46.7 million
in deferred revenue on the Merger date, September 6, 2002, of which
approximately $749,000 remained at January 31, 2004.

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SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred Compensation

The Company recorded approximately $3,416,000 of deferred compensation
attributable to unvested stock options assumed in the Merger, which will be
amortized over the remaining vesting period of the underlying options. As of
January 31, 2004 approximately $2.1 million in deferred compensation remains to
be amortized in future periods.

Deferred Taxes

The Company has recorded as part of purchase accounting in the Merger a
deferred tax liability of $7.4 million on the separately identified intangible
assets. In addition, through purchase accounting in the Merger, the Company has
recognized a deferred tax asset relative to the acquired net operating loss
carryforwards of a similar amount. Accordingly, the Company has provided a full
valuation allowance against its otherwise realizable deferred tax assets as of
January 31, 2003 and 2004, except for the amounts realized to offset this
potential deferred tax liability.

(b) BOOKS

On December 28, 2001, the Company acquired Books, a provider of Web-based
digital technical and business reference content. The Company acquired 100% of
the outstanding shares of Books for consideration of $35.9 million plus assumed
liabilities. This acquisition was accounted for as a purchase, and accordingly,
the results of Books' operations from the date of acquisition are included in
the Company's consolidated statements of operations.

The components of the consideration paid are as follows (in thousands):

The consideration was allocated to the fair value of assets acquired and
liabilities assumed as follows (in thousands):

In connection with the acquisition of Books, the Company's management
approved and initiated plans to restructure pre-acquisition Books, to eliminate
redundant facilities and headcount, reduce cost structure and better align
operating expenses with existing economic conditions.

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SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Allocation of the purchase price for the acquisition was based on estimates
of the fair value of the net assets acquired. The fair market value of
intangible assets acquired, including the estimates of their useful lives, was
based on independent appraisals. In making the purchase price allocation, the
Company considered present value calculations of income, an analysis of project
accomplishments and remaining outstanding items and an assessment of overall
contributions, as well as project risks. The goodwill resulting from the Books
acquisition was included in the multi-modal reporting unit.

(c) TELCOM DISPOSITION

On January 31, 2003, the Company and its wholly-owned subsidiary
SmartForce-Telcom (U.S.) Corporation and its wholly-owned subsidiary
SmartForce-Telcom (Canada) Corporation entered into an asset purchase agreement
with Advanced Education Corporation (AEC) whereby AEC purchased certain of the
assets of SmartForce-Telcom (U.S.) Corporation and SmartForce-Telcom (Canada)
Corporation and certain assets of the Company and assumed certain liabilities.
In addition, AEC agreed to pay a royalty to the Company on all future revenues
in an amount ranging from 2.5% to 11% based on the amount of revenue and year.
The Company will record any royalties received as an adjustment to goodwill.

As a result of the uncertainties associated with the future royalty
payments, the Company did not value the assets of the Telcom business acquired
in the Merger. In addition, in accordance with EITF 95-3, the Company accrued
the costs to dispose of the business as of the date of the Merger. The net
operating loss of the business disposed of for the period from September 6, 2002
to January 31, 2003 is included as a component of other income (expense), net.
Results of operations for the period from September 6, 2002 through January 31,
2003 of SmartForce-Telcom (U.S.) Corporation including SmartForce-Telcom
(Canada) were as follows (in thousands):

(d) GOTRAIN CORP.

In June 2003, the Company acquired the assets of GoTrain Corp. (GoTrain),
an e-learning business, for approximately $5.2 million in cash, which was paid
during the quarter ended July 31, 2003. This acquisition resulted in allocations
of purchase price to goodwill and intangible assets of $3.7 million and $1.5
million, respectively. Intangible assets allocated were the internally developed
software, which is comprised of content valued at $498,000 that will be
amortized over a period of 4 years and the platform valued at $512,000 that will
be amortized over a period of 2 years. Intangible assets also include customer
contracts valued at $518,000, which will be amortized over 4 years. The
historical results of operations for GoTrain were not material to the results of
the operations of the Company.

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SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(e) MERGER AND EXIT COSTS

SmartForce

In connection with the Merger, the Company's management approved and
initiated plans prior to December 31, 2002 to restructure the operations of
pre-Merger SmartForce PLC to eliminate redundant facilities and headcount,
reduce cost structure and better align the Company's operating expenses with
existing economic conditions. Consequently, the Company recorded $30.3 million
of costs primarily relating to exiting activities of pre-Merger SmartForce PLC,
such as severance and related benefits, costs to vacate leased facilities and
other pre-Merger liabilities. These costs were accounted for under EITF 95-3,
"Recognition of Liabilities in Connection with Purchase Business Combinations."
These costs were recognized as a liability assumed in the purchase business
combination and included in the allocation of the purchase price, and have been
included as an increase to goodwill.

The reductions in employee headcount totaled approximately 632 employees
from the administrative, sales, marketing and development functions, and
amounted to a charge of approximately $14.4 million. Approximately $8.6 million
and $3.0 million was paid out against the exit plan accrual during the years
ended January 31, 2003 and 2004, respectively, and the remaining amount of $2.8
million, net of adjustments, is expected to be paid by January 2005.

In connection with the exit plan, the Company decided to abandon or
downsize certain leased facilities. For the year ended January 31, 2003,
facilities consolidation charges of $12.7 million, consisting of sublease
losses, broker commissions and other facility costs, were recorded in connection
with the downsizing and closing of sites. As part of the plan, 11 sites have
been vacated and 4 sites have been downsized. To determine the sublease loss,
which is the loss after the Company's cost recovery efforts from subleasing the
building, certain assumptions were made related to the (1) time period over
which the property will remain vacant, (2) sublease terms and (3) sublease
rates. The lease loss is an estimate under SFAS No. 5 "Accounting for
Contingencies" (SFAS no. 5). In the year ended January 31, 2004, the Company
revised certain of its estimates made in connection with the original purchase
price pertaining to unoccupied facilities under lease as a result of the Merger.
This adjustment to the exit plan accrual falls within the one year purchase
price allocation period prescribed by SFAS No. 141 "Business Combinations" (SFAS
No. 141). The net present value of these obligations was $14.5 million.

B-24

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The merger and exit costs consist of the following (in thousands):

Other merger accruals primarily include payments under operating equipment
leases.

The Company anticipates that the remainder of the merger and exit accrual
will be paid out by October 2011 as follows (in thousands):

Year Ended January 31, 2005................................. $ 6,919
Year Ended January 31, 2006................................. 1,728
Year Ended January 31, 2007................................. 1,105
Year Ended January 31, 2008................................. 1,099
Thereafter.................................................. 1,537
-------
Total....................................................... $12,388
=======

Books

As part of the acquisition of Books, the Company undertook a plan to exit
certain activities of Books. The cost associated with the exit plan was included
in the purchase price and was composed of severance related to reductions in
employee headcount and remaining lease obligations related to canceled leases.
The reductions in employee headcount totaled 11 employees from the
administrative and development functions, and amounted to a charge of
approximately $1.6 million, which included severance and other termination
costs.

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SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The remaining lease obligations related to the vacating of space associated with
these functions and amounted to a charge of approximately $200,000. The
acquisition exit cost consists of the following (in thousands):

(4) RESTRUCTURING AND OTHER NON-RECURRING CHARGES

(a) RESTRUCTURING

The Company recorded a $14.2 million restructuring charge for the year
ended January 31, 2003, which was included in the statement of operations.
Approximately $10.2 million of this charge represents the compensation cost of
terminated SmartForce PLC employees for services rendered from the date of the
Merger through such employees' termination dates and certain other non-recurring
compensation costs to terminated and continuing employees of the Company. Also
included in the $14.2 million charge are certain other non-recurring costs
incurred by SkillSoft Corporation as a result of the Merger. These costs
primarily consist of employee severance and related costs and contractual
obligations. Payments made under these obligations during the years ended
January 31, 2003 and 2004 aggregated approximately $11.5 million and $2.6
million, respectively.

During the year ended January 31, 2004, the Company recorded and paid an
additional $1.9 million of restructuring and non-recurring charges related to
further restructuring of the pre-Merger SmartForce PLC operations. These
restructuring costs included additional compensation to pre-Merger SmartForce
PLC employees as well as additional non-recurring costs as a result of the
Merger. During the fiscal years ended January 31, 2004 and 2003, activity in the
Company's restructuring provision related to the Merger was as follows (in
thousands):

The components of the restructuring charges are as follows (in thousands):

B-26

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The net restructuring charges for the fiscal years ended January 31, 2003
and 2004 would have been allocated as follows had the Company recorded the
expense and adjustments within the functional department of the restructured
activities (in thousands):

(b) OTHER NON-RECURRING CHARGES

Consistent with the Company's accounting policy and historical treatment
regarding annual audit fees, the Company accrued the estimated audit fees
related to the restatement of the historical SmartForce PLC financial
statements, the acquired business, in the year end January 31, 2003. All other
costs associated with the restatement, the resulting SEC investigation, and the
2002 shareholder lawsuit are expensed as the work is performed. For the year
ended January 31, 2003 and 2004, the Company recorded $5.1 million and $16.4
million, respectively, in expenses related to the restatement and SEC
investigation consisting primarily of professional fees, including legal,
accounting and other consulting fees.

(5) GOODWILL AND INTANGIBLE ASSETS

On February 1, 2002, the Company adopted SFAS No. 142, which requires
companies to discontinue amortizing goodwill and certain intangible assets with
indefinite useful lives and requires an annual review for impairment. The
non-amortization provisions of SFAS No. 142 apply to goodwill and intangible
assets acquired after June 30, 2001. The Company's goodwill and intangible
assets relate to both the Merger and its acquisitions of Books and GoTrain,
which were accounted for in accordance with the non-amortization provisions of
SFAS No. 142. Therefore, there is no impact on the comparability of the
accompanying condensed consolidated statements of operations as a result of
discontinuing the amortization of goodwill.

Goodwill and intangible assets are as follows (in thousands):

Customer contracts are existing contracts that relate to underlying
customer relationships pertaining to the services provided by the acquired
company. The Company expects to amortize the fair value of customer contracts on
an accelerated basis over a weighted average estimated useful life. Internally
developed

B-27

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

software/courseware relates to the Books platform, GoTrain content and platform,
and the SmartForce PLC content. Course content includes courses in both soft
skills and information technology. All courseware is deployable via the Internet
or corporate intranets.

A summary of activity pertaining to goodwill and intangible assets during
the year ended January 31, 2004 is as follows (in thousands):

The acquired intangibles relates to software and courseware and customer
contracts acquired from GoTrain. The goodwill adjustment resulted from the
revisions to the purchase price related to the impact of the restatement of the
historical financial statements of SmartForce and of certain estimates and cash
received on previously written off accounts receivable and investments from the
Merger.

Amortization expense for the fiscal years ended January 31, 2003 and 2004
is as follows (in thousands):

Amortization expense for the next five fiscal years is expected to be as
follows (in thousands):

Goodwill Impairment Analysis

In response to several factors in the fourth quarter of fiscal 2003, the
Company re-evaluated the fair value of the goodwill established in connection
with the Merger and the Books acquisition. The Company prepared a cash flow
analysis by reporting segment comparing the discounted cash flows to the net
book values of the direct assets, goodwill and intangibles associated with the
two reporting units: multi-modal learning and retail certification. The
discounted cash flows did not support the direct assets, goodwill and
intangibles of the multi-

B-28

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

modal learning business unit. However, the discounted cash flows did support the
retail certification reporting unit.

The enterprise value of the two reporting units and the identifiable
intangible assets were based on valuations prepared by a third party appraisal
firm using assumptions provided by management. The Company's management prepared
a discounted cash flow analysis by reportable segment for each reporting unit
comparing the discounted cash flows to the net book values of the direct assets,
goodwill and intangibles associated with each reporting unit. The enterprise
value was based upon a discounted cash flow analysis. The cash flow analysis
indicated the discounted cash flows were not sufficient to recover the assets.
Accordingly, the Company recorded a $250.1 million impairment to goodwill in the
fourth quarter of fiscal 2003.

In the fourth quarter of fiscal 2004, the Company re-evaluated the fair
value of goodwill related to the Merger. The Company prepared a cash flow
analysis by reporting segment comparing the discounted cash flows to the net
book values of the direct assets, goodwill and intangibles associated with the
two reporting units: multi-modal learning and retail certification. The
discounted cash flows supported the carrying value of the direct assets,
goodwill and intangibles of the multi-modal learning business unit and the
retail certification reporting unit. In the fourth quarter of fiscal 2004 the
Company concluded there was no additional impairment of goodwill.

(6) RELATED PARTY TRANSACTIONS

(a) NOTES RECEIVABLE FROM STOCKHOLDERS

In December 1997, the Company issued 1,499,353 shares of Class A common
stock to a founder of the Company in exchange for a $166,000 full recourse note
receivable with interest at 6.2% per annum which was equal to the fair market
value of the shares at the date of the transaction. As of January 31, 2002, the
balance on this note receivable was $166,000 and was included as a reduction of
stockholders' equity in the accompanying consolidated balance sheets and
consolidated statements of stockholders' equity (deficit) and comprehensive
loss. The note receivable and accrued interest was paid in December 2002.

During the fiscal years ended January 31, 1999 and 2000, the Company issued
a total of 1,558,538 shares of Class A restricted common stock to three officers
and several key employees of the Company in exchange for $173,000 full recourse
notes receivable equal to the fair market value of the shares. The shares vest
ratably on a monthly basis over three years (See Note 9(c)). The notes
receivable accrue interest at rates of 4.83%-5.77% per annum and the principal
and all outstanding interest are due upon the maturity of the notes through
March 2004. The total balance of these notes receivable was $172,000, $58,000
and $0 at January 31, 2002, 2003 and 2004 respectively, and was included as a
reduction of stockholders' equity in the accompanying consolidated balance
sheets and consolidated statements of stockholders' equity and comprehensive
loss.

All of the shares of Class A common stock converted into an equal number of
shares of common stock in connection with the SkillSoft Corporation's initial
public offering of common stock in February 2000.

(b) OWNERSHIP OF CBT TECHNOLOGY

Approximately 9% of the outstanding share capital of CBT (Technology)
Limited (CBT T), one of the Company's Irish subsidiaries, representing a special
non-voting class, is owned by Stargazer Productions (Stargazer), an unlimited
company which is wholly-owned by certain employees of SmartForce PLC (the
predecessor entity, for accounting purposes, of SkillSoft PLC). These key
employees do not include any of the Company's directors or executive officers.

All of the voting securities of CBT T are owned by Fidalco Limited, a
wholly owned subsidiary of SkillSoft PLC and, except for the securities owned by
Fidalco Limited and Stargazer, there are no other outstanding securities of CBT
T. CBT T has in the past and may in the future declare and pay dividends to

B-29

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stargazer, and Stargazer may pay dividends to its shareholders out of such
amounts. Stargazer does not have any rights to the assets of CBT T, only to
receive periodic dividends as and when declared by CBT T. Except for the fact
that Stargazer is wholly owned by certain key employees of SkillSoft PLC, there
is no relationship between SkillSoft PLC and Stargazer.

(C) SPHERION CORPORATION

In April 2000, the Company sold 338,200 shares of common stock to Spherion
Corporation (Spherion) (formerly Interim Services, Inc.), at a price of $5.91
per share, for approximately $2 million, which approximated the fair market
value at that date. In addition, the Company entered into a separate license
arrangement with Spherion, under which the Company recognized approximately
$493,000 and $461,000 of product revenue in the years ended January 31, 2002,
and 2003 respectively. The Company believes that all transactions with Spherion
were rendered at arms' length. There were no dealings with Spherion Corporation
during the fiscal year ended January 31, 2004.

(D) BUSINESS PERFORMANCE TECHNOLOGIES, LLP

During the year ended January 31, 2001, the Company invested approximately
$100,000 in Business Performance Technologies, LLP (BPT), a provider of
consulting services to the Company's customers. The investment represented a
minority interest in BPT which was accounted for using the cost method. The
Company valued the investment at zero during the year ended January 31, 2001
because the ultimate value of its interest in BPT was permanently impaired.

Net revenue recorded by the Company associated with work performed by BPT
during the years ended January 31, 2002 and 2003 was approximately $920,000 and
$483,000, respectively. The Company had no revenue associated with BPT in the
fiscal year ended January 31, 2004. Included in accounts payable on the
accompanying consolidated balance sheets as of January 31, 2003 and 2004 was
approximately $31,000 and $230,000, respectively, due to BPT for services
performed.

(7) INCOME TAXES

Loss before provision/benefit for income taxes consist of the following (in
thousands):

B-30

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The provision for income taxes consist of the following (in thousands):

Net deferred tax assets and liabilities consist of the following (in
thousands):

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

The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes" (SFAS No. 109).
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

B-31

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

The Company has recorded a total provision for income taxes in 2003 and
2004 of $383,000 and $529,000 respectively, primarily related to income
generated in foreign countries which cannot be offset by loss carryforwards.

As of January 31, 2004, the Company has U.S. federal net operating loss
carryforwards of approximately $350.1 million available to reduce future income
taxes, if any. The Company also has U.S. federal tax credit carryforwards of
approximately $3.0 million at January 31, 2004. Additionally, the Company has
approximately $86.7 million of net operating loss carryforwards in jurisdictions
outside of the U.S. If not utilized, these carryforwards expire at various dates
through the year ending January 31, 2024.

Included in the $350.1 million the Company has approximately $217.7 million
of U.S. net operating loss carryforwards and $365,000 of U.S. tax credit
carryforwards that were acquired in the Merger and the purchase of Books. In
addition, included in the $86.7 million the Company has approximately $62.7
million of net operating loss carryforwards in jurisdictions outside the U.S.
acquired in the Merger and the purchase of Books. The Company will realize the
benefits of these acquired net operating losses through reductions to goodwill
and non-goodwill intangibles during the period that the losses are utilized.

At January 31, 2004, the Company has approximately $3.4 million of net
operating loss carryforwards in the United States resulting from disqualifying
dispositions. The Company will realize the benefit of these losses through
increases to stockholder's equity in the periods in which the losses are
utilized to reduce tax payments.

The Company has completed several financings since its inception and has
incurred ownership changes as defined under Section 382 of the Internal Revenue
Code. The Company has completed an analysis of these changes and does not
believe that the changes will have a material impact on its ability to use its
net operating loss and tax credit carryforwards.

The Company has recorded as part of purchase accounting a deferred tax
liability of $7.4 million related to separately identified intangible assets.
Additionally, through purchase accounting, the Company has recognized a deferred
tax asset of $7.4 million relative to a portion of the net operating losses
acquired. 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 realizable net deferred tax assets as
of January 31, 2003 and 2004.

The Company has a reserve for taxes that may become payable as a result of
audits in future periods with respect to previously filed tax returns. The
Company establishes the reserves based upon management's assessment of exposure
associated with permanent tax differences and associated interest expense. The
tax reserves are analyzed periodically (at least annually) and adjustments are
made as events occur to warrant adjustment to the reserve. For example, if the
statutory period for assessing tax on a given tax return or period lapses, the
reserve associated with that period will be reduced. In addition, the adjustment
to the reserve will reflect any additional exposure based on current
calculations.

(8) COMMITMENTS AND CONTINGENCIES

(A) LEASES

The Company leases its facilities and certain equipment and furniture under
operating lease agreements that expire at various dates through 2023. The lease
agreements frequently include renewal clauses, escalation clauses and purchase
provisions and require the Company to pay taxes, insurances and maintenance
costs. Included in the accompanying statements of operations is rent expense for
leased facilities and equipment of

B-32

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approximately $1,102,000, $3,252,000, and $4,998,000 for the fiscal years ended
January 31, 2002, 2003 and 2004, respectively.

Future minimum lease payments under the operating lease agreements are
approximately as follows (in thousands):

(B) MINIMUM COMMITMENTS

As of January 31, 2004 the Company had not entered into any long-term
agreements with third parties to provide services and/or subject matter
expertise.

(C) LITIGATION

SEC Investigation

On or about February 4, 2003, the Securities Exchange Commission (SEC)
informed the Company that it is the subject of a formal order of private
investigation relating to its November 19, 2002 announcement that it would
restate the financial statements of SmartForce PLC for the period 1999 through
June 2002. The Company understands that the SEC's investigation concerns
SmartForce's financial disclosure and accounting during that period, other
related matters, compliance with rules governing reports required to be filed
with the SEC, and the conduct of those responsible for such matters. The Company
continues to cooperate with the SEC in this matter.

Class Action Lawsuits

Six class action lawsuits have been filed against the Company and certain
of its current and former officers and directors captioned: (1) Gianni Angeloni
v. SmartForce PLC d/b/a SkillSoft, William McCabe and Greg Priest; (2) Ari R.
Schloss v. SkillSoft PLC f/k/a SmartForce PLC, Gregory M. Priest, Patrick E.
Murphy, David C. Drummond and William G. McCabe; (3) Joseph J. Bish v.
SmartForce PLC d/b/a SkillSoft, Gregory M. Priest, William G. McCabe, David C.
Drummond, John M. Grillos, John P. Hayes and Patrick E. Murphy; (4) Stacey Cohen
v. SmartForce PLC d/b/a SkillSoft, William G. McCabe and Greg Priest; (5) Daniel
Schmelz v. SmartForce PLC d/b/a SkillSoft, William G. McCabe and Greg Priest;
and (6) John O'Donoghue v. SmartForce PLC d/b/a SkillSoft, William G. McCabe and
Greg Priest. Each lawsuit was filed in the United States District Court for the
District of New Hampshire; the first action was filed on November 22, 2002, the
second action was filed on December 4, 2002 and the third and fourth actions
were filed on December 11, 2002, the fifth action was filed on December 23,
2002, and the sixth action was filed on January 16, 2003. These lawsuits allege
that the Company misrepresented or omitted to state material facts in its SEC
filings and press releases regarding its revenues and earnings and failed to
correct such false and misleading SEC filings and press releases, which are
alleged to have artificially inflated the price of the Company's ADSs. These
lawsuits seek unspecified monetary damages, including punitive damages together

B-33

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

with interest, costs, fees and expenses. These lawsuits have all been assigned
to Chief Judge Paul J. Barbadoro. On March 26, 2003, Judge Barbadoro
consolidated the lawsuits under the caption "In re SmartForce Securities
Litigation," Civil Action No. 02-544-B, appointed as lead plaintiffs the
Teacher's Retirement System of Louisiana and the Louisiana Sheriff's Pension &
Relief Fund, and approved the lead plaintiffs' choice of lead counsel and local
counsel. In March 2004, the Company reached a settlement of this litigation for
total settlement payments of $30.5 million, with one-half paid soon after
preliminary approval by the court. The Company is in discussions with its
insurers and hopes they will contribute a portion of the settlement amount. The
settlement is subject to court approval. We are in discussions with our insurers
to determine how much, if any, of this settlement amount will be paid by them.
We have recorded the aggregate settlement as a charge in our fiscal 2004 fourth
quarter; any reimbursement from our insurers will be recorded in the period in
which it is finalized.

On December 1, 2003, the Company reached a settlement of the class action
litigation filed in 1998 in the United States District Court for the Northern
District of California against the Company, one of its subsidiaries and certain
of its former and current officers and directors alleging violations of the
federal securities laws. Under the terms of the settlement, the Company made a
$10 million cash payment in January 2004 and will make an additional $6 million
payment in mid-2004. The Company's insurance carriers paid an additional $16
million for total settlement payments of $32 million. The court granted final
approval of the settlement, and the litigation was dismissed with prejudice on
February 27, 2004. The Company expensed the entire settlement in the fiscal year
ending January 31, 2004.

On July 21, 2003, the parties entered into a settlement agreement, which
resulted in a final dismissal and termination of the NETg State Court Litigation
and the NETg Patent Litigation. Under the terms of the settlement agreement, the
Company has agreed to pay NETg an aggregate of $44 million in two payments of
$22 million each. We made the first payment on July 25, 2003. The second payment
is due on July 21, 2004. The Company also agreed not to make certain specific
modifications to our information technology training courseware for a limited
period of time. In exchange, SkillSoft Corporation and the other defendants
received complete but conditional releases from any liability relating to the
subject matter of the NETg State Court Litigation or the NETg Patent Litigation,
or with certain exceptions, based on or arising from the alleged use of any
alleged NETg intellectual property. The Company also received a perpetual,
non-transferable, non-exclusive license to develop, use, sell, offer for sale,
lease or offer to lease products or services containing or embodying certain
NETg technology or inventions disclosed or described in certain NETg patent
applications. The Settlement Agreement provides that "it is specifically
understood that two million dollars of the payments provided for under the
Settlement Agreement, shall be in respect of" such license. Under the terms of
the settlement agreement, if NETg was not compelled to return the first $22
million payment on or before October 28, 2003, then the releases would become
unconditional, the NETg State Court Litigation would be dismissed with prejudice
and the NETg Patent Litigation would not be pursued further. On October 29,
2003, the state court entered the parties' stipulation of dismissal, and the
action was dismissed with prejudice. The above-referenced releases likewise
became unconditional. The Company expensed the entire settlement in the fiscal
year ending January 31, 2004.

In June 2003, we reached an agreement with IP Learn regarding the
settlement of the pending litigation pursuant to which we obtained a license to
use certain of IP Learn's patents. Under the terms of the settlement agreement,
we made a cash payment of $2.0 million and issued 100,000 ordinary shares (which
are represented by ADSs). On or about November 18, 2003, pursuant to the
settlement agreement and a stipulation filed by the parties, the court entered
an order dismissing the lawsuits with prejudice. The Company expensed the entire
settlement in the fiscal year ending January 31, 2004.

On October 23, 2003, we entered into a settlement agreement with Lionet
Limited. The Company recorded to expense the entire settlement in the fiscal
year ending January 31, 2004.

We are not a party to any other material legal proceedings.
B-34

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(D) CREDIT FACILITY

On June 24, 2003 the Company executed a $25 million one year, secured line
of credit from a bank. Under the terms of the line of credit, the facility is to
be initially secured by $25 million in cash held in a certificate of deposit,
plus a first security interest in all domestic business assets. All borrowings
under the line of credit bear interest at the lesser of the bank's prime rate or
the 30 or 60 day LIBOR rate plus 1.25%. The facility was subject to a commitment
fee of $75,000 to secure the line of credit and unused commitment fees of 0.05%
based upon the daily average of un-advanced amounts under the revolving line of
credit. The Company has paid approximately $6,300 in unused commitment fees for
the fiscal year ended January 31, 2004. In addition, the line of credit contains
certain financial and non-financial covenants. At January 31, 2004, the Company
is in compliance with all financial and non-financial covenants. As of January
31, 2004 there were no borrowings on the line of credit; however the Company had
outstanding letters of credit of $6.5 million that reduced the availability
under the line of credit. Letters of credit are subject to commission fees of
0.9% as well as administrative costs. The Company has paid approximately $60,000
in letters of credit fees for the fiscal year ended January 31, 2004.

(E) DELINQUENT FOREIGN FILINGS

The Company operates in various foreign countries through subsidiaries
organized in those countries. Due to the restatement of the historical
SmartForce statutory financial statements, some of the subsidiaries have not
filed their audited financial statements and have been delayed in filing their
tax returns in their respective jurisdictions. As a result, some of these
foreign subsidiaries may be subject to regulatory restrictions, penalties and
fines. The Company does not believe such restrictions, penalties and fines, if
any, would have a material impact on the financial statements.

(9) STOCKHOLDERS' EQUITY

(A) REVERSE ACQUISITION ACCOUNTING

As a result of the Merger, each issued and outstanding share of SkillSoft
Common Stock, par value $0.001 per share, was automatically converted into the
right to receive 2.3674 (the Exchange Ratio) validly issued and fully paid
ordinary shares, nominal value E0.11 per share, of the Company, with each
ordinary share represented by an ADS. The Company also assumed each outstanding
option to purchase SkillSoft Common Stock, which had been granted under
SkillSoft Corporation's existing stock option plans, under the same Exchange
Ratio of 2.3674. As a result of the Merger, all discussions and notes regarding
common shares include the effect of the aforementioned SmartForce reverse
acquisition.

In accordance with the preceding paragraph, the outstanding shares as of
January 31, 2002 and the weighted average shares outstanding for the year ended
January 31, 2002 were restated as follows.

B-35

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(B) CAPITALIZATION

The Company has authorized capital stock of 250,000,000 shares of E0.11 par
value ordinary shares.

On July 30, 2001, the Company closed a public offering of 6,619,842 shares
of common stock at a public offering price of $11.83 per share. Net proceeds to
the Company from this offering were approximately $72,000,000. In addition to
shares issued by the Company, certain members of management and a key investor
of the Company sold 603,687 and 1,420,440 shares of common stock, respectively,
at a public offering price of $11.83 per share.

(C) COMMON SHARES

Prior to the Company's initial public offering, the Company authorized
shares of Class A and Class B common stock, $0.001 par value. The voting,
dividend and liquidation rights of the holders of the common stock were subject
to, and qualified by, the rights of the holders of the Preferred Stock.

The Company issued 1,340,000 shares of Class A common stock, which were not
part of the 1998 Stock Incentive Plan, to a founder of the Company and to
several private investors in December 1997. Of these shares, 633,333 shares were
issued to a founder of the Company in exchange for a full recourse note
receivable (see Note 6a).

During the fiscal years ended January 31, 1999 and 2000, the Company issued
1,124,000 and 340,000 shares of Class A restricted common stock, respectively,
pursuant to the 1998 Stock Incentive Plan. Of these shares, 658,333 were issued
to three officers and several key employees of the Company in exchange for full
recourse notes receivable (see Note 6a). 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.

In connection with the Company's initial public offering on February 4,
2000, all issued and outstanding shares of Class A common stock and Class A
restricted 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 PLANS

In February 1998, the Company adopted the 1998 Stock Incentive Plan (the
1998 Plan), pursuant to which up to 7,402,071 shares of common stock could have
been issued. In July 2001, the Company adopted the 2001 Stock Incentive Plan
(the 2001 Plan), pursuant to which up to 3,432,730 shares of common stock could
have been issued, subject to increase in accordance with the terms of the 2001
Plan. Under the 1998 Plan and the 2001 Plan, the Company could have granted 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 or its designee. Incentive stock options were to be granted
at a price not less than 100% of the fair market value of

B-36

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

In connection with the acquisition of Books on December 28, 2001, the
Company assumed the Books 1994 Stock Option Plan (the 1994 Plan), consisting of
options to purchase 808,799 shares, insofar as it related to outstanding
options. Under the 1994 Plan, options to acquire ordinary shares in Books could
have been granted to all officers, other key employees, consultants and
advisors. The 1994 Plan is administered by the Board of Directors. Options under
the Plan generally expire not later than 90 days following termination of
employment or service or 12 months following the optionees' death. There are
certain exceptions for exercises following retirement or death.

All option plans of SkillSoft in existence upon the closing of the Merger
on September 6, 2002 have been terminated, except insofar as they relate to the
outstanding options.

In connection with the Merger on September 6, 2002, the Company assumed the
SmartForce plans, consisting of options to purchase 15,941,705 ordinary shares.
Under the 1990 Plan, options to acquire ordinary shares in the Company could
have been granted to any director or employee of the Company. The 1990 Plan has
expired by its terms. Under the 1994 Plan, all employees and directors of the
Company and any independent contractor who performs services for the Company are
eligible to receive grants of non-statutory options (NSO's). Employees are also
eligible to receive grants of incentive share options intended to qualify under
Section 422 of the Internal Revenue Code. Under the Outside Director Plan, all
outside directors of the Company are eligible to receive option grants upon
appointment to the Board of Directors and each subsequent year thereafter. Under
the 1996 Plan, all employees, with the exception of directors and executive
officers, are eligible to receive grants of NSO's. Under the ForeFront92 Plan,
(the FF92 Plan) NSO's and ISO's were granted to any employee or director of
ForeFront. Under the ForeFront96 Plan, (the FF96 Plan) NSO's were granted to
employees and directors of ForeFront. Under the Forefront Directors' 1996 Plan,
(the FF96 Directors' Plan) non-employee directors were eligible to receive
grants of options to acquire common stock upon election to the Board of
Directors and each subsequent year thereafter. Under the Knowledge Well Limited
Plan, (the KWL Plan) and the Knowledge Well Group Limited Plan, (the KWGL Plan),
employees and directors and any independent contractor who performs services for
Knowledge Well Limited (KWL) and Knowledge Well Group Limited (KWGL) were
eligible to receive grants of NSO's. Employees of KWL and KWGL were also
eligible to receive grants of ISO's which were intended to qualify under Section
422 of the Internal Revenue Code.

The Plans are administered by the Compensation Committee of the Board of
Directors (the Committee). The terms of the options granted under all plans,
except for the Outside Director Plan, are generally determined by the Committee,
the Board of Directors or a designee of the Board of Directors. All grants of
options under the Outside Director Plan are automatic and nondiscretionary and
are made strictly in accordance with the provisions of the plan. The exercise
price of options granted under the 1990 Plan and ISO's granted under the 1994
Plan cannot be less than the fair market value of ordinary shares on the date of
grant (as defined in the plans). In the case of ISO's granted to holders of more
than 10% of the voting power of the Company the exercise price cannot be less
than 110% of such fair market value. Under the 1994 Plan, the exercise price of
NSO's may be set by the Committee at its discretion. The exercise price of
option grants under the Outside Director Plan is the closing sales price for
such shares (or the closing bid, if no sales were reported) as quoted on such
exchange or system for the last market trading day prior to the time of
determination. The term of an option under the 1994, Outside Director, 1996,
FF92, FF96, KWL and KWGL Plans cannot exceed ten years and, generally, the terms
of an option under the 1990 Plan and FF96 Directors' Plan cannot exceed ten
years. The term of an ISO granted to a holder of more than 10% of the voting
power of the Company cannot exceed five years. An option may not be exercised
unless the option holder is at the date of exercise, or within three months of
the date of exercise has been, a director, employee or contractor of the
Company. There are certain exceptions for exercises following retirement or
death. Options under the Plans

B-37

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

generally expire not later than 30 to 90 days following termination of
employment or service or six months following an optionees' death or disability.

The following is a summary of the share options authorized, outstanding and
available to be granted under all of the Company's share option plans as of
January 31, 2004:

Due to the reverse acquisition accounting, the SkillSoft options were
converted using the Exchange Ratio (see Note 9(a)).

B-38

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

All stock option activity under the Plans for the fiscal years ended
January 31, 2002, 2003 and 2004 is as follows:

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

* Beginning balance adjustment is comprised of: certain extensions of
post-termination exercise periods as a result of the Company's failure to file
Form 8-K as a result of the restatement of SmartForce's historical financial
statements offset by retroactive terminations of options shown as outstanding
at January 31, 2003.

The following table summarizes certain information relating to the
outstanding and exercisable options as of January 31, 2004:

B-39

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 $2,852,000, 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 approximately $736,000, $602,000, and $240,000 in the years ended
January 31, 2002, 2003 and 2004, respectively, related to these restricted
shares and options.

In connection with the purchase of Books on December 28, 2001, the Company
assumed the Books 1994 Stock Option Plan, consisting of options to purchase
808,799 shares, insofar as it related to outstanding options. These options were
valued at $6,376,000 using the Black-Scholes option pricing model, and were
included in the determination of consideration paid. In addition, the Company
recorded deferred compensation of $1,752,000, which represents the intrinsic
value of unvested options assumed in the transaction. The deferred compensation
will be amortized to expense over the vesting period of the stock options. The
Company recorded compensation expense of approximately $57,000, $660,000 and
$583,000 in the years ended January 31, 2002, 2003 and 2004, respectively,
related to these options.

In connection with the Merger on September 6, 2002, the Company assumed all
the SmartForce stock option plans consisting of options to purchase 15,941,705
shares. These options were valued at approximately $38,900,000 using the
Black-Scholes option pricing model, and were included in the determination of
consideration paid. In addition, the Company recorded deferred compensation of
$3,416,000, which represents the intrinsic value of unvested options assumed in
the transaction. The deferred compensation will be amortized to expense over the
vesting period of the stock options. The Company recorded compensation expense
of approximately $372,000 and $890,000 in the years ended January 31, 2003 and
2004, respectively, related to these options.

Dividends may only be declared and paid out of profits available for
distribution determined in accordance with accounting principles generally
accepted in Ireland and applicable Irish Company Law. There are no material
restrictions on the distribution of income or retained earnings by the
consolidated group of companies of the Company. Any dividends, if and when
declared, will be declared and paid in dollars.

The Company recorded a compensation charge of $274,000 in the fiscal year
ended January 31, 2004 due to the extension of certain option agreements until
the Registration Statement on Form S-8 covering such option agreements, which
was suspended as a result of the delay in filing a Form 8-K/A containing the
historical SmartForce financial statements, was again available for use.

(E) EMPLOYEE STOCK PURCHASE PLANS

In 2001, the Company's Board of Directors and stockholders approved the
2001 Employee Stock Purchase Plan, under which a maximum of 624,994 shares could
have been issued. In 2001, the Company's Board of Directors approved the 2001
International Employee Stock Purchase Plan, under which a maximum of 118,370
shares could have been issued.

Participants in each of the 2001 Employee Stock Purchase Plan and the 2001
International Employee Stock Purchase Plan were granted options to purchase
shares of common stock on the last business day of each six-month payment period
ending each June 30 and December 31 for 85% of the market price of the common
stock on the first or last business day of each payment period, whichever was
less. The purchase price for such shares was paid through payroll deductions,
and the maximum allowable payroll deduction was 15% of each eligible employee's
eligible compensation. On August 26, 2002, the Board of Directors approved an
acceleration of the purchase date scheduled for December 31, 2002 to September
5, 2002. Under these Employee Stock Purchase Plans, the Company issued 160,690
shares during the period ending September 6, 2002. As of September 6, 2002,
there were 463,045 shares available for future issuance under the 2001

B-40

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Employee Stock Purchase Plan and 93,156 shares available for future issuance
under the 2001 International Employee Stock Purchase Plan. Such shares are no
longer available for issuance.

On August 26, 2002, the Board of Directors terminated the 2001 Employee
Stock Purchase Plan and the 2001 International Employee Stock Purchase Plan,
leaving the 1995 Employee Share Purchase Plan as the primary plan for all
employee stock purchase plan purchases. Participants in the 1995 Employee Share
Purchase Plan are generally granted options to purchase ordinary shares on the
last business day of each six-month offering period ending each August 31 and
February 28 for 85% of the market price of the ADSs on the first or last
business day of each offering period, whichever is less. The purchase price for
such shares is paid through payroll deductions, and the current maximum
allowable payroll deduction is 20% of each eligible employee's eligible
compensation. The Company issued 628,911 shares during the period from February
1, 2003 to January 31, 2004. As of January 31, 2004, there were 1,094,489 shares
available for future issuance under the 1995 Employee Share Purchase Plan.

(10) EMPLOYEE BENEFIT PLAN

The Company has a 401(k) plan covering all US-based 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. Under this plan, contributions of approximately $87,000 and
$32,000 were made for the fiscal years ended January 31, 2003 and 2004,
respectively.

(11) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE

The Company follows the provisions of SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131
established 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 established 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.
Prior to the Merger, the Company had viewed its operations and managed its
business as principally one operating segment. Subsequent to the Merger, the
Company has viewed its operations and manages its business as principally two
operating segments -- multi-modal learning and retail certification (which was
part of the acquisition).

B-41

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following tables set forth the Company's statement of operations for
the fiscal years ended January 31, 2003 and 2004 by segment with additional
disclosures as required by SFAS No. 131:

The following tables set forth the Company's supplemental balance sheet
information by segment:

B-42

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following tables set forth the Company's supplemental balance sheet
information by segment:

B-43

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

GEOGRAPHICAL REPORTING

The Company attributes revenues to different geographical areas on the
basis of the location of the customer. Revenues by geographic area are as
follows (in thousands):

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

(12) PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets in the accompanying consolidated
balance sheets consist of the following (in thousands):

B-44

SKILLSOFT PUBLIC LIMITED COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(13) ACCRUED EXPENSES -- CURRENT

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

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

* Includes $2,210 of accrued income taxes

(14) VALUATION & QUALIFYING ACCOUNTS

ALLOWANCE FOR DOUBTFUL ACCOUNTS (AMOUNTS IN THOUSANDS)

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

(1) Other relates to amount acquired in an acquisition.

B-45

EXHIBIT INDEX

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

+ Filed herewith.

** Denotes management or compensatory plan or arrangement required to be filed
by registrant pursuant to Item 15(c) of this report on Form 10-K.

*** Confidential treatment requested for certain portions, which portions have
been separately filed with the Securities and Exchange Commission.