LEARN2 CORP - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K

(MARK ONE)

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 0-27417

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

DELAWARE 76-0518568
(State of incorporation) (I.R.S. Employer Identification
No.)

111 HIGH RIDGE ROAD 06905
STAMFORD, CONNECTICUT (Zip Code)
(Address of principal executive offices)

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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 975-9602

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(TITLE OF CLASS)

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. [ ]

As of March 20, 2002, there were approximately 75,576,764 shares of the
registrant's common stock outstanding. The aggregate market value of the common
stock held by non-affiliates of the registrant (based on the closing price of
the common stock on The Nasdaq National Market) on March 20, 2002 was
approximately $10,406,308 or $0.14 per share (calculated by excluding shares
actually owned by our current directors and officers).

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LEARN2 CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001

TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

HISTORY

On September 25, 2001, we acquired all of the outstanding stock of
Learn2.com, Inc., a publicly traded company, changed the name of our company
from E-Stamp Corporation to Learn2 Corporation and assumed the on-going business
of Learn2.com. Learn2.com's offerings included engaging online and physical
learning and training products and complementary services, commonly referred to
as e-learning services, marketed to corporate, government and individual clients
and customers and provided e-mail marketing services. Under the terms of the
merger agreement, we issued approximately 37.8 million shares of our common
stock. Each share of Learn2.com common stock outstanding immediately prior to
the completion of the merger automatically converted into the right to receive
0.4747 shares of our common stock resulting in our stockholders immediately
prior to the consummation of the merger owning approximately 50.1% of the
outstanding stock of the combined company. The former stockholders of Learn2.com
including Learn2.com's $10.0 million convertible debenture holder, received
approximately 49.9% of the combined company. The total value of the transaction
was approximately $19.2 million including approximately $6.6 million of assumed
liabilities, transaction costs totaling approximately $5.2 million and a
pre-closing payment of $1.0 million to Learn2.com's $10.0 million convertible
debenture holder. The transaction was accounted for using the purchase method of
accounting. The results of Learn2.com for the period from September 25, 2001
through December 31, 2001 are included in the consolidated statement of
operations for the year ended December 31, 2001.

E-Stamp Corporation, founded in 1994, originally provided an Internet
postage service that enabled users to purchase, download and print Internet
postage directly from their personal computers without the need to maintain a
persistent Internet connection. In May 2000, we acquired two companies, Infinity
Logistics and Automated Logistics for a total purchase price of $9.0 million.
These companies offered transportation management and warehouse management
products and services that allowed enterprise customers to review carrier rates
and shipping options, select a carrier, print shipping labels, track shipments
and create shipping reports.

During 2000, we undertook two corporate restructurings. In July 2000, we
restructured the organization to accelerate the development, marketing and sales
of our transportation management products and services in addition to our
Internet postage business. In November 2000, we restructured the organization to
phase out our Internet postage business. We incurred charges of approximately
$20.3 million related to these restructurings.

On April 19, 2001, in connection with our then planned merger with
Learn2.com, we discontinued our remaining transportation management business.

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

On March 4, 2002, we announced that we will phase out our remaining
production and distribution operations in Pryor, Oklahoma and consolidate our
e-learning business in Golden, Colorado, which is the current home of our
courseware and authoring tool development activities. We eliminated
approximately sixty positions, primarily in the Oklahoma facility and certain
field sales operations. Severance and related expenses attributable to the
elimination of these positions will be approximately $300,000 and will be
recorded in the quarter ending March 31, 2002. When fully implemented, we expect
that these steps will result in a reduction of operating expenses of
approximately $5.5 million on

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an annualized basis. As a result of this decision, we reduced the value of our
intangible assets through an impairment charge as of December 31, 2001 by
approximately $330,000.

From September 25, 2001 until February 28, 2002, we operated in two
segments: "e-learning" and "permission email marketing". As part of our
restructuring announced on March 4, 2002, effective March 1, 2002, we split our
e-learning segment into "corporate and government" and "retail".

E-LEARNING OVERVIEW

We develop and market open-standards multimedia courseware in four broad
categories: computer software applications for end-users: professional
Information Technology or IT software, business skills and compliance. In
addition, we develop and market tools for the creation of open-standards
multimedia courseware. We market our products to corporate, government and
individual clients and customers. Our corporate and government customers have
access to reporting and administration features when they purchase our hosted
Learn2University service. Our courseware is available to individual consumers
online and on CD-ROM and can be purchased from our Website and major retailers
nationwide. Our goal in this segment is to be business and governments'
preferred partner offering interactive open-standards multimedia courseware and
courseware creation tools.

PERMISSION E-MAIL MARKETING OVERVIEW

Through our subsidiary, Etracks.com, Inc., we provide permission e-mail
marketing and tracking software and services to customers that have "opt-in"
e-mail customer lists. Our goal in this segment is to be the leading provider of
full service and hosted, permission e-mail marketing campaigns.

MARKETPLACE

MARKETPLACE FOR E-LEARNING

Analysts are tracking closely the shift from classroom to technology-based
training, and are forecasting an acceleration of online adoption. According to
International Data Corporation or IDC, in the corporate training market
specifically, technology-based training is the highest growth segment, expecting
to grow from $3.8 billion in 1999 to $16 billion in 2003. IDC expects
non-IT-training to more than double each year and reach $5.3 billion by 2003;
and IDC expects Web-based training content revenues will surpass technology and
services revenues and reach $6.2 billion by 2003. They expect worldwide revenues
of corporate e-learning to exceed $23 billion by 2004.

According to iBiz Stats, businesses are making the transition to e-learning
not only for the cost savings but also for the round-the-clock availability and
flexibility it offers workers. A recent survey reports that 70% of Fortune 1000
companies stated that CEOs feel that finding and retaining qualified workers is
a major issue for growth. Furthermore, corporations are now measuring the
results of their training investment; for example, Motorola calculates that
every $1 it spends on corporate learning translates into $30 in productivity
gains within three years.

MARKETPLACE FOR PERMISSION E-MAIL

The permission e-mail marketing and tracking industry is in its early stages
of development. We believe that the industry will evolve over the next few years
as permission e-mail marketing becomes even more widely used and permission
e-mail marketers and Web advertisers require more information about the behavior
of their permission e-mail recipients and Website visitors. The permission
e-mail market is becoming increasingly competitive. Participants compete
primarily in the following areas: reporting and tracking capabilities, customer
service, brand recognition, ease of implementation, time-to-market of a campaign
and price.

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According to e-Marketer 2001, total e-mail marketing spending in the U.S. in
2000 was just over $1 billion, including $496 million spent on e-mail ads.
e-Marketer expects by year-end 2003, U.S. businesses (and other organizations)
will spend almost $4.6 billion, including $2.2 billion on e-mail advertising
expenditures. The Winterberry Group expects mergers and acquisitions among
e-mail marketers and the development of customer relationship management or CRM,
services will spur 41 percent annual growth in the e-mail marketing industry to
$3.5 billion by 2005, up from $910 million in 2001. Winterberry noted that this
growth is being driven by direct marketers' increasing acceptance of e-mail as a
viable marketing channel. Permission-based commercial e-mail accounts for about
10 percent of the 300 billion messages sent today. By 2005, it is expected to
account for about 25 percent of 600 billion messages.

COMPETITIVE STRENGTHS

E-LEARNING

We believe we can help our customers more effectively educate and inform
their employees and customers because of our four key strengths: ownership of
courseware, technology, industry experience and consumer distribution network.

- - Courseware

- We own substantially all of the courseware relating to software
applications for end-users that we market. To date, this category of
courseware has accounted for more than 75% of our courseware licensing
revenue. Our courseware covers a wide range of topics in an engaging and
interactive manner. Developing and owning courseware provides us with a
strategic advantage by:

- Allowing for increased gross profit.

- Providing consistent appearance and quality.

- Limiting reliance on third-party content providers.

- Allowing us to market products for resale under our brand.

- We market open-standards courseware in four broad categories: Computer
software applications for end-users, professional IT software, business
skills and compliance. Our courseware development follows our
instructional design methodology that includes clear objectives, frequent
and appropriate interactivity, pre- and post-assessments, and appropriate
use of multimedia. We develop our courseware in conjunction with or
license it from leading subject matter experts.

- Our courseware complies with industry standards such as the Aviation
Industry Computer-Based Training Committee standard, commonly referred to
as AICC. We expect to comply with other standards such as the Shareable
Content Object Reference Model, commonly referred to as SCORM and
Section 508 of the Amended Rehabilitation Act of 1998. Courseware
developed to these standards will "plug and play" with other vendors'
learning management systems or LMS's.

- - Technology

- StreamMaker-TM-, our rapid development authoring tool utilizes patented
technologies to produce fully-synchronized, interactive, CD-ROM quality
multimedia streams that can be delivered through computer network
connections, including 28.8 modem connections, without download delays.

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- StreamMaker produces multimedia streams that can be viewed using both
Microsoft Windows and Macintosh operating systems. The following benefits
of StreamMaker provide us with a competitive strategic advantage:

- A proprietary method for graphics compression, enabling our screen
captures to appear clearly and realistically.

- A patented technology that ensures that the elements of a multimedia
production including audio, graphics, animation, video and text are
synchronized.

- The ability to develop interactive streams, which allow users to
assess their understanding of a concept during the learning
experience.

- A design that facilitates integration with other technologies.

- A platform that enables multiple courseware developers to collaborate
on the same project simultaneously.

- - Industry experience--Through our acquisition of Learn2.com, we acquired a
business whose experience as a pioneer in the development of e-learning
content and tools dates back to the early 1990's.

- - Learn2 Consumer Distribution Network--Our consumer products are available
from retailers, catalogs, on the Internet, and through resellers and
distributors. This multi-channel approach to product distribution creates a
broad market for our products, giving us a competitive advantage.

- Retailers--Our CD-ROM and videotape tutorials are available from
Staples, CompUSA, Office Depot, Best Buy, Frys and other major
merchants.

- Catalogs--Our CD-ROM and videotape tutorials are available in major
catalogs such as the Tiger Direct catalog.

- Internet--We market our CD-ROM, videotape and online tutorials at
www.Learn2.com, to America Online and other Websites.

PERMISSION E-MAIL MARKETING

As one of the first permission e-mail marketing and tracking companies, we
have managed thousands of permission e-mail campaigns. We are able to send over
30 million unique e-mail messages per day and expect to more than double
capacity this year. Our proprietary technology allows for extensive data mining,
broadcasting, tracking, and real-time reporting. We own substantially all of our
mail transfer agent and APTracking -TM-, or APT technologies. APT utilizes
noninvasive technology, provides tracking and logging information and analysis
that can cross application and server boundaries without requiring our clients
to modify their HTML code or place cookies on a user's hard drive.

PRODUCTS AND SERVICES

E-LEARNING

PRODUCTS AND SERVICES FOR CORPORATIONS AND GOVERNMENT AGENCIES

Learn2University-TM---Learn2University or L2U is an interactive,
asynchronous LMS that we provide to our customers as an Application Service
Provider or ASP. L2U includes courseware, administration, tracking, reporting
and e-commerce capabilities. We believe that our combination of content software
and services is more cost effective, and easier to implement than that which our
customers and prospective customers can deliver using their internal resources.
L2U can be personalized for corporate and government customers by incorporating
their logo and branding into the Web pages of their individual L2U.

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Our customers pay us based on the specific courseware, number of courses and
number of users. L2U enables users to practice and test skills as they learn,
utilizing simulation technologies that allow them to practice many of the
concepts introduced. Upon completion of each course, users can print a
completion certificate indicating that they have successfully met all the
requirements of the course. We also license our courseware to corporate and
government customers that have their own LMS. L2U and courseware have been
licensed to companies and organizations including U.S. Department of Labor, U.S.
Department of Veterans Affairs, U.S. Department of Justice, Microsoft--Great
Plains, Sanofi-Synthelabo and Anheuser-Busch.

We have organized our courseware into libraries of courses that cover the
following categories: computer software applications for end-users, professional
IT software and business skills. The Libraries are:

- Office Plus Library--Approximately 175 courses in Microsoft Windows
operating systems, end-user applications, communication, customer
management, database applications, finance, graphic design,
presentations, project management, spreadsheets, word processing and Web
design and development.

- Professional Development Library--Approximately 79 courses in business
skills courses including courses in customer service, general business
practices, human resources, management, leadership, sales, marketing, and
team building.

- Technology Plus Library--Approximately 263 courses for certification
preparation in Cisco's CCNA 2.0, Microsoft's MCSE 2000, Novell's CNE 4,
Oracle's 8i DBA and PL/SQL, and Sun's Java Programming. In addition,
there are courses in Linux, C, Visual C++, HTML 4, DHTML, Java,
JavaScript, and Visual Basic.

StreamMaker--StreamMaker, our rapid development authoring tool utilizes
patented technologies to produce fully-synchronized, interactive, CD-ROM quality
multimedia streams that can be delivered through computer network connections,
including 28.8 modem connections, without download delays. StreamMaker produces
multimedia streams that can be viewed using both Microsoft Windows and Macintosh
operating systems.

PRODUCTS AND SERVICES FOR CONSUMERS

Tutorials--Through our Website, retailers and catalogs, we market our
interactive multimedia courseware to consumers such as students, and
work-at-home professionals. Our courseware is packaged for individuals as single
titles and in suites or libraries of related content. Customers can purchase
these courses on physical digital media (CD-ROMs or videotapes); or they can
access the tutorials from our Website for a specified period of time.

PERMISSION E-MAIL MARKETING

- Permission e-mail services--We offer list development and refinement,
e-mail distribution, tracking and reporting. We charge for this service
on a cost per thousand, or CPM, basis.

- List rental--We rent e-mail addresses, which we have collected with the
permission of address holders to our customers. We charge for this
service on a CPM basis.

- Tracking services--We offer APT services to customers who use our
broadcast e-mail services, and as a standalone service. We charge for
this service on a CPM basis.

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BUSINESS STRATEGY AND STRATEGIC DIRECTION

E-LEARNING

Our goal in this segment is to be business and governments' preferred
partner offering interactive open-standards multimedia courseware and courseware
creation tools. To achieve this goal, we expect to expand our content offerings,
improve and expand our technologies, and expand our consumer distribution.

EXPAND CONTENT OFFERINGS

- We intend to introduce new courseware by pursuing relationships with
subject matter experts and content providers to develop courseware
directed toward new markets. For example:

- We have recently entered into agreements with Carl Larson who is a
noted author and lecturer on a wide variety of management issues
including negotiation. Mr. Larson will provide subject matter
expertise in a course about negotiations.

- We have recently entered an agreement with McLure and Moynihan, Inc.
MMI's principals are healthcare compliance experts in electronic
commerce healthcare standards training, including the regulatory
requirements of the Health Insurance Portability and Accountability
Act of 1996, or HIPAA. Health plans and healthcare providers are
required to comply with HIPAA regulations which deal with claims
processing, privacy and security under government-mandated deadlines.

- We expect to enable our courseware to comply with evolving industry
standards such as the Shareable Content Object Reference Model, commonly
referred to as SCORM and Section 508 of the Rehabilitation Act as amended
in 1998. Courseware developed to these standards will "plug and play"
with other vendors' learning management systems or LMS's.

ENHANCE TECHNOLOGIES

- We expect to continue to invest in our technologies.

- We intend to enhance the capabilities of StreamMaker to enable it to
produce courseware in additional formats such as Flash and HTML.

- We intend to build tools to enable subject matter experts to more easily
develop their own courseware.

PERMISSION E-MAIL MARKETING

Our goal in this segment is to be the preferred provider of full service and
hosted, large-scale e-mail marketing campaigns. To achieve this goal we intend
to expand our technologies, expand our service offerings and expand our
distribution.

- Expand Technologies

- We intend to develop software that will enable our customers to manage
their e-mail campaigns on our servers. We believe this will create
new opportunities for attracting customers that do not need or
require full service e-mail broadcast campaigns.

- We intend to develop a complementary data management system that will
integrate with CRM and predictive modeling applications.

- We intend to develop a content management module to enable our clients
to self-manage their brand and creative assets.

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- Expand Service Offerings

- We intend to offer consulting services to assist our clients in their
implementation and deployment of our services within their
organization.

- We intend to resell campaign analysis services provided by third
parties.

- Expand Distribution

- We intend to develop business relationships with advertising agencies,
marketing agencies and e-mail list brokers that will represent and
resell our services.

- We expect to continue to expand our direct sales team

SUPPLIERS

We currently have relationships with several content providers and subject
matter experts. We are not reliant upon any single outside content provider. We
may increase the number of content providers in the future to broaden the scope
of our subject matter.

CUSTOMERS

The following customer individually accounted for more than 10% of our
$4.4 million in revenue in 2001: Traffix--Bulk email broadcast services
$1.0 million or 23.9% of revenue.

This customer was acquired as part of the acquisition of Learn2.com on
September 25, 2001. On a pro forma basis, assuming we had acquired Learn2.com on
January 1, 2001, this customer would have accounted for 12% of our pro forma
revenue.

The following is a list of certain of our customers and a brief description
of the products and services that we provide to that customer:

- America Online--We sell CD-ROM courseware to AOL that it resells to
its members. Also, AOL has licensed L2U for use by certain of its
employees.

- Canon USA--We use StreamMaker authoring tool to create streams of
Canon's proprietary tutorials, which it uses to train its employees.
We host the streams in the L2U infrastructure.

- Microsoft--Great Plains--We licensed StreamMaker to Microsoft--Great
Plains to enable it to produce its own courseware relating to the use
of its accounting software, which it licenses to its customers. We
host the courseware in the L2U infrastructure. Also, Microsoft--Great
Plains has licensed L2U for use by certain of its employees.

- Staples--We sell CD-ROM courseware to Staples that it resells to its
customers.

- Office Depot--We sell CD-ROM courseware to Office Depot that it
resells to its customers.

- U.S. Department of Labor--Through one of our resellers, the U.S.
Department of Labor has licensed L2U for use by certain employees.

COMPETITION

E-LEARNING

We provide e-learning products and services to corporate and government
markets as well as to consumers. The e-learning market is evolving. The market
is fragmented and competitive, with no dominant players. Our competitors vary in
size and in the scope and breadth of the products and

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services they offer. Many of our competitors have greater financial resources
than we have. We believe that new competitors will enter the market, increasing
the level of competition. We believe that the principal competitive factors in
our market include:

- Breadth, depth and quality of content.

- Technology

- Services

- Distribution

- Reputation, financial strength and brand recognition

- Our competition comes from a variety of sources, including:

- "Instructor-led" training companies including IBM, New Horizons and
Productivity Point International.

- Corporate training departments.

- Other e-learning companies including Click2Learn, Digital Think,
Element K, SmartForce, and SkillSoft.

- Vendors offering computer-based and videotape tutorials including
NETg, Microsoft Press, Keystone Learning Systems and Video Professor.

- Publishers including Thomson Learning, John Wiley & Sons, McGraw Hill
and Pearson.

MULTIMEDIA STREAMING AND AGENT TECHNOLOGIES

The three most prominent providers of multimedia streaming technologies are
Macromedia, Microsoft Corporation and RealNetworks Inc. StreamMaker is different
than other multimedia streaming technologies because engineered it specifically
for use in training and e-learning applications. However, these other companies
have substantial resources.

PERMISSION E-MAIL MARKETING SERVICES

Our competitors in the permission e-mail marketing and tracking arena
include providers of e-mail based services such as: Double Click, Exactis,
Responsys.com, Digital Impact, and Cheetah Mail. The majority of our competitors
operate with greater financial resources than we do.

INTELLECTUAL PROPERTY AND LICENSES

Our success and ability to compete effectively will depend, in part, on our
ability to protect our intellectual property. We rely primarily on a combination
of statutory and common law copyright, trademark and trade secret laws, customer
licensing agreements, employee and third-party nondisclosure agreements and
other methods to protect our proprietary rights. We have received patents that
are important in the operation of our business. These patents may not be broad
enough to protect our rights.

We generally require the execution of a license agreement that restricts
copying and use of our products. In addition, we have agreements with resellers
and customers that require the other party to pay us royalties based on sales or
use of our products. We may not be compensated properly if those sales or uses
are not reported to us. If unauthorized copying or misuse of our products were
to occur to any substantial degree, then our business could be affected
materially and adversely. It may be possible for a third-party to copy or
otherwise obtain and use our courseware or technologies without authorization,
or to develop similar courseware or technologies independently.

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We use employee and third-party confidentiality and non-disclosure
agreements to protect our trade secrets and unpatented know-how. We require our
employees to assign to us all rights in any proprietary information or
technology made or contributed by the employee during his or her employment with
us. In addition, we regularly enter into non-disclosure agreements with third
parties including consultants, potential strategic partners and customers.
Unfortunately, these agreements cannot guarantee the confidentiality of our
trade secrets or unpatented know-how, nor can they prevent third parties from
independently developing substantially equivalent proprietary information or
copying, developing, or otherwise obtaining and using our proprietary
information without authorization. We may resort to litigation to enforce our
intellectual property rights, determine the validity and scope of the
proprietary rights of others, or defend against claims of infringement or
invalidity by others. While we are not currently engaged in any intellectual
property litigation or proceedings, we may be in the future. An adverse outcome
in a litigation or similar proceeding could subject Learn2 to significant
liabilities to third parties, require disputed rights to be licensed from
others, or require us to cease marketing or using certain products or services.
The cost of addressing any intellectual property litigation, both in legal fees
and the diversion of management resources, regardless of whether the claim is
valid, could be significant.

Third parties may claim that our current or future products infringe on
their proprietary rights. We may be subject to these claims as the number of
products and competitors in the marketplace overlap. Any of these claims, with
or without merit, could result in costly litigation or might require us to enter
into royalty or licensing agreements. These royalty or license agreements, if
required, may not be available on terms acceptable to us, if at all.

EMPLOYEES

As of March 20, 2002, we had a total of eighty-five full-time employees, of
whom twenty-seven were engaged in research and product development, thirty-nine
in sales and marketing and nineteen in general and administrative functions.
Substantially all of the employees work in our offices in Belmont, California,
Golden, Colorado or Stamford, Connecticut. None of our employees are subject to
a collective bargaining agreement and we have not experienced any work
stoppages. We believe that our relationship with our employees is good. However,
our recent workforce reductions and poor financial performance will place
additional strain on our people and may harm the morale and performance of our
employees and our ability to hire new ones.

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RISK FACTORS

AN INVESTMENT IN OUR COMMON STOCK IS VERY RISKY. YOU SHOULD CONSIDER
CAREFULLY THE RISKS DESCRIBED BELOW TOGETHER WITH ALL OF THE OTHER INFORMATION
IN OUR 10-K AND OTHER SEC FILINGS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR,
OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE AFFECTED
MATERIALLY AND ADVERSELY; THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE,
AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.

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

For the year ended December 31, 2000, we incurred a net loss of
$112.8 million and for the year ended December 31, 2001, we incurred a net loss
of $22.4 million. At December 31, 2001, we had an accumulated deficit of
approximately $211 million. We expect to continue to incur losses for the
foreseeable future. These losses will be substantial, and we may never become
profitable.

OUR AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE AS A
GOING CONCERN AND WE MAY NEED TO RAISE ADDITIONAL CAPITAL

Our auditors have expressed substantial doubt as to our ability to continue
as a going concern. However, our audited financial statements for the year ended
December 31, 2001 and 2000 have been prepared on a going concern basis, which
contemplates the realization of assets and settlement of liabilities in the
normal course of business. Management believes that if we meet our revenue and
cash collection targets on a timely basis, we will have sufficient resources for
our operating requirements and sufficient resources to realize our business plan
at least for the next twelve months.

However, our ability to achieve our projected revenue and positive cash flow
depends upon a variety of factors, including the timely introduction and market
success of our products, the costs of developing, producing and marketing these
products, adoption of the Internet as a medium of commerce and delivery of
services, general economic conditions and various other factors, some of which
may be beyond our control. Many of our costs are fixed and are based on
anticipated revenue levels. We may be unable to adjust spending quickly enough
to offset any unexpected revenue shortfall. If we have a shortfall in cash
collections or in revenues in relation to expenses, or if our expenses continue
to exceed revenues, then our results of operations and financial condition would
be affected adversely and we would need to raise additional funds. If we need to
raise additional funds we cannot be certain that we will be successful nor can
we predict the terms under which such funds would be available if at all. If
additional funds are not available through debt or equity financings, we may not
be able to meet our on-going expenses unless we change our business plan, sell
assets, curtail expenditures, and/or employ other strategies as are required in
these circumstances. We believe that for us to raise additional funds without
selling assets will be very difficult.

GENERAL ECONOMIC CONDITION DOWNTURNS HAVE HARMED OUR ABILITY TO GENERATE
REVENUE.

The September 11, 2001 terrorist attacks and the United States' military
response may cause continued general economic weakness and, accordingly, further
reductions in sales. Additional terrorists acts against the United States, and
the Unites States response to such acts, may also exacerbate general slowdown in
the U.S. economy, which could cause our revenues to decrease or fail to grow.

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

In connection with our effort to streamline our operations, reduce costs and
bring our staffing and structure in line with our expected revenue base, in
November 2002 and March 2002, we restructured our organization and reduced our
workforce by more than 75 employees. There have been and may

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continue to be substantial costs associated with the workforce reduction related
to severance and other employee-related costs, as well as material charges for
reduction of excess facilities, and our restructuring plan may yield
unanticipated consequences, such as attrition beyond that which we planned. This
workforce reduction has placed significant strain on our administrative,
operational and financial resources and has resulted in increased
responsibilities for all of our managers. As a result, our ability to respond to
unexpected challenges may be impaired and we may be unable to take advantage of
new opportunities. In addition, many of the employees who were terminated
possessed specific knowledge or expertise, and that knowledge or expertise may
prove to have been important to our operations. In that case, their absence may
create significant difficulties. Further, the reduction in workforce may reduce
employee morale and may create concern among potential and existing employees
about their job security, which may lead to difficulty in hiring and increased
turnover in our current workforce, and divert management's attention. In
addition, this headcount reduction may subject us to the risk of litigation,
which could result in substantial costs to us and would divert our time and
attention away from business operations.

WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN REVENUES AND OPERATING RESULTS,
WHICH COULD CAUSE OUR SHARE PRICE TO BE VOLATILE.

Due to the emerging nature of the e-learning and permission e-mail markets
and a sluggish economy, we may be unable to forecast our revenues and
profitability accurately. Because many of our costs are fixed and based on
anticipated revenue levels, variations in, and the timing of, revenue
recognition could cause significant variations in operating results from quarter
to quarter. If our future operating results are below the expectations of
investors, the trading price of our company's common stock is likely to fall.

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

The trading price of our common stock can fluctuate significantly. For
example, during the 52 week period ended February 28, 2002, the market price of
our common stock ranged from $0.06 to $0.31 per share. Our stock price may
fluctuate in response to a number of events and factors, including:

- The seasonal variations in our operating results.

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

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

- News reports relating to trends in our markets.

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

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

Shares of our common stock are currently listed on the Nasdaq National
Market. Under Marketplace Rule 4450(a)(5) of the Nasdaq National Market, in
order to maintain the listing of our common stock on the Nasdaq National Market
the bid price per share of our common stock must close at or above $1.00. Our
common stock has previously been delisted from the Nasdaq National Market

13

and traded on the OTC Bulletin Board and is currently trading below $1.00. If
our common stock is delisted from the Nasdaq National Market again, your ability
to trade in our common stock may be impacted adversely, not only in the number
of shares which could be bought or sold, but also through delays in the timing
of transactions and a reduction in media coverage. This may reduce the demand of
our common stock and thus the trading price. A delisting may impair our ability
to raise additional working capital.

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

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

In connection our acquisition of Learn2.com, certain current and former
directors and officers of our company and Learn2.com's $10 million convertible
debenture holder were restricted from selling their shares of our common stock
until March 25, 2002. For the six months period beginning March 25, 2002 until
September 25, 2002, those parties are subject to certain trading limitations.
The market price of our common stock could decline as a result of sales by these
and other existing stockholders of a large number of shares of common stock in
the market on or after March 25, 2002, or the perception that these sales may
occur. These sales also might make it more difficult for us to sell equity
securities in the future on terms favorable to us, or at all.

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

The e-learning and permission e-mail markets are evolving quickly and are
subject to rapid technological change shifts in customer demands and evolving
industry standards. To succeed, we must continue to expand courseware offerings
and upgrade our technologies. We may not be able to do so successfully. If we
fail to anticipate or respond adequately to changes in technology and customer
preferences, or we have any significant delays in development or introduction of
new products, our competitors may be able to attract and maintain a greater
customer base.

The e-learning and permission e-mail markets are characterized by
significant price competition. We face increased price pressures from
competitors, as customers demand more value for their budgets. This has resulted
in reduced revenues, operating margins, and market share. Although these markets
are highly fragmented with no single competitor accounting for a dominant market
share, competition is intense. Our competitors vary in size and in the scope and
breadth of their offerings and services. Several of our competitors have longer
operating histories and most have significantly greater financial, technical and
marketing resources.

14

OUR BUSINESS WILL SUFFER IF E-LEARNING ADOPTION CONTINUES TO BE LESS THAN WE
EXPECTED.

The market for e-learning products and services is new and evolving. We
expect that we will engage in intensive marketing and sales efforts to enable
prospective customers to learn about the benefits of our products and services.
There are a number of factors that could impact the acceptance of our products
and services, which are new and largely untested compared to more established
training and educational methods, including:

- companies that have historically relied on, or invested in, traditional
training and educational methods may be reluctant or slow to adopt
Web-based e-learning products and services;

- many of our potential customers have allocated only a limited portion of
their budgets to e-learning; and

- end users may not use e-learning products effectively.

If the market for e-learning fails to develop or develops more slowly than
we expect, we will not achieve our growth and revenue targets and the value of
our common stock will likely decline.

THE SUCCESSFUL OPERATION OF OUR BUSINESS DEPENDS UPON A CONTINUAL SUPPLY OF
CONTENT OTHER THAN RELATED TO OUR CURRENT LIBRARY.

Our business success is dependent upon our ability to develop internally or
obtain content from third party content providers because this content broadens
the variety of content subjects we offer. Our inability to develop our own
content or obtain it from third parties could result in delays in product
introductions or shipments. We will depend on the quality and reliability of the
content licensed and timely delivery of this content by our sources. Although we
will have agreements specifying the terms of the licenses, these agreements may
not be enforceable. We believe that we can arrange alternate sources for some or
all of our content, but our inability to provide content to our customers and
prospects on a timely basis could adversely affect the performance of our
business. The subject matter of our third party content can be important to
prospective customers that evaluate e-learning companies based on a variety of
courseware subjects.

WE MUST DELIVER COURSEWARE THAT MEETS THE NEEDS OF OUR CUSTOMERS OR OUR BUSINESS
WILL SUFFER.

To be competitive, we must develop and introduce on a timely basis new
tutorial offerings that meet the needs of companies seeking to use our
e-learning products. Furthermore, the viability of our e-learning products
depends in large part on our ability to update our courseware and develop new
content as the underlying subject matter changes.

WE PLAN TO EXPAND THE SCOPE OF OUR COURSEWARE AND MAY DEPEND ON OUR ABILITY TO
ATTRACT EXPERTS OR SPECIALISTS. IF WE ARE UNABLE TO ATTRACT THE NECESSARY
EXPERTISE, WE WILL NOT BE ABLE TO ENTER NEW FIELDS.

Our strategy involves broadening the fields presently covered by our
courseware. In particular, to date we have focused primarily on courseware in
the information technology area and we are planning to develop and introduce new
courseware offerings in other fields. These new offerings may encompass areas in
which we have little or no experience or expertise. Therefore, our ability to
expand our courseware into these areas will require us to locate and evaluate
third-party experts or specialists who would develop or assist us in developing
the courseware. If we are unable to locate and evaluate these experts, we may
fail to develop the courseware our customers require or be unable to pursue new
market opportunities. If we do not extend our courseware offerings into new
fields, our revenue growth could be constrained.

15

THE VARIABILITY AND LENGTH OF OUR SALES CYCLE FOR OUR PRODUCTS MAY MAKE OUR
OPERATING RESULTS UNPREDICTABLE AND VOLATILE

The period between our initial contact with potential corporate and/or
government customers and the first purchase of our product by that customer
typically ranges from three to nine months and in some cases may be as long as
two years. Because we will rely on large sales for a substantial portion of our
revenues, these long sales cycles can have a particularly significant effect on
our financial performance in any quarter. Factors, which may contribute to the
variability and length of our sales cycle, include:

- The time required for potential customers to learn about the benefits of
our products and services.

- The time it takes our potential customers to evaluate competitive
products and services.

- Our potential customers' internal budget and approval processes.

- The extended periods most large corporations and government entities
require making purchasing decisions.

As a result of our lengthy sales cycle, we have only a limited ability to
forecast the timing and size of specific sales and thus to predict quarterly
financial performance.

WE DEPEND ON MAJOR RETAILERS AND RETAIL DISTRIBUTORS TO MARKET OUR PRODUCTS.

The retail market is subject to the unpredictability of consumer demand. We
may not plan effectively for this market, which could result in adverse
operating results in future periods. Our retail customers also carry our
competitors' products. We pay retailers competitive rates to provide shelf space
for our products. If we are unable to pay competitive rates, retailers may not
continue to provide shelf space for our products, which could result in adverse
operating results. Retail distributors may have limited capital to invest in
inventory. Their decisions to purchase our products are partly a function of
pricing, terms and special promotions offered by our competitors and other
factors that we do not control nor can we predict. Our agreements with retailers
are generally nonexclusive and may be terminated by them or by us without cause.

Some retailers and distributors have experienced financial difficulties in
the past. Distributors that we currently use may experience financial
difficulties in the future. If these distributors do experience financial
difficulties and we are unable to move their inventories to other distributors,
we may experience reduced sales or increased write-offs, which would adversely
affect our operating results.

OUR E-LEARNING PRODUCTS ARE DESIGNED FOR MICROSOFT TECHNOLOGIES.

Our e-learning products are designed primarily for Microsoft technologies.
We believe that Microsoft technologies are and will continue to be, widely
utilized by our customers. However, if these customers do not actually adopt and
continue to utilize these technologies as anticipated or in the future migrate
to other computing technologies that we do not support, we may have to spend
significant capital and other resources including personnel to adapt our
products to these alternative technologies. Our streaming technology does not
function in a Linux environment.

OUR FUTURE GROWTH DEPENDS ON OUR ABILITY TO RETAIN KEY PERSONNEL AND SUCCESSFUL
HIRING AND RETENTION, PARTICULARLY WITH RESPECT TO SALES, MARKETING AND
DEVELOPMENT PERSONNEL, AND WE MAY BE UNABLE TO HIRE AND RETAIN THE SKILLED
PERSONNEL WE NEED TO SUCCEED.

Our future growth and success depends to a significant extent on the
continued service of Robert H. Ewald, Executive Chairman of the Board of
Directors, and other key employees, the development of management personnel and
the hiring of new qualified employees. Competition for highly skilled personnel
is intense in the technology industry. We may not be successful in recruiting
new personnel

16

or in retaining existing personnel. The loss of one or more key or other
employees or our inability to attract additional qualified employees or retain
other employees could have a material adverse effect on our business, results of
operations or financial condition.

WE FACE A RISK OF SYSTEM FAILURE.

Our operations depend to a significant extent on our ability to maintain our
computer and telecommunications systems. We must also protect our systems
against damage from fire, natural disaster, power loss, telecommunications
failure or similar events. In addition, growth of our customer base may strain
the capacity of our computer operations center and telecommunications systems
and/or lead to degradations in performance or system failure. Any damage to or
loss of our computer and telecommunications networks including our operations
center could affect adversely the performance of our business. We do not have a
redundant off-site back-up location site for our web servers however we are in
the process of identifying a third party facility to host our servers. To date,
we have not experienced system failures that have adversely and materially
affected operations.

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

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

WE MAY NOT BE ABLE TO IMPLEMENT OUR GROWTH STRATEGY.

Successfully achieving our growth plan depends on our ability to:

- Continue to develop and market our products and services.

- Maintain and increase our customer base.

- Effectively integrate businesses and technologies.

- Continue to identify, attract, retain and motivate qualified personnel

If we do not successfully implement our growth strategy, our results of
operations will be adversely affected.

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

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

17

OUR INTELLECTUAL PROPERTY RIGHTS ARE COSTLY AND DIFFICULT TO PROTECT.

We have patents that cover our StreamMaker and LearningAgent technologies
and have a patent pending for our AdaptiveProxy Tracking technologies. At some
point in the future, these patents may be deemed to be invalid or unenforceable,
or otherwise not provide us with any meaningful protection. We also have rights
in the trademarks that we use to market our e-learning services and products.
These trademarks include, among others, Learn2-TM- and StreamMaker-TM-. Our
intellectual property allows us to develop engaging, multimedia,
technology-based courseware. Our success and ability to compete effectively will
depend, in part, on our ability to protect our intellectual property, which we
protect through a combination of patent, trade secret, copyright, trademark,
nondisclosure agreements and other contractual provisions and technical
measures. None of these protections may be adequate to prevent our competitors
from copying or reverse engineering our products, concepts, trade names and
trade dress. Furthermore, none of these protections prohibit our competitors
from independently developing technologies that are substantially equivalent or
superior to our technologies. We license certain products under licenses that
are not signed by our licensees. The licensee agrees to the license by either
(i) opening a package on which the license is written or (ii) on a computer,
"clicking" the "I accept" or "I agree" tab underneath the license. These types
of licenses may be unenforceable under the laws of certain jurisdictions. In
addition, the laws of certain countries in which our products are or may be
licensed do not protect us to the same extent as the laws of the United States.

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

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

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

Websites usually place certain information called "cookies" on a user's hard
drive usually without the user's knowledge or consent. Websites use cookies for
a variety of reasons. We employ the use of cookies on our Websites. Certain
Internet browsers allow users to modify their browser settings to remove cookies
at any time or to prevent cookies from being stored on their hard drive. In
addition, some Internet commentators, privacy advocates and governmental bodies
have suggested limiting or eliminating the use of cookies. The effectiveness of
our technology and products could be limited by any reduction or limitation in
the use of cookies. Specifically, some of our products use information provided
by cookies to, among other things, (i) help track the progress of users through
a course, (ii) remember a user's login/password and (iii) track other session
information. The reduction or limitation in the use of cookies may result in the
loss of this session information, which could require the user to either
re-enter the information and/or increase the response time of a tutorial. This
could result in delays and a decrease in the effectiveness of our products. In
this regard, there are a large number of legislative proposals before the United
States Congress, foreign governments and other international regulatory agencies
regarding privacy issues and the regulation and use of cookies. It is not
possible to predict whether or when such legislation may be adopted, and certain
proposals, if

18

adopted, could adversely affect our business. This could be caused by, among
other possible provisions, the requirement that permission be obtained before we
use cookies.

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

The applicability to the Internet of existing laws is uncertain and
developing with regard to many issues, including sales tax, intellectual
property ownership and infringement, copyright, trademark, trade secret,
obscenity, libel, export of encryption technology, solicited and unsolicited
e-mail and personal privacy. There are an increasing number of laws and
regulations pertaining to liability for information received from or transmitted
over the Internet, online content regulation, user privacy, taxation and quality
of products and services.

We are currently defending against a claim that Etracks has violated certain
statues in California relating to the distribution of unsolicited e-mail. We can
give no assurance that the defense of that action will be successful or that we
will not be subject to further similar actions.

In addition, it is possible that more laws and regulations may be adopted
with respect to the Internet, such as laws or regulations relating to user
privacy, taxation, e-mail, pricing, Internet access, content, copyrights,
distribution and characteristics and quality of products and services. Various
state statutes govern private post-secondary educational institutions. We are
uncertain whether states will attempt to apply these statutes to regulate the
offering of e-learning products distributed over the Internet. Changes in
existing laws and the adoption of additional laws or regulations may decrease
the popularity or limit expansion of the Internet. A decline in the growth of
the Internet could decrease demand for our tutorials and services and increase
our cost of doing business.

OUR BUSINESS COULD BE HARMED BY CONSUMERS' CONCERNS ABOUT THE SECURITY OF
TRANSACTIONS OVER THE INTERNET.

We believe that concerns regarding the security of confidential information
transmitted over the Internet, such as credit card numbers, prevent many
potential customers from engaging in online transactions. Our success may depend
on our ability to add sufficient security features to our e-commerce engine and
to instill confidence in those features in our customers. If we fail to do so,
we may not realize our business plan.

ITEM 2. PROPERTIES

We own or lease facilities and offices at the following locations:

We entered into an operating lease agreement on February 25, 2000 for office
space in Mountain View, California. As a result of the merger with Learn2.com,
we closed our corporate headquarters in Mountain View and negotiated a
settlement with the lessor of approximately $1.6 million. This amount is
recorded in the accompanying consolidated statement of operations for the year
ended December 31, 2001 as part of gain on disposal of discontinued operations.
In addition, we assumed the obligations of Learn2.com. Certain subsidiaries of
Learn2.com also have operating leases for facilities in Golden, Colorado and
Belmont, California. In March 2002, our subsidiary, Street Technologies, Inc.,
received

19

notice that it was in default under its lease agreement for office space located
in White Plains, New York. As result of the default, Street Technologies may be
liable to pay the remaining lease obligations net of security deposits totaling
approximately $660,000.

Our subsidiary, ViaGrafix has listed a building and land for sale in Pryor,
Oklahoma, that previously served as a production facility.

ITEM 3. LEGAL PROCEEDINGS

On March 16, 2001, one of our prior customers, Mr. Joseph Pavel, filed a
purported consumer class action suit against us in the Supreme Court of the
State of New York, County of Kings. The suit alleges that we breached our
contracts with the plaintiff and other customers. The plaintiff seeks
unspecified damages and disgorgement of monies received in connection with the
sale of Internet postage products. By agreement of the parties, the plaintiff
dismissed the New York action and refiled in Santa Clara County, California on
or about May 24, 2001. We filed our answer to the complaint on June 18, 2001. On
February 20, 2002, the Court granted Plaintiff's motion for class certification.
We are vigorously defending this action. Pendency of these legal proceedings can
be expected to result in expenses to Learn2 and the diversion of management time
and other resources.

On August 3, 2001, Sales and Marketing Technologies, Inc. filed suit against
us and certain of our officers in the Superior Court of California, San Mateo
County, California. The complaint was amended on September 19, 2001. The
plaintiff alleges breach of contract, breach of good faith and fair dealing,
fraud, misrepresentation alleging breach of contract, fraud and unfair
competition in connection with a consulting agreement between the plaintiff and
our company. The plaintiff seeks unspecified general and compensatory damages,
treble damages and equitable remedies. We are vigorously defending this action.
Pendency of these legal proceedings can be expected to result in expenses to
Learn2 and the diversion of management time and other resources.

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

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

In addition, we are involved in certain other legal proceedings and claims
in the ordinary course of our business. We are vigorously contesting all matters
referred to above and management believes that their ultimate resolution will
not have a materially adverse effect on our consolidated financial position,
results of operations or cash flows.

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

No matters were submitted to a vote of the security holders during the
fourth quarter of the year ended December 31, 2001.

20

PART II

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

Our common stock is traded on The Nasdaq Stock Market's National Market
under the symbol "LTWC." The following table sets forth, for the periods
indicated, the range of the high and low sale prices for our common stock as
reported on The Nasdaq Stock Market's National Market:

The last reported sale price of our common stock on The Nasdaq Stock
Market's National Market on March 20, 2002, was $0.14 per share. As of
March 20, 2002, there were approximately 75,576,764 shares of our common stock
outstanding that were held of record by approximately 925 stockholders.

Shares of our common stock are currently listed on the Nasdaq National
Market. Under Marketplace Rule 4450(a)(5) of the Nasdaq National Market, in
order to maintain the listing of our common stock on the Nasdaq National Market
the bid price per share of our common stock must close at or above $1.00. Our
common stock has previously been delisted from the Nasdaq National Market and
traded on the OTC Bulletin Board and are currently trading below $1.00. If our
common stock are delisted from the Nasdaq National Market again, your ability to
trade in our common stock may be impacted adversely, not only in the number of
shares which could be bought or sold, but also through delays in the timing of
transactions and a reduction in media coverage. This may reduce the demand of
our common stock and thus the trading price. A delisting would greatly impair
our ability to raise additional working capital.

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

21

DIVIDEND POLICY

We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below with respect to our
consolidated statements of operations for each of the years ended December 31,
2001, 2000 and 1999 and with respect to our consolidated balance sheets as of
December 31, 2001 and 2000 have been derived from our audited financial
statements. The selected consolidated financial data set forth with respect to
our consolidated statements of operations for each of the years ended
December 31, 1998 and 1997 and with respect to our consolidated balance sheets
as of December 31, 1999, 1998 and 1997 are derived from our audited financial
statements, which are not included herein.

The following selected financial data should be read in connection with the
Financial Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

See Note 12 of Notes to Financial Statements for an explanation of the method
used to determine the number of shares used in computing per share amounts.

22

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

OVERVIEW

On September 25, 2001, we acquired all of the outstanding stock of
Learn2.com, a publicly traded company, changed the name of our company from
E-Stamp Corporation to Learn2 Corporation and assumed the on-going business of
Learn2.com. Learn2.com's offerings included engaging online and physical
learning and training products and complementary services, commonly referred to
as e-learning services, marketed to corporate, government and individual clients
and customers and provided e-mail marketing services. Under the terms of the
merger agreement, we issued approximately 37.8 million shares of our common
stock. Each share of Learn2.com common stock outstanding immediately prior to
the completion of the merger automatically converted into the right to receive
0.4747 shares of our common stock resulting in our stockholders immediately
prior to the consummation of the merger owning approximately 50.1% of the
outstanding stock of the combined company. The former stockholders of Learn2.com
including Learn2.com's $10.0 million convertible debenture holder, received
approximately 49.9% of the combined company. The total value of the transaction
was approximately $19.2 million including approximately $6.6 million of assumed
liabilities, transaction costs totaling approximately $5.2 million and a
pre-closing payment of $1.0 million to Learn2.com's $10.0 million convertible
debenture holder. The transaction was accounted for using the purchase method of
accounting. The results of Learn2.com for the period from September 25, 2001
through December 31 2001 are included in the consolidated statement of
operations for the year ended December 31, 2001.

E-Stamp Corporation, founded in 1994, originally provided an Internet
postage service that enabled users to purchase, download and print Internet
postage directly from their personal computers without the need to maintain a
persistent Internet connection. In May 2000, we acquired two companies, Infinity
Logistics and Automated Logistics for a total purchase price of $9.0 million.
These companies offered transportation management and warehouse management
products and services that allowed enterprise customers to review carrier rates
and shipping options, select a carrier, print shipping labels, track shipments
and create shipping reports.

During 2000, we undertook two corporate restructurings. In July 2000, we
restructured the organization to accelerate the development, marketing and sales
of our transportation management products and services in addition to our
emphasis on our Internet postage business. In November 2000, we restructured the
organization to phase out our Internet postage business. We incurred charges of
approximately $20.3 million related to these restructurings.

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

On March 4, 2002, we announced that we will phase out our remaining
production and distribution operations in Pryor, Oklahoma and consolidate our
e-learning business in Golden, Colorado, which is the current home of our
courseware and authoring tool development activities. We eliminated
approximately sixty positions, primarily in the Oklahoma facility and certain
field sales operations. Severance and related expenses attributable to the
elimination of these positions will be approximately $300,000 and will be
recorded in the quarter ending March 31, 2002. When fully implemented, we expect
that these steps will result in a reduction of operating expenses of
approximately $5.5 million on an annualized basis. As a result of this decision,
we reduced the value of our intangible assets through an impairment charge as of
December 31, 2001 by approximately $330,000.

23

From September 25, 2001 until February 28, 2002, we operated in two
segments: "e-learning" and "permission email marketing." As part of our
restructuring, effective, announced on March 4, 2002, March 1, 2002, we split
our e-learning segment into "corporate and government" and "retail."

On April 19, 2001, in connection with our then planned merger with
Learn2.com, we discontinued our remaining transportation management business.
Therefore, our consolidated financial statements and notes included herein
reflect our businesses as discontinued operations in accordance with APB
No. 30. as of December 31, 2001 and for all periods presented. The results of
discontinued operations do not include any interest income, interest expense or
allocation of corporate expenses. As a result of the merger, we adopted the
on-going business of Learn2.com.

We develop and market open-standards multimedia courseware in four broad
categories: computer software applications for end-users; professional
Information Technology, business skills and compliance. In addition we develop
and market tools for the creation of open multimedia courseware. We market our
products to corporate, government and individual clients and customers. Our
corporate and government customers have access to reporting and administration
features when they purchase our hosted Learn2University service. Our courseware
is available to consumers online and on CD-ROM and can be purchased from our
Website and major retailers nationwide.

Through our subsidiary, Etracks, we provide permission e-mail marketing and
tracking services to customers that have "opt-in" e-mail customer lists.
Etracks' services include e-mail creation, delivery, tracking and response
analysis for a high volume of client e-mail accounts in a short period of time.

Our goal is to be business and governments' preferred partner offering
interactive open multimedia courseware and courseware creation tools. Etracks'
goal is to be the preferred provider of full service and hosted, large-scale
email broadcast campaigns.

As set forth in Note 3 to our consolidated financial statements, our
reported results of operations for all periods prior to September 25, 2001 do
not reflect the results of Learn2.com. Consequently, the results prior to these
dates and our consolidated balance sheet at December 31, 2001 are not reflective
of our operations and financial position as presently constituted.

CRITICAL ACCOUNTING ESTIMATES

The preparation of consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to customer programs and incentives, product returns, bad debts,
inventories, intangible assets, and contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

The preparation of our financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the amounts reported in our financial statements and
accompanying notes. Actual results could differ materially from those estimates.
The items in our financial statements requiring significant estimates and
judgments are as follows:

- BAD DEBTS AND PRODUCT RETURNS. We maintain allowances for doubtful
accounts and product returns for estimated losses resulting from either
the inability of our customers to make required payments or return of
merchandise. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.

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

- LITIGATION. We are currently involved in certain legal proceedings as
discussed in the "Commitments and Contingencies" note in the Notes to
Consolidated Financial Statements. We do not believe these legal
proceedings will have a material adverse effect on our consolidated
financial position, results of operations or cash flows. However, were an
unfavorable ruling to occur in any quarterly period, there exists the
possibility of a material impact on the operating results of that period.

The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by accounting principles generally accepted
in the U.S., with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result. See our audited
consolidated financial statements and notes thereto which begin on page F-1 of
this Annual Report on Form 10-K which contain accounting policies and other
disclosures required by generally accepted accounting principles.

SOURCES OF REVENUE AND REVENUE RECOGNITION POLICY

We generate revenue primarily from the sales and licensing of courseware and
development tools, and permission e-mail marketing services.

Revenue from software license agreements is recognized in accordance with
the provisions of American Institute of Certified Public Accountants Statement
of Position No. 97-2, "Software Revenue Recognition." Software product sales
under such license agreements are recognized as revenue upon shipment of the
products to customers, provided that there are no significant vendor obligations
and collection of the related receivable is fixed and determinable. In
circumstances whereby we have has established vendor specific objective
evidence, we account for insignificant vendor obligations and post-contract
support over the service period.

Revenue from courseware licensing sales delivered online is recognized when
persuasive evidence of an arrangement exists, delivery has occurred, the sales
price is fixed or determinable and collectibility is probable. We defer a
portion, generally 3% of the selling price, of these sales for hosting and
recognize that hosting ratably over the contractual period. We recognize the two
components, the software, (or training course) and the service (or hosting)
based on their relative fair values.

Revenue from physical product sales is recognized when persuasive evidence
of an arrangement exists, delivery has occurred, the sales price is fixed or
determinable and collectibility is probable. Generally, these criteria are met
at the time product is shipped. A reserve is made at the time the related
revenue is recognized for estimated product returns based on history,
cooperative advertising, or other promotions that may occur under programs we
have with our customers.

Revenues from permission e-mail marketing services are recognized at the
time the broadcast is sent, as we have no further significant obligations.

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RESULTS OF OPERATIONS

The following table sets forth industry segment information for the years
ended December 31, 2001, 2000 and 1999 (in thousands):

In 2000 and 1999, we operated in one segment. These operations have been
accounted for as a discontinued operations in all periods presented.

2001 COMPARED TO 2000

CONTINUING OPERATIONS

Following the acquisition of Learn2.com on September 25, 2001, we operate in
two segments: "e-learning" and "Permission e-mail marketing". Revenues and gross
profits for 2001 relate solely to the Learn2.com operations acquired on
September 25, 2001 through December 31, 2001. Operating expenses for 2001
comprise the operations of Learn2.com from September 25, 2001 through
December 31, 2001 as well as the on-going general and administrative expenses
that we incurred before and after the acquisition.

E-LEARNING

e-learning revenues consist primarily of learning products and services sold
or distributed through the Internet and of physical products sold through
traditional retail channels. Cost of revenues consists of the expenses
associated with the production and shipment of our physical products. In
addition, it includes costs to develop custom courseware and other fulfillment
costs. Net revenues for 2001 were approximately $2.7 million and composed of
approximately $1.3 million of courseware and services licensed to corporate and
government customers or 49% of revenues and approximately $1.4 million or 51% of
revenues of courseware sold online, to online merchants and through traditional
retail channels. For 2001, one customer accounted for 13.8% of the segment's
revenue. This customer was acquired as part of the acquisition of Learn2.com on
September 25, 2001. On a pro forma basis, assuming Learn2.com had been acquired
on January 1, 2001, this customer would have accounted for 6.0% of our pro forma
revenue for this segment.

PERMISSION E-MAIL MARKETING

Permission e-mail marketing revenues consist primarily of permission e-mail
marketing and tracking services. For 2001, one customer accounted for 61.7% of
the segment's revenue. This customer was acquired as part of the acquisition of
Learn2.com on September 25, 2001. On a pro forma basis, assuming Learn2.com had
been acquired on January 1, 2001, this customer would have accounted for 46.9%
of our pro forma revenue for this segment. Cost of revenues consists of the
expenses associated

26

with the delivery of permission e-mail and tracking services, including Internet
access and personnel related costs incurred to fulfill our marketing and
tracking services. Net revenues for 2001 were approximately $1.7 million.

OPERATING EXPENSES

RESEARCH AND PRODUCT DEVELOPMENT EXPENSES

Research and product development expenses were approximately $1.1 million
for 2001. Research and product development expenses relate to the development
and enhancement of our technologies, content, Website and product design.

SALES AND MARKETING

Sales and marketing expenses were approximately $2.9 million for 2001. Sales
and marketing expenses consist primarily of salaries, commissions, advertising,
trade show expenses and advertising costs of marketing materials.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were approximately $7.5 million for 2001
compared to $8.2 million for 2000. These expenses consist of expenses associated
with the general responsibilities of a public company, and exclude those costs
associated with our transportation management and Internet postage businesses.
These expenses include salaries and related costs for certain administrative
functions, professional services, including legal and accounting services,
insurance and an allocation of facilities costs.

IMPAIRMENT OF LONG-LIVED ASSETS

On March 4, 2002, we announced that we will phase out our remaining
production and distribution operations in Pryor, Oklahoma and consolidate our
business in Golden, Colorado, which is the current home of our courseware and
authoring tool development activities. We eliminated approximately sixty
positions, primarily in the Oklahoma facility and certain field sales
operations. Severance and related expenses attributable to the elimination of
these positions will be approximately $300,000 and will be recorded in the
quarter ended March 31, 2002. As a result of this decision, we reduced the value
of our intangible assets as of December 31, 2001 by approximately $330,000.

27

NON-RECURRING COSTS

In 2001, non-recurring charges related and consequential to the merger
totaling approximately $2.6 million were incurred. These costs consisted
primarily of $1.4 million for severance and other related payroll charges,
$843,000 for Directors' & Officers' tail insurance for acts that occurred prior
to the Learn2.com acquisition, and $340,000 for other costs related to our
November 8, 2001 workforce reduction.

INTEREST INCOME

Interest income, net, consists primarily of earnings on our cash and cash
equivalents, net of interest expense. Interest income, net, was income of
$766,000 for 2001 compared to income of $4.0 million for 2000. The decrease in
interest income, net, was due to decreased interest earned as a result of lower
average cash balances resulting from our continued use of cash to fund our
operations and lower interest rates.

INTEREST EXPENSE AND OTHER, NET

Interest expense and other, net was an expense of $35,000 in 2001 compared
to an expense of $178,000 in 2000.

DISCONTINUED OPERATIONS

NET LOSS FROM DISCONTINUED OPERATIONS

For 2001, loss from discontinued operations reflects the operating expenses
related to our transportation management business through the measurement date
of April 19, 2001, net of revenues from that business of approximately $318,000.
For 2000, loss from discontinued operations reflects the operating expenses
related to our Internet postage and transportation management businesses net of
revenues of approximately $5.3 million. Operating expenses for 2001 were
significantly reduced from operating expenses for 2000 primarily due to reduced
headcount resulting from our restructuring efforts in 2000. In addition, we
significantly reduced our advertising and promotional activities in the first
half of 2001 compared to the first half of 2000. Amortization of deferred stock
compensation, which is recorded using the graded vesting method, was
$2.3 million in 2001.

These decreases in operating expenses were partially offset by charges
totaling $4.7 million related to the amortization and write off of goodwill and
other intangible assets related to our transportation management solutions
business. During the first quarter of 2001 we identified possible indicators of
impairment of these assets and determined that these assets had a fair value of
zero. In addition, we wrote off property and equipment held for disposal as a
result of reduced employee headcount totaling $1.4 million.

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

GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS

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

28

This income was offset by costs of discontinuing the transportation
management business, including costs related to shutting down the business's
operations after the April 19, 2001 measurement date, charges for fixed asset
impairment and an accrual for lease termination costs. For 2001, the gain on
disposal of discontinued operations, net was approximately $165,000.

The net loss available for common stockholders was $22.4 million for 2001
compared to $112.8 million for 2000 and was attributable to the factors
discussed above.

2000 COMPARED TO 1999

GENERAL AND ADMINISTRATIVE

General corporate expenses totaled $8.2 million in 2000 compared to
$9.2 million in 1999. The decrease in 2000 from 1999 was primarily due to lower
salary cost as a result of lower bonuses paid and lower amortization of deferred
stock compensation partially offset by higher facilities costs.

INTEREST INCOME

Interest income, net, was $4.0 million in 2000 compared to $2.0 million in
1999. The increase in interest income, net, was due to increased interest earned
as a result of higher average cash balances resulting from our initial public
offering in October 1999 and private placements of preferred stock in
August 1999 and July 1998.

INTEREST EXPENSE AND OTHER, NET

Interest expense and other, net was an expense of $178,000 in 2001 compared
to an expense of $37,000 in 1999.

NET LOSS FROM DISCONTINUED OPERATIONS.

In 2000, loss from discontinued operations reflects the operating expenses
related to the transportation management business and the Internet postage
business, net of revenues from those businesses of $5.3 million. Operating
expenses in 2000 were significantly higher than operating expenses in 1999,
primarily due to increased headcount related expenses, higher facilities costs
and increased spending on marketing programs, advertising and promotion. In
addition, loss on discontinued operations for 2000 included $20.3 million of
restructuring costs resulting from the phase-out of the Internet postage
business and $1.7 million of in-process research and development resulting from
the acquisition of Infinity Logistics Corporation and Automated Logistics Corp.

During 2000, we undertook two corporate restructurings. In July 2000, we
restructured our organization to accelerate development, marketing and sales of
our transportation management business and while continuing our Internet postage
business. In November 2000, we restructured the organization to phase out our
Internet postage business. We incurred charges of approximately $20.3 million
related to these restructurings. These charges included $2.3 million for
severance payments and benefits continuation for terminated employees,
$13.3 million for asset write-offs, $2.9 million for contract terminations, and
$1.8 for operations shutdown costs. Asset write-offs of $13.3 million included
$4.4 million of prepaid marketing costs that were being amortized over the terms
of the underlying contracts that had no future economic benefit due to the phase
out of the Internet postage business.

In May 2000, we acquired Infinity Logistics Corporation and Automated
Logistics Corp. These companies provided transportation management products and
services that allowed enterprise customers to review carrier rates and shipping
options, select a carrier, print shipping labels, track shipments and create
shipping reports. Based on an independent appraisal, approximately $1.7 million
of the purchase price was allocated to in-process research and development
related to Infinity Logistics Corporation products that had not yet reached
technological feasibility and had no alternative future

29

use. This amount was expensed immediately. As of the acquisition date,
in-process research and development of Infinity Logistics Corporation and
Automated Logistics Corp. consisted of the development of two products,
e-Warehouse, which was 80 percent complete, and DigitalShipper Enterprise, which
was 75 percent complete. Of the $1.7 million of in-process research and
development expensed, $143,000 related to e-Warehouse and approximately
$1.5 million related to DigitalShipper Enterprise.

The e-Warehouse product was completed and introduced in July 2000 and the
DigitalShipper Enterprise product was completed and introduced in late
June 2000. In March 2001, we discontinued offering the e-Warehouse product to
new customers in order to continue to develop the operability and functionality
of the product. In valuing the in-process technologies of Infinity Logistics
Corporation and Automated Logistics Corp. at the acquisition date, we used a
discounted cash flow analysis based on projected net product and services
revenues, cost of revenues, operating expenses and income taxes resulting from
these technologies over a 4-year period. The projected financial results, which
were discounted using a 25 percent rate, were based on expectations for Infinity
Logistics Corporation and Automated Logistics Corp. on a stand-alone basis and
excluded any special synergistic benefits that we expected to achieve after the
acquisition. The revenue projections for the developed technologies, which
considered the release dates of new products, assumed a gradual decline. The
revenue projections for the in-process research and development were based on
expected trends in technology and timing of new product introductions. In 1999,
loss from discontinued operations reflects the operating expenses related to the
Internet postage business, net of revenues from that business of $1.3 million.

The net loss available for common stockholders was $112.8 million for 2000
compared to $57.5 million for 1999 and was attributable to the factors discussed
above.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through private
and public sales of equity securities. We have received net proceeds of
approximately $72.9 million in private placements of our equity securities and
net proceeds of $125.4 million from the initial public offering of our common
stock. As of December 31, 2001, we had cash and cash equivalents totaling
$6.3 million.

Net cash used in continuing operations totaled $12.6 million for the year
ended December 31, 2001 while cash used in continuing operations for the year
ended December 31, 2000 was $1.9 million and cash provided by operations was
$3.7 million in 1999. These amounts resulted primarily from net operating losses
during those periods offset by non-cash charges.

Net cash used in discontinued operations totaled $13.4 million,
$72.3 million, and $52.4 million for the years ended December 31, 2001, 2000,
and 1999, respectively. These amounts resulted primarily from net operating
losses during those periods offset by non-cash charges.

Net cash provided by investing activities totaled $7.1 million for the year
ended December 31, 2001. Net cash used in investing activities totaled
$19.9 million and $2.8 million for the years ended December 31, 2000 and 1999,
respectively. For the year ended December 31, 2001, cash provided resulted
mainly from the sale of discontinued operations and a decrease in restricted
cash and other assets offset by merger related expenses and the purchase of
assets.

Net cash provided by financing activities totaled $0 for the year ended
December 31, 2001. Net cash provided by financing activities was $630,000 and
$160.0 million for the years ended December 31, 2000 and 1999, respectively.

We have incurred significant net losses and negative cash flows from
operations since our inception. At December 31, 2001, we had an accumulated
deficit of approximately $211 million. On March 4, 2002, we announced that we
will phase out our production and distribution operations in Pryor, Oklahoma and
consolidate our e-learning business in Denver, Colorado, which is the current

30

home of our courseware and authoring tool development activities. We eliminated
approximately sixty positions, primarily in the Oklahoma facility and certain
field sales operations. Severance and related expenses attributable to the
elimination of these positions will be approximately $300,000 and will be
recorded in the quarter ended March 31, 2002. When fully implemented these steps
we expect that these steps will result in a reduction of operating expenses of
approximately $5.5 million on an annualized basis. As a result of this decision,
we reduced the value of our intangible assets as of December 31, 2001 by
approximately $330,000. The operating results for future periods are subject to
numerous uncertainties. Failure to generate sufficient revenue or to reduce
costs as necessary could have a material adverse effect on our ability to
continue as a going concern and achieve our business objectives.

Our auditors have expressed substantial doubt as to our ability to continue
as a going concern. However, our audited financial statements for the year ended
December 31, 2001 were prepared on a going concern basis, which contemplates the
realization of assets and settlement of liabilities in the normal course of
business. Management believes that if we meet our revenue and cash collection
targets, we will have sufficient resources for our operating requirements and
sufficient resources to realize our business plan at least for the next twelve
months.

However, our ability to achieve our projected revenue and positive cash flow
depends upon a variety of factors, including the timely introduction and market
success of our products, the costs of developing, producing and marketing these
products, adoption of the Internet as a medium of commerce and delivery of
services, general economic conditions and various other factors, some of which
may be beyond our control. Many of our costs are fixed and are based on
anticipated revenue levels. We may be unable to adjust spending quickly enough
to offset any unexpected revenue shortfall. If we have a shortfall in cash
collections or in revenues in relation to expenses, or if our expenses continue
to exceed revenues, then our results of operations and financial condition would
be affected adversely and we may need to raise additional funds. If we need to
raise additional funds we cannot be certain that we will be successful nor can
we predict the terms under which such funds would be available if at all. If
additional funds are not available through debt or equity financings, we may not
be able to meet our on-going expenses unless we change our business plan, sell
assets, curtail expenditures, and/or employ other strategies as are required in
these circumstances. We believe that for us to raise additional funds without
selling assets will be very difficult.

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

RECENT ACCOUNTING PRONOUNCEMENTS

In October 2001, the Financial Accounting Standards Board (FASB)issued
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), which is effective for
fiscal years beginning after December 15, 2001. SFAS 144 supersedes certain
provisions of Accounting Principles Board (APB) Opinion No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions and supersedes SFAS 121. We do not expect the adoption of SFAS 144
to have a material effect on our consolidated financial position or results of
operations.

31

ITEM 7A. QUANTATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK

INTEREST RATE RISK

The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
To achieve this objective, we maintain our portfolio of cash equivalents in a
variety of securities, including both government and corporate obligations and
money market funds.

We have never held derivative financial instruments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required pursuant to this item are included in Item
14 of this Annual Report on Form 10-K and are presented beginning on page F-1.

SUPPLEMENTARY DATA

The following tables set forth unaudited quarterly supplementary data for
each of the eight quarters in the two-year period ended December 31, 2001.

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURES

On October 1, 2001, we terminated Ernst & Young LLP as our independent
auditors.