ITC LEARNING CORP, 10KSB, 1998-03-13

ITC LEARNING CORP
10KSB, 1998-03-13
MOTION PICTURE & VIDEO TAPE PRODUCTION

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<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-KSB

[X] Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of
1934 [Fee Required] for the Fiscal Year ended December 31, 1997

[ ] Transition Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934 [No Fee Required]

Commission File Number 0-13741

ITC LEARNING CORPORATION
------------------------
(FORMERLY KNOWN AS INDUSTRIAL TRAINING CORPORATION)
(Exact name of small business issuer as specified in its charter)

<TABLE>
<S> <C>
Maryland 52-1078263
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
</TABLE>

13515 Dulles Technology Drive, Herndon, Virginia 20171
------------------------------------------------------
(Address of principal executive offices and zip code)

(703) 713-3335
--------------
Issuer's telephone number (including area code)

Securities registered pursuant to Section 12(b) of the Act:

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<S> <C>
None None
---- ----
(Title of each Class) (Name of each exchange on
which registered)
</TABLE>

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.10 par value per share
---------------------------------------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No
----- -----

Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB.

[ ]

Issuer's revenues for the year ended December 31, 1997 were $25,582,153.
Aggregate market value of voting stock held by non-affiliates and outstanding at
February 20, 1998 was $11,753,776. Amount was computed using the average bid and
ask price as of February 20, 1998, which was $3.91. As of February 20, 1998,
3,887,731 shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------

Portions of the proxy statement for the annual shareholders meeting to be held
May 7, 1998 are incorporated by reference into Part III.

<PAGE> 2

TABLE OF CONTENTS

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PART I PAGE
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Item 1 Description of Business 1

Item 2 Description of Properties 3

Item 3 Legal Proceedings 4

Item 4 Submission of Matters to a Vote of Security Holders 4

PART II
- -------

Item 5 Market for Common Equity and Related Stockholder Matters 5

Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations 5

Item 7 Financial Statements 9

Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26

PART III
- --------

Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 27

Item 10 Executive Compensation 29

Item 11 Security Ownership of Certain Beneficial Owners and Management 29

Item 12 Certain Relationships and Related Transactions 29

Item 13 Exhibits and Reports on Form 8-K 29
</TABLE>

<PAGE> 3

PART I

ITEM 1. DESCRIPTION OF BUSINESS

(a) General Development of Business

ITC Learning Corporation (the "Company" or "ITC") was incorporated under the
laws of the State of Maryland on January 28, 1977 as Industrial Training
Corporation. Following approval by the Company's shareholders, the Company
changed its name to ITC Learning Corporation on May 9, 1997. ITC develops,
markets and sells training materials that are delivered in multimedia platforms.
ITC's multimedia training courseware combines full-motion video, audio,
animation, graphics and text into a single training presentation. The Company
provides self-directed multimedia learning solutions that improve employee
skills in business, education and government. The Company's products, which
include the largest library of interactive CD-ROM programs available today, have
improved productivity in major corporations and school systems across America.
These products also enable local communities to make a positive difference every
day by opening multimedia learning opportunities to the general public through
the use of multimedia learning centers and they have proven very effective as
Welfare to Work programs. The Company has a worldwide customer base of
approximately 5,000.

During 1997, the Company continued to concentrate its efforts on product
development and increasing its distribution capabilities. Prior to 1997, the
Company's product development efforts had focused on improving ITC's core
multimedia training products, including converting its existing analog laserdisc
training programs into the digital CD-ROM format. In 1997, the Company's
development efforts were focused on updating its product offerings in the area
of PC Skills training, particularly the Microsoft Office 97 suite of products
and Internet training products. The Company also invested in the next release of
its training administration product, ActivPro and in its electrical maintenance
series. During 1997, the Company also invested in research and development
activities to explore the feasibility of delivering its product over the
Internet and corporate intranets.

In 1997, the Company embarked on a new strategy intended to position itself as a
broad-based education and training integrator of an expanded line of multimedia
training products. In addition to broadening its own courseware library, ITC
intends to enter into strategic alliances with publishers of training software
in the areas of customer service, leadership, financial skills and other "soft
skills" training topics. These products represent approximately 75% of the $60
billion training market, according to International Data Corporation's August
1997 industry report.

In an effort to increase its distribution capabilities, the Company launched its
new Business Alliance Partner ("BAP") program which is intended to increase both
market coverage and bring additional industry knowledgeable resources to drive
sales. In concert with these changes, the Company also began to expand its
direct sales force and intends to triple its number of sales representatives and
to continue the expansion and growth of the BAP program in 1998.

In January 1997, the Company announced a joint marketing agreement with IBM
which will enable IBM to distribute the Company's products to both the K-12 and
Higher Education markets. In September 1997, the Company partnered with Pomeroy
Computer Resources, Inc. of Hebron, Kentucky to supply interactive multimedia
teacher training in PC literacy skills to the state of West Virginia as part of
a $16 million state funded technology integration initiative. These alliances
combine ITC's extensive products with the industry experience and distribution
networks of these business partners, and are considered important steps in
expanding the Company's distribution capabilities in the Education market.

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<PAGE> 4

In November 1997, the Company sold its Anderson Soft-Teach subsidiary
("Anderson" or "AST") to an investor group. As part of the agreement, the
Company will retain certain rights to distribute Anderson's products throughout
1998.

In December 1997, the Company's Board of Directors agreed to appoint Carl D.
Stevens as Chief Executive Officer, in addition to his duties as President,
replacing James H. ("Bill") Walton, a founder of the Company. In January 1998,
the appointment was officially approved by the Board. Mr. Stevens had joined the
Company in March 1997 as Senior Vice President and was subsequently named
President and Chief Operating Officer in June 1997. Mr. Walton resigned his
position as a Director of the Company in February 1998.

In January 1998, the Company announced that it invested $1 million in the stock
of Mentor Networks, Inc. ("Mentor"). For its investment, ITC acquired 8% of the
outstanding stock of Mentor with an option to acquire an additional 12%. The
Company had previously acquired the rights to distribute Mentor's products
exclusively in the United States. Mentor, based in Nova Scotia, specializes in
the development and distribution of interactive multimedia courseware. Mentor's
product offerings include the Microsoft Office suite of PC Skills training
products and Professional Skills training products in the areas of customer
service, telesales, collections, leadership training and human resources. Its
products include the only training product rated by Call Center Magazine as a
Call Center Product of the Year in February 1998.

In February 1998, the Company signed a letter of intent to acquire Turn-Key
Training Technologies, Inc. ("Turn-Key"), a developer and distributor of
performance-based training administration software. The purchase price for all
of the outstanding common stock of Turn-Key is $700,000 in cash. ITC also
agreed to employ the founder and president of Turn-Key, and will enter into an
agreement with him providing for an initial payment of $600,000 cash and the
issuance of 100,000 shares of ITC common stock in consideration of his
employment and certain extended non-competitive covenants. Turn-Key is a
privately-held company located in Grand Rapids, Michigan. Turn-Key's proprietary
administration software, AdminSTAR(R), provides customers with the capability
for personal skills assessment, creation of individual development plans,
management of the training process for corporate training departments, and a
broad array of reporting capabilities. Turn-Key's customers include the Coca
Cola Corporation, NASA, Shaw Industries and the Pentagon. The Company expects
to complete the acquisition of Turn-Key by the end of March 1998.

(b) Narrative Description of Business

ITC is an education and training integrator specializing in the development,
production, marketing and sale of multimedia training courseware for corporate,
educational and governmental organizations. ITC courseware uses the power of
full-motion video, audio and text as a learning tool on a PC platform. These
courses combine high quality video and sound with the PC's capability for
graphics and automatic recordkeeping. Standard multimedia platforms for ITC
products include both AVI and MPEG CD-ROM digital video format. The majority of
the Company's multimedia products are sold under the Company's registered
trademark ACTIV(R). These products are focused in five primary areas, as
represented by the five ACTIV(R) Learning Libraries: the "ACTIV(R) PC Skills
Learning Library," the "ACTIV(R) Regulatory Compliance Training Library," the
"ACTIV(R) Basic Skills Learning Library," the "ACTIV(R) Technical Skills
Learning Library," and the "ACTIV(R) INVOLVE(R) Instrumentation Learning
Library."

Distribution of the Company's products is managed through a number of channels.
Primarily, the Company employs a direct salesforce which is responsible for
sales of the Company's multimedia training products throughout North America,
Australia and the United Kingdom, with the exception of those territories which
have been sold to certain resellers as exclusive territories for distribution of
the "ACTIV(R) PC Skills Learning Library." These resellers in turn employ sales
persons to market and sell ITC's "PC Skills" products throughout their protected
territories. In certain other U.S. markets, the

2
<PAGE> 5

Company also uses its Business Alliance Partners to distribute its courseware
products. In foreign markets other than Canada, Australia and the United
Kingdom, the Company markets its products primarily through dealers and
distributors.

All of the Company's training programs are proprietary and, as a result, they
are all protected by copyright. The Company's libraries include in excess of 200
training programs, all of which were produced by the Company. Certain of the
Company's "Basic Skills" and "Technical Skills" products are owned by limited
partnerships in which the Company acts as a general partner; in some cases, the
Company also participates as a limited partner.

In addition to selling multimedia training courseware, the Company sells related
hardware products. The Company uses many IBM compatible hardware systems for the
delivery of its products. In addition to being an authorized IBM Industry
Remarketer and a Value Added Reseller, the Company utilizes the products of
Compaq, Hewlett Packard, Gateway 2000 and other computer hardware manufacturers.
Such hardware is integrated with ITC's courseware to provide a full-service
solution to meet the training needs of ITC's clients.

No customer accounted for more than 10% of consolidated net courseware sales in
1997 and no material part of the business is dependent upon a single customer or
a few customers, the loss of any one or several of which would have a materially
adverse effect on the Company.

All materials used in the Company's products are available from numerous sources
of supply. The Company does not foresee any shortage of such materials. Further,
ITC does not believe that the loss of any single supplier would have a material
adverse effect on the Company as a whole.

There are many companies engaged in the business of providing training and
instructional materials using various media. These companies include providers
of traditional instructor-led training, multimedia developers and sellers,
textbook publishers, and others, all of which compete for available training
funds. At present, there are several providers of interactive multimedia
training products and management believes that the number of companies providing
multimedia training products will continue to increase in the future. Some of
these companies are larger and have greater resources than ITC, while others
offer only specialized training materials. Considering the diversity of the
Company's "Learning Libraries" and the related multiple platforms, management
believes that ITC offers the broadest array of multimedia training products and
services available.

At December 31, 1997, the Company and its subsidiaries employed a total of 74
people, all of whom are full-time. This represents a decrease of 46 employees
since December 31, 1996, due primarily to the divestiture of AST and
cost-cutting measures enacted in 1997. The Company utilizes free-lance and
temporary personnel who are familiar with ITC's development and production
process to support increased personnel requirements that arise from time to
time. The Company is not a party to any collective bargaining agreements, and
believes that relations with its employees are good.

ITEM 2. DESCRIPTION OF PROPERTIES

The Company currently occupies 26,225 square feet of office, warehouse and
production space in a commercial building located at 13515 Dulles Technology
Drive, Herndon, Virginia. This lease will expire in June of 1999. The Company
also occupies 3,405 square feet of office space in a commercial building located
at 2000 RiverEdge Parkway, Atlanta, Georgia. This lease will expire in January
of 2001. Additionally, the Company has various leased space for its
international operations in Australia, Canada, and the United Kingdom. All
facilities are in good condition and are adequate for the Company's use.

3
<PAGE> 6
ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to, nor is any of its property the subject of, any
material pending legal proceedings.

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

The Company has not submitted any matters to a vote of security holders since
the May 1997 Annual Meeting of Stockholders.

4
<PAGE> 7

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a) Market Information

The Company's Common Stock is traded on the National Association of Security
Dealers Automated Quotation System (NASDAQ), National Market System (NMS).

The following table states the high and low quotation information by quarter for
the Company's Common Stock based on actual trading, as reported by NASDAQ/NMS.

<TABLE>
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High Low
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<S> <C> <C>
1st Quarter, 1996 9 1/2 6 1/4
2nd Quarter, 1996 9 6
3rd Quarter, 1996 8 1/4 5 5/16
4th Quarter, 1996 6 5/16 4
1ST QUARTER, 1997 6 1/4 4
2ND QUARTER, 1997 6 4
3RD QUARTER, 1997 5 5/8 4 9/16
4TH QUARTER, 1997 5 1/4 3 5/8
</TABLE>

(b) Holders

As of December 31, 1997, there were 1,028 holders of record of the Company's
Common Stock, the Company's only class of stock.

Shareholders of the Company's Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available. There has been no declaration of dividends since 1984.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Revenues

During 1997, revenues for ITC Learning Corporation totaled $25,582,000 as
compared with $22,144,000 in 1996, representing an increase of $3,438,000 or
16%. Courseware revenues, which includes sales of off-the-shelf courseware,
custom courseware and consulting services, fees and royalties and videotape
training products, totaled $18,720,000, as compared to $18,003,000 in 1996, an
increase of $717,000 or 4%. Revenues from the sales of hardware systems
aggregated $6,862,000 in 1997 as compared with $4,141,000 in 1996, representing
an increase of $2,721,000 or 66%.

The increase in courseware revenues for 1997 was primarily attributable to sales
of the Company's PC Skills courseware training products in the domestic markets
as well increased courseware sales in the international markets. Domestic sales
from PC Skills training products, which include sales to commercial, education
and government market sectors, totaled $7,819,000 for 1997 as compared to
$7,192,000 for 1996, representing an increase of $627,000 or 9%. The increase is
due to revenues

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<PAGE> 8

generated by Anderson Soft-Teach in 1997, partially offset by PC Skills revenues
from the DeKalb contract in 1996. International courseware sales for the year
totaled $4,210,000, representing an increase of $1,238,000 or 42% from 1996. The
increase was due in part to the fact that 1997 was the first full year of
operations for ITC Australasia Pty., Ltd., the Company's Australian subsidiary.

Revenues in 1997 from the Education market declined from 1996 levels due to the
Company's contract with the DeKalb County (GA) Board of Education ("DeKalb"). In
1996, the Company recognized approximately $3,200,000 in courseware revenues
under the Dekalb contract, while 1997 courseware and services revenues from
DeKalb amounted to $511,000. In total, the Company recognized $1,693,000 in
Education revenues in 1997, as compared to $4,607,000 in 1996. Excluding the
effect of the DeKalb contract, 1997 Education revenues decreased from 1996 by
$225,000. Sales of the Company's core Technical Skills and Regulatory Compliance
products totaled $5,394,000 during 1997, representing a decrease of $604,000
from 1996 levels; meanwhile, sales from the Federal Government markets
aggregated $610,000 during 1997 as compared to $1,512,000 achieved during 1996.

The increase in hardware revenues was attributable to the Company's 1997
contract with DeKalb. Under the terms of the contract, the Company delivered and
installed approximately 3,000 desktop and laptop computers to the County's
public schools during the third and fourth quarters of 1997. The hardware
contract placed a personal computer in every classroom in DeKalb County. During
the second half of 1997, the Company recognized revenues of approximately
$5,750,000 associated with the hardware contract. Excluding the effect of the
DeKalb hardware contract, total hardware revenues decreased $3,029,000 from 1996
to 1997. The substantial decrease in hardware revenues was the result of the
proliferation of multimedia hardware equipment in the marketplace as well as
significant competitive price pressures experienced by the Company. The Company
anticipates that revenues from hardware systems will continue to decline in the
near future.

Cost of Sales and Gross Margin

Cost of sales for 1997 totaled $16,202,000 resulting in a gross margin of
$9,380,000 or 37% of total revenues. During 1996, cost of sales totaled
$15,031,000 and resulted in a gross margin of $7,113,000 and gross margin
percent of 32% of total revenues. Excluding revenue and costs associated with
hardware sales, gross margin in 1997 totaled $9,066,000 or 48% of total revenues
as compared with $7,003,000 or 39% in 1996, an increase of $2,063,000. The
increase in gross margin and gross margin percent is principally due to lower
amortization expense associated with capitalized program development costs. The
lower amortization expense is attributable to the effect of the 1996 write-down
of $3,300,000 in program development costs and lower overall levels of
development activities during 1997.

Selling, General and Administrative Expenses

Selling, general and administrative expenses during 1997 totaled $12,038,000, as
compared to $9,316,000 in 1996. The increase of $2,722,000 or 29% is primarily
attributable to the increased infrastructure costs associated with the Company's
1996 acquisitions and the costs incurred in establishment and maintenance of the
Company's international subsidiaries. Additionally, included in SG&A expense for
1997 is approximately $600,000 of compensation related expenses associated with
the termination of the Company's contract with its former Chief Executive
Officer.

Gain on Sale of Subsidiary

On November 20, 1997 the Company sold all of the stock of its Anderson
Soft-Teach ("AST") subsidiary to an investor group for $4,000,000 in cash, a
promissory note in the amount of $950,000 and forgiveness of AST's intercompany
debt to ITC. The Company realized a pre-tax gain of

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approximately $732,000 for 1997, after deducting the carrying value of ITC's
investment in AST and ITC's costs of divestiture from the proceeds realized on
the sale.

ITC had acquired AST in December of 1996 for approximately $5,800,000 in cash
and stock. At the end of 1996, ITC recorded a charge of $2,500,000 associated
with the purchase price, representing the value of acquired in-process research
and development. When taking into consideration both the acquisition in 1996 and
the sale in 1997, the Company incurred a loss on its investment in AST of
approximately $1,800,000.

Income Taxes

The Company did not recognize any net tax benefit during 1997, as estimated
foreign tax expenses of $335,000 offset deferred benefits available from the
losses of the Company's domestic operations.

Net Loss

The Company incurred a net loss for 1997 of $1,433,000 or $0.37 per share (basic
and diluted) compared with a loss of $5,659,000 or $1.59 per share (basic and
diluted) in 1996. The loss per share amounts prior to 1997 have been restated as
required by the Financial Accounting Standards Board's SFAS No. 128 - Earnings
per Share.

CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES

Working capital at December 31, 1997 was $7,344,000 as compared to $6,056,000 at
December 31, 1996, an increase of $1,288,000 or 21%. The increase is primarily
due to the cash received from the sale of Anderson Soft Teach, net of the
working capital relinquished as part of the sale.

Cash flow from operations totaled $2,017,000 in 1997, compared with $983,000 in
1996, an increase of $1,034,000 or 105%. The increase is principally due to the
smaller net loss incurred in 1997, although after-tax losses net of non-cash
charges resulted in a cash inflow of $1,326,000 in 1997 compared with $2,981,000
in 1996. Changes in operating assets and liabilities accounted for the remaining
increase in operating cash flow in 1997, principally reductions in accounts
receivable of $1,242,000 and inventories of $349,000.

Net cash provided by investing activities during 1997 totaled $715,000 as
compared with net cash used of $8,750,000 in 1996. The total difference of
$9,465,000 from 1996 is due to lower investments in program development of
$2,015,000 and net cash realized in the sale of AST of $3,149,000 as compared
with cash used to acquire AST and ITC Australasia of $4,426,000 during 1996.

The Company used net cash of $544,000 for financing activities in 1997 as
compared with $116,000 of net cash provided by financing activities during 1996.
The total difference of $660,000 is principally due to the payment of $515,000
for the line of credit assumed in the purchase of Anderson Soft-Teach and
proceeds received from the exercise of common stock options totaling $127,000
during 1996. No common stock options were exercised in 1997.

Management believes that cash generated from operations combined with the
Company's existing resources and available line of credit are adequate to meet
ITC's working capital requirements for 1998.

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SOFTWARE REVENUE RECOGNITION

In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, Software Revenue
Recognition, which supersedes SOP 91-1. The provisions of SOP 97-2 take effect
in fiscal years beginning after December 15, 1997 and clarify rules of revenue
recognition related to customer acceptance, upgrades and post-contract customer
support. The Company's management has undertaken an assessment of the impact of
these rules on its pricing and revenue recognition policies and the terms and
conditions of its courseware license agreements. While the Company has
implemented SOP 97-2 beginning January 1, 1998, management does not expect it to
materially impact the Company's results of operations or to impair the
comparability of its financial statements.

IMPLICATIONS OF YEAR 2000

The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
courseware products or internal computer software that have time-sensitive
programs may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities. Similar failures in the Company's courseware could result in an
impairment of revenue recognition due to significant future obligations,
impairment of future sales of the Company's product, or potential product
liability.

The Company began an assessment of the implications of the Year 2000 during late
1997. At December 31, 1997, the process of evaluating the Company's courseware
products and internal systems was underway and is expected to be completed in
the first quarter of 1998. At this time, the actual impact of Year 2000
compliance on the Company's future results of operations, capital spending, and
business operations is not known, but is not expected to be material.

FORWARD LOOKING STATEMENTS

Certain statements made by the Company's management may be considered to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Act of 1995. Forward-looking statements are based on various factors
and assumptions that include known and unknown risks and uncertainties, the
completion and profitability of sales reported, changes in economic conditions
and interest rates, increases in raw material and labor costs, changes in
technology and general competitive factors, that may cause actual results to
differ materially.

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ITEM 7. FINANCIAL STATEMENTS

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INDEX PAGE
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Report of Independent Auditors 10

Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996 11

Consolidated Balance Sheets as of December 31, 1997 and 1996 12-13

Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1997 and 1996 14

Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 15

Notes to Consolidated Financial Statements 16-26
</TABLE>

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
ITC Learning Corporation

We have audited the accompanying consolidated balance sheets of ITC Learning
Corporation as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ITC
Learning Corporation at December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for the years then ended, in conformity
with generally accepted accounting principles.

Washington, D.C. Ernst & Young LLP
February 23, 1998

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ITC LEARNING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31, 1997 and 1996

<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Revenues, net:
Courseware $ 18,720,292 $ 18,002,803
Hardware 6,861,861 4,140,767
------------ ------------
Total revenues, net (note 3) 25,582,153 22,143,570

Costs and expenses:
Courseware cost of sales 9,654,736 10,999,376
Hardware cost of sales 6,547,324 4,031,627
Reduction in capitalized program development costs - 3,300,000
Acquired research and development - 2,500,000
Selling, general and administrative expenses 12,038,439 9,316,163
Equity in earnings of affiliates (288,129) (216,832)
------------ ------------
Total costs and expenses 27,952,370 29,930,334

Gain on sale of subsidiary (note 9) 732,238 -
------------ ------------

Loss before interest and income tax benefit (1,637,979) (7,786,764)

Interest income, net 204,651 467,454
------------ ------------

Loss before income tax benefit (1,433,328) (7,319,310)

Income tax benefit (note 8) - (1,660,000)
------------ ------------

Net loss $ (1,433,328) $ (5,659,310)
============ ============

Net loss per common share, basic and diluted (note 1) $ (0.37) $ (1.59)
============ ============

Weighted average number of shares outstanding 3,885,462 3,566,000
============ ============
</TABLE>

See accompanying notes.

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ITC LEARNING CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31, 1997 and 1996

ASSETS

<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,885,672 $ 2,697,566
Accounts receivable, net (notes 2, 5 and 6) 6,167,592 7,641,066
Due from affiliates (note 3) 33,092 36,768
Inventories, net of reserve of $199,809 and
$142,267 at December 31, 1997 and 1996,
respectively (notes 5 and 6) 357,374 1,018,383
Prepaid expenses 123,042 190,402
Income taxes receivable (note 8) 175,206 689,104
Other current assets 11,912 --
------------ ------------
Total current assets 11,753,890 12,273,289

Long-term receivable (notes 2, 5 and 6) 836,882 1,589,916

Note receivable (note 9) 922,940 --

Property and equipment (note 6):
Video and computer equipment 1,336,735 3,361,923
Furniture and fixtures 125,259 747,146
Leasehold improvements 21,313 95,422
------------ ------------
1,483,307 4,204,491
Less accumulated depreciation and amortization (802,989) (2,963,197)
------------ ------------
Net property and equipment 680,318 1,241,294

Capitalized program development costs, net
of accumulated amortization of $1,847,481 and
$977,775 at December 31, 1997 and 1996,
respectively 3,947,086 4,226,525
Intangible assets, net of accumulated amortization of
$676,111 and $511,111 at December 31, 1997
and 1996, respectively (note 9) 1,631,299 3,975,840
Other 12,340 67,461
------------ ------------
Total assets $ 19,784,755 $ 23,374,325
============ ============
</TABLE>

See accompanying notes.

12
<PAGE> 15

ITC LEARNING CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31, 1997 and 1996

LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current liabilities:
Line of credit (note 5) $ -- $ 515,000
Current installments of long-term debt (note 6) 100,000 130,745
Accounts payable 740,353 1,331,079
Due to affiliates (note 3) 293,561 335,797
Accrued compensation and benefits 1,281,691 826,764
Deferred revenues 422,787 1,458,945
Other accrued expenses 1,236,012 1,619,326
Income taxes payable (note 8) 335,102 --
------------ ------------
Total current liabilities 4,409,506 6,217,656

Deferred lease obligations 60,296 113,020
Deferred income taxes (note 8) -- 353,522
Long-term debt (note 6) 400,000 --
------------ ------------
Total liabilities 4,869,802 6,684,198

Commitments (note 10)

Stockholders' equity (notes 6, 7, 9, and 11):
Common stock, $.10 par value, 12,000,000 shares
authorized; 3,897,074 and 3,896,924 shares
issued and outstanding in 1997 and
1996, respectively 389,708 389,693
Additional paid-in capital 16,090,816 16,067,366
Note receivable from ESOP (541,677) (143,677)
Retained earnings (deficit) (1,056,583) 376,745
Foreign currency translation adjustment 32,689 --
------------ ------------
Total stockholders' equity 14,914,953 16,690,127
------------ ------------
Total liabilities and stockholders' equity $ 19,784,755 $ 23,374,325
============ ============
</TABLE>

See accompanying notes.

13
<PAGE> 16
ITC LEARNING CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Years ended December 31, 1997 and 1996

<TABLE>
<CAPTION>
Common Stock Additional Note
------------ Paid-In Receivable
Shares Par Value Capital From ESOP
------ --------- ------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 3,556,424 $ 355,643 $ 14,770,853 $ (250,177)

Note payments - - - 106,500

New shares issued:
Stock issuance 300,000 30,000 1,170,000 -
Stock options exercised 40,000 4,000 123,113 -
Common stock issued to employees 500 50 3,400 -

Net loss - - - -
------------ ------------ ------------ ------------
Balance at December 31, 1996 3,896,924 389,693 16,067,366 (143,677)

NOTE PAYMENTS - - 392 102,000

SHARES REPURCHASED (103,322) (10,332) (467,532) -

NEW SHARES ISSUED:
COMMON STOCK ISSUED TO EMPLOYEES 150 15 922 -
COMMON STOCK CONTRIBUTED TO ESOP 103,322 10,332 489,668 (500,000)

NET LOSS - - - -

CUMULATIVE EFFECT OF FOREIGN CURRENCY
TRANSLATION ADJUSTMENT - - - -
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1997 3,897,074 $ 389,708 $ 16,090,816 $ (541,677)
============ ============ ============ ============
</TABLE>

<TABLE>
<CAPTION>
Retained Foreign Currency Total
Earnings Translation Stockholders'
(Deficit) Adjustment Equity
--------- ---------- ------
<S> <C> <C> <C>
Balance at January 1, 1996 $ 6,036,055 $ - $ 20,912,374

Note payments - - 106,500

New shares issued:
Stock issuance - - 1,200,000
Stock options exercised - - 127,113
Common stock issued to employees - - 3,450

Net loss (5,659,310) - (5,659,310)
------------ ------------ ------------
Balance at December 31, 1996 376,745 - 16,690,127

NOTE PAYMENTS - - 102,392

SHARES REPURCHASED - - (477,864)

NEW SHARES ISSUED:
COMMON STOCK ISSUED TO EMPLOYEES - - 937
COMMON STOCK CONTRIBUTED TO ESOP - - -

NET LOSS (1,433,328) - (1,433,328)

CUMULATIVE EFFECT OF FOREIGN CURRENCY
TRANSLATION ADJUSTMENT - 32,689 32,689
------------ ------------ ------------
BALANCE AT DECEMBER 31, 1997 $ (1,056,583) $ 32,689 $ 14,914,953
============ ============ ============
</TABLE>

See accompanying notes.

14
<PAGE> 17

ITC LEARNING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 1997 and 1996

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,433,328) $ (5,659,310)
Reconciling items:
Reduction in capitalized program development costs -- 3,300,000
Acquired research and development -- 2,500,000
Deferred tax benefit -- (1,255,000)
Depreciation and amortization 2,725,367 4,091,483
Common stock issued to employees 937 3,450
Foreign currency translation adjustment 32,689 --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1,241,541 (4,428,928)
Decrease (increase) in inventories 349,450 (147,311)
Decrease in prepaid expenses 46,026 62,659
Increase (decrease) in due to affiliates, net (38,560) 56,641
Decrease (increase) in other assets 40,857 (36,372)
Decrease in accounts payable (489,293) (290,464)
Increase (decrease) in accrued expenses (803,991) 2,990,441
Increase (decrease) in deferred lease obligations (23,875) 10,056
Decrease (increase) in income taxes receivable 368,681 (794,104)
Net effect of acquired operating assets and liabilities -- 579,454
------------ ------------
Net cash provided by operating activities 2,016,501 982,695

Cash flows from investing activities:
Capitalized program development costs (1,983,392) (3,997,925)
Capital expenditures (449,934) (326,007)
Sale of subsidiary, net of cash relinquished 3,148,676 --
Acquisitions, net of cash acquired -- (4,426,397)
------------ ------------
Net cash provided by (used in) investing activities 715,350 (8,750,329)

Cash flows from financing activities:
Repayment of line of credit (515,000) --
Proceeds from long-term debt 500,000 --
Principal payments under term loans (130,745) (117,175)
Repurchase of common stock (500,000) --
Issuance of common stock -- 127,113
Employee stock ownership plan note collections 102,000 106,500
------------ ------------
Net cash (used in) provided by financing activities (543,745) 116,438
------------ ------------

Net increase (decrease) in cash 2,188,106 (7,651,196)

Cash and cash equivalents at beginning of year 2,697,566 10,348,762
------------ ------------
Cash and cash equivalents at end of year $ 4,885,672 $ 2,697,566
============ ============
</TABLE>

See accompanying notes.

15
<PAGE> 18

ITC LEARNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1997 and 1996

1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a) Basis of Presentation

The consolidated financial statements of ITC Learning Corporation (the "Company"
or "ITC") include the accounts of its wholly owned subsidiaries, ITC Australasia
Pty., Ltd., Activ Training, Ltd., and ComSkill Learning Centers, Inc. Pursuant
to approval by the Company's shareholders, the Company changed its name to ITC
Learning Corporation on May 9, 1997. The Consolidated Statements of Operations
and Statements of Stockholders' Equity and Statements of Cash Flows also reflect
the results of operations and subsequent sale of the Company's Anderson
Soft-Teach ("AST") subsidiary which was acquired on December 31, 1996 and
divested on November 20, 1997. Significant intercompany accounts and
transactions have been eliminated in consolidation. The Company is a
full-service training company specializing in the development, production,
marketing and sale of both off-the-shelf and custom multimedia training
courseware for corporate, educational and governmental organizations. ITC's
multimedia training courseware combines full-motion video, audio, animation,
graphics and text into a single training presentation.

b) Revenues and Costs

Revenues from courseware include both off-the-shelf and custom courseware sales,
courseware licenses and consulting service revenues. The Company recognizes
revenues on off-the-shelf product and hardware sales as units are shipped. The
Company permits the customer the right to return the courseware within 30 days
of purchase. In the event that sales returns are material, the Company adjusts
revenue accordingly. Revenues from sales of custom training programs that are
developed and produced under specific contracts with customers, including
contracts with affiliated joint ventures and limited partnerships, are
recognized on the percentage of completion basis as related costs are incurred
during the production period. Gross revenues from sales of affiliated joint
venture and limited partnership copyrighted courseware are included in the
Company's financial statements, as are related production, selling and
distribution costs. Amounts due to co-owners of the affiliated joint venture and
partnerships related to such courseware sales are reflected as royalties and
included in cost of sales in the financial statements. Revenues from courseware
licenses are recognized upon delivery of the initial copy of each product
licensed, less any duplication costs which are accrued based on estimates.
Revenues from consulting services are recognized as services are performed.

16
<PAGE> 19

c) Capitalized Program Development Costs

Certain costs of developing and producing off-the-shelf courseware have been
capitalized. Capitalized costs include direct labor, materials, product masters,
subcontractors, consultants, and applicable overhead. These capitalized costs
are amortized on a straight-line basis over the estimated useful lives of the
related programs which range from three to five years. The related amortization
expense is included in the cost of sales and amounts to approximately $1,578,000
and $3,202,000 in 1997 and 1996, respectively. Periodically, the Company
assesses the net realizable value of program development costs by reviewing past
sales performances, current and planned future marketing activities, specific
sales promotions and strategic distribution arrangements. Based on this
assessment, the Company determines each product's prospects for future sales,
and, if necessary, adjusts asset values to net realizable value.

During 1996, sales of products in laser videodisc format declined dramatically
as a result of the conversion of all the Company's multimedia products to
digital format, and the Company determined that potential future sales in the
laser videodisc format are limited. As a result, the Company recorded an
additional $3,300,000 pre-tax charge, principally consisting of the unamortized
cost of laser videodisc product, to reduce all capitalized program development
costs in excess of net realizable value.

d) Cash and Cash Equivalents

Cash and cash equivalents include cash and other highly liquid investments
having original maturities of less than three months.

e) Inventories

Inventories primarily consist of multimedia courseware and related computer
hardware, and are stated at the lower of cost or market. Cost is determined
using the average cost method.

f) Property and Equipment

Property, equipment and leasehold improvements are stated at cost. Depreciation
on property and equipment is computed on a straight-line basis over estimated
useful lives of three to five years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or estimated useful lives
of the related assets. Depreciation and leasehold amortization expense amounted
to approximately $759,000 and $736,000 in 1997 and 1996, respectively.

During 1997, the Company recorded an adjustment to remove the cost of property
and equipment which was fully depreciated. The result of the adjustment was a
reduction of approximately $2,844,000 in both cost and accumulated depreciation.

g) Investments in Affiliates

Investments in affiliated joint ventures and limited partnerships are accounted
for using the equity method and, accordingly, the initial cost of the
investments are adjusted for the Company's proportionate share of joint venture
and partnership undistributed earnings or losses.

h) Income Taxes

The Company provides for income taxes using the liability method in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting
for Income Taxes. Deferred income taxes result primarily from differences
between financial statement and income tax treatment of program development
costs, revenue recognition and net operating loss carryforwards.

17
<PAGE> 20

i) Net Loss Per Common Share

In 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings
Per Share ("Statement 128"). Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to Statement 128
requirements. The effect on weighted average shares outstanding of securities
that could potentially dilute basic earnings per share in the future that were
not included in the computation of diluted earnings per share because to do so
would have been antidilutive for the periods presented were 4,789 and 50,304 of
stock options and warrants for 1997 and 1996, respectively.

j) Intangible Assets

Intangible assets include allocations of the purchase price of acquisitions to
workforce investments, customer base and goodwill. These assets are being
amortized using the straight-line method over estimated useful lives of five to
fifteen years. Amortization expense for 1997 and 1996 amounted to approximately
$389,000 and $165,000, respectively. As part of its ongoing review, management
takes into consideration any events and circumstances which might indicate an
impairment to the carrying amount of intangible assets. Factors that management
uses to evaluate continuing value include sales from acquired product lines,
employee turnover, and development of related customer and distribution networks
that were in place at the date of the acquisition.

As a result of the sale of AST (see Note 9), the Company reduced net intangible
assets by $1,956,000, which represents the amount originally recorded when AST
was purchased, less $224,000 in amortization expense incurred in 1997.

k) Research and Development

Research and development costs consist of software-related expenditures incurred
during the course of planned search and investigation aimed at developing new
products or processes. The Company expenses all research and development costs
as they are incurred. Research and development costs of $764,000 and $329,000
were incurred during 1997 and 1996, respectively, and are included in cost of
sales.

l) Foreign Subsidiaries

The Company owns international subsidiaries in both the United Kingdom and
Australia. Each of these subsidiaries primarily perform sales and marketing
activities of products developed in the U.S. Therefore, under Statement of
Financial Accounting Standards No. 52, Foreign Currency Translation, the
subsidiaries' financial statements are translated from their local currencies
using the corresponding foreign currency exchange rate with the resulting
difference recorded as a component of consolidated stockholders' equity.
Transaction gains and losses incurred during 1997 were not material. The Company
believes its exposure to foreign currency risk is not material. The following
table presents sales and other financial information from 1997 related to its
foreign operations:

<TABLE>
<CAPTION>
U.S. U.K. AUSTRALIA
----------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 21,281,000 $ 2,858,000 $ 1,443,000
Operating Profit (Loss) (3,742,000) 677,000 343,000
Identifiable Assets 17,341,000 1,734,000 710,000
</TABLE>

18
<PAGE> 21

m) Stock Option Plans

In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation (Statement 123), which provides an
alternative to APB Opinion No. 25 in accounting for stock-based compensation.
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options. The Company's method of adoption of
Statement 123 requires additional footnote disclosures regarding the Company's
stock-based compensation, but does not impact the financial position or the
results of operations of the Company.

n) Use of Estimates

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

o) New Accounting Pronouncements

In February 1997, the Financial Accounting Standards Board issued SFAS No. 129,
Disclosure of Information about Capital Structure (Statement 129), which
establishes standards for disclosing information about an entity's capital
structure. Statement 129 was effective for periods ending after December 15,
1997. The adoption of Statement 129 did not impact the Company's capital
structure disclosures as the Company was already in compliance with Statement
129.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income (Statement 130) and SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information (Statement 131), which
are effective for fiscal years beginning after December 15, 1997. The Company
will adopt Statement 130 and Statement 131 with the fiscal year beginning
January 1, 1998. Statement 130 and Statement 131 will not have a material impact
on the financial results or financial condition of the Company, but will result
in certain changes in required disclosures. Management is evaluating the
additional disclosure requirements for the Company upon the implementation of
Statement 130 and Statement 131.

2) ACCOUNTS RECEIVABLE

Accounts receivable include the following at December 31:

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Trade accounts receivable $ 5,412,822 $ 6,738,762
Current portion of long-term receivable, net 909,575 1,012,287
Unbilled contract receivables 98,162 182,025
Less allowance for doubtful accounts (254,728) (296,148)
------------- -------------
Trade accounts receivable, net 6,165,831 7,636,926
Other receivables 1,761 4,140
------------- -------------
$ 6,167,592 $ 7,641,066
============= =============
</TABLE>

During the second quarter of 1996, the Company entered into a contract with the
DeKalb County (GA) Board of Education ("DeKalb") for the sale of a district-wide
multicopy courseware license, hardware and certain future services. The total
contract amount of $5,060,000 is payable in four installments, $1,535,000 upon
contract execution, and the remaining $3,525,000 in three equal annual
installments beginning in June 1997. The June 1997 installment was received in
accordance with the provisions of the contract and the effect of the payments is
reflected in the financial statements. Total revenues recognized under the
contract during the second quarter of 1996 for the courseware license and

19
<PAGE> 22

hardware were $3,218,000 and $620,000, respectively. Dealer fees relating to
this sale have been charged against the related revenues, and are payable only
when proceeds are received by the Company. The long-term portion of the net
receivable has been discounted assuming a 6% interest rate.

Components of the long-term receivable include the following:

<TABLE>
<CAPTION>
DECEMBER 31, December 31,
1997 1996
<S> <C> <C>
Receivable from DeKalb County (GA) Board of Education $ 2,350,000 $ 3,525,000
Related dealer fees payable (510,758) (737,083)
Less amounts classified as current, net of related dealer fees (909,575) (1,012,287)
Less amount representing interest (92,785) (185,714)
------------- -------------
$ 836,882 $ 1,589,916
============= =============
</TABLE>

3) INVESTMENTS IN AND DUE TO AFFILIATES

The Company is a participant in five separate limited partnerships with
Industrial Training Partners, Ltd. (the ITP partnerships) and a joint venture
with DynCorp. In all of the ITP partnerships, the Company is a 5% general
partner and in certain partnerships the Company has acquired limited partnership
interest as well. In the joint venture with DynCorp, the Company has a 50%
ownership interest. The ITP partnerships and the DynCorp joint venture were
formed to develop and produce various series of training programs. Under the
contracts to market the programs for the partnerships and joint venture, ITC
receives 50%-70% of the sales price for the costs of reproducing and marketing
the training materials. In the case of the joint venture agreement, the Company
also receives an additional 25% for its share of the joint venture profits.
Sales of programs related to these affiliates were approximately $1,729,000 and
$2,493,000 in 1997 and 1996, respectively. In connection with the development of
new off-the-shelf partnership programs, the Company billed certain of the ITP
partnerships approximately $532,000 in 1996; however, no new development
activity took place in 1997. Amounts earned but not billed to the ITC
partnerships totaling $21,000 are included in unbilled receivables at December
31, 1996. In connection with the financing of product development activities for
these partnerships, the Company has guaranteed two bank loans for two of the
partnerships. At December 31, 1997, the outstanding balance of these loans
totaled $299,000.

4) LEASES

The Company has several noncancelable operating leases, primarily for office
space and transportation equipment, that expire over the next four years,
certain of which include purchase or renewal options at fair value at the time
of renewal.

Future minimum lease payments under noncancelable operating leases as of
December 31, 1997 are as follows:

<TABLE>
<CAPTION>
Year ending December 31:
------------------------
<S> <C>
1998 $ 491,000
1999 284,000
2000 117,000
2001 32,000
-------------
Total future minimum lease payments $ 924,000
=============
</TABLE>

Rental expenses for operating leases for the years ended December 31, 1997 and
1996 were approximately $910,000 and $533,000, respectively.

20
<PAGE> 23

5) LINES OF CREDIT

At December 31, 1997, the Company had no amounts outstanding relating to its
$3,000,000 and $250,000 revolving bank lines of credit, which bear interest at
prime (8.5% at December 31, 1997). Borrowings under the lines are collateralized
by the Company's accounts receivable and inventory.

The loan agreements include certain covenants which limit borrowings and the
ability to merge or dispose of assets, and require the maintenance of minimum
working capital and tangible net worth ratios.

In connection with the acquisition of AST, the Company assumed a line of credit
with an outstanding balance of $515,000 at December 31, 1996. In January 1997,
this amount was repaid and the related line of credit was terminated.

6) LONG-TERM DEBT

<TABLE>
<CAPTION>
Long-term debt consists of the following at December 31: 1997 1996
---- ----
<S> <C> <C>
8.5% note payable to financial institution due in monthly $ 500,000 $ 130,745
principal and interest installments of $10,258 through December 2002,
collateralized by the assignment of interest in the shares of the Company's
common stock held by the ESOP, accounts receivable, inventory and property
and equipment.

Less current installments (100,000) (130,745)
--------- ---------
Long-term debt, excluding current installments $ 400,000 $ --
========= =========
</TABLE>

Interest paid on all debt amounted to approximately $36,000 and $34,000 in 1997
and 1996, respectively.

7) STOCK OPTIONS AND STOCK WARRANTS

At December 31, 1997, the Company had outstanding options to purchase common
stock under two separate incentive stock option plans. These plans, the 1992
Director Incentive Stock Option Plan and the 1992 Key Employee Incentive Stock
Option Plan have effectively replaced the Company's 1982 Incentive Stock Option
Plan. Options granted under the 1992 Director Incentive Stock Option Plan may be
qualified or non-qualified. From time to time, the Company also has granted
other non-qualified options to certain individuals. The Company also has
outstanding 14,572 warrants to purchase common stock. These warrants are
exercisable at $3.50 and expire in July 1998.

21
<PAGE> 24

The following table summarizes option activity:

<TABLE>
<CAPTION>
NON-QUALIFIED OPTIONS QUALIFIED OPTIONS
--------------------- -----------------

No. of Exercise No. of Exercise
Options Price Options Price
------- ----- ------- -----

<S> <C> <C> <C> <C>
Outstanding at January 1, 1996 117,000 $2.875-7.50 127,000 $2.875-10.05
Granted -- 95,000
Canceled or expired -- (41,000)
Exercised (6,000) (34,000)
----------- ----------
Outstanding at December 31, 1996 111,000 $5.00-7.50 147,000 $4.75-6.50
GRANTED 108,000 $4.875-4.875 115,000 $4.25-6.25
CANCELED OR EXPIRED (76,384) $6.50-7.50 (119,616) $4.75-6.50
----------- ----------
OUTSTANDING AT DECEMBER 31, 1997 142,616 $4.875-6.50 142,384 $4.25-6.25
=========== ==========
EXERCISABLE AT DECEMBER 31, 1997 34,616 $6.50-6.50 38,434 $4.75-6.50
=========== ==========
EXERCISABLE AT DECEMBER 31, 1996 91,000 $5.00-7.50 52,000 $5.00-6.50
=========== ==========
</TABLE>

Qualified options outstanding under the Company's stock option plans expire as
follows: 2,000 in 1999, 15,384 in 2000, 50,000 in 2001 and 75,000 in 2002.
Non-qualified options outstanding expire as follows: 34,616 in 2000 and 108,000
in 2002. As of December 31, 1997 there were no more options available for
additional grants under the 1992 Director Incentive Stock Option Plan and
168,500 options available under the 1992 Key Employee Incentive Stock Option
Plan. Subsequent to December 31, 1997, the Board of Directors approved the
allocation of 200,000 shares of the Company's stock to the ITC Learning
Corporation 1998 Incentive Stock Option Plan, contingent on and subject to
approval of the Company's stockholders at the 1998 Annual Meeting.

The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its plans. Accordingly,
no compensation expense has been recognized for its stock option plans because
stock options are granted with an exercise price equal to the fair value of the
stock on the grant date. Had compensation cost for the Company's stock option
plans been determined based upon the fair value of the options at the grant date
for awards under these plans consistent with the methodology prescribed under
Statement 123, the Company's 1997 net income and earnings per share would not
have been materially affected. The fair value of the options granted was
determined using the Black-Scholes option pricing model with the following
assumptions: dividend yield of 0%, volatility of 73%, risk-free interest rate of
5.625% and an expected life of five years.

8) INCOME TAXES

The components of income tax expense (benefit) are as follows:

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current:
Federal $ -- $ (320,000)
State -- (85,000)
Foreign 335,000 --
-------------- --------------
335,000 (405,000)

Deferred:
Federal (193,000) (1,148,000)
State (142,000) (107,000)
-------------- --------------
(335,000) (1,255,000)
-------------- --------------
$ -- $ (1,660,000)
============== ==============
</TABLE>

22
<PAGE> 25

The difference between income tax expense (benefit) and the amount determined by
applying the federal statutory rate is as follows:

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Federal statutory rate $ (487,000) $ (2,488,000)
State income taxes, net of federal benefit (59,000) (192,000)
Amortization of intangibles 63,000 60,000
Acquired research and development -- 925,000
Subsidiary foreign tax liability 335,000 --
Income tax at other than the U.S. rate 89,000 --
Alternative Minimum Tax credit 47,000 --
Other 12,000 35,000
-------------- --------------
$ -- $ (1,660,000)
============== ==============
</TABLE>

The following temporary differences give rise to the provision for deferred
taxes (benefit) at December 31:

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Capitalized program development costs $ 241,000 $ (419,000)
Deferred revenues and accruals 279,000 (583,000)
Depreciation -- (80,000)
Allowance for doubtful accounts 5,000 (30,000)
Inventory reserves (49,000) 14,000
Net operating loss/capital loss
and tax credit carryforwards (net) (549,000) (107,000)
Accrued compensation (259,000) (50,000)
Other (3,000) --
-------------- --------------
$ (335,000) $ (1,255,000)
============== ==============
</TABLE>

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31 are
presented below.

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred revenues and accruals $ 304,000 $ 583,000
Allowance for doubtful accounts 96,000 101,000
Inventory reserves 76,000 27,000
Accrued compensation 337,000 78,000
Net operating and capital loss carryforwards 2,450,000 580,000
Deferred lease obligation 23,000 26,000
Difference in depreciation 97,000 97,000
Other -- 478
-------------- --------------
Total deferred tax assets 3,383,000 1,492,478
Less valuation allowance (1,917,000) (421,000)
-------------- --------------
Net deferred tax assets 1,466,000 1,071,478
-------------- --------------
Deferred tax liabilities:
Capitalized product development costs (1,466,000) (1,425,000)
-------------- --------------
Total gross deferred tax liabilities (1,466,000) (1,425,000)
-------------- --------------
Net deferred tax assets $ -- $ (353,522)
============== ==============
</TABLE>

At December 31, 1997, the Company had $1,172,000 in net operating loss
carryforwards available for income tax purposes. The Company also has a capital
loss carryforward available for income tax

23
<PAGE> 26

purposes in the amount of $3,239,000. The Company has recorded a reserve of
$1,917,000 to reduce the value of its net deferred tax asset to the amount of
its available net operating loss carryforwards.

As a result of an acquisition, the Company has available approximately
$1,125,000 of additional net operating loss carryforwards that expire at varying
dates through 2007. Pursuant to Section 382 of the Internal Revenue Code (the
"Code"), the utilization of the net operating loss is limited to approximately
$245,000 per year. Due to the limitation on uses and other uncertainties
relating to the utilization of the remaining tax benefit of these deductions, a
valuation allowance has been recorded to substantially offset the net deferred
tax asset related to the acquisition.

The Company paid federal and state income taxes of $14,000 and $103,000 in 1997
and 1996 respectively. The Company also received refunds of federal and state
income taxes in 1997 totaling $577,000.

9) ACQUISITIONS AND DIVESTITURES

Effective December 31, 1996, the Company purchased the common stock of Anderson
Soft-Teach for $4,500,000 in cash and 300,000 shares of the Company's common
stock valued at $4.00 per share. AST is a developer, producer and distributor of
multimedia training solutions for computer skills training and on-line
electronic performance support systems. As a result of the acquisition, the
Company recorded intangible assets of approximately $2,180,000, consisting of
workforce investment, customer base, and goodwill. Additionally, the Company
recorded a charge of $2,500,000 of the $5,800,000 purchase price, representing
the value of acquired in-process research and development.

On September 1, 1996, ITC Australasia Pty., Ltd. ("ITCA"), a newly-formed and
wholly-owned subsidiary of the Company, purchased substantially all of the
assets of Acumen People and Productivity Pty., Ltd. ("Acumen") for approximately
$80,000. Acumen had been a distributor of ITC products in Australia and Asia
since 1991. ITCA was created in order to continue the expansion of the Company's
presence in the international marketplace, particularly throughout Australia and
the Pacific Rim.

On November 20, 1997 the Company entered into a stock purchase agreement with
Anderson Holdings, an investor group headed by a former employee of the Company,
to sell all of the Company's stock in AST in exchange for $4,000,000 cash, a
promissory note in the amount of $950,000, and forgiveness of AST's outstanding
intercompany obligations to ITC. One of the Company's Directors, who
subsequently resigned his position on the Board, was paid a fee of $150,000 for
services provided in connection with the sale of AST. As a result of the sale,
the Company recorded a gain of $732,000. When taking into consideration both the
costs incurred on the initial acquisition in 1996 and the subsequent gain on
sale in 1997 of AST, the Company incurred an overall loss of approximately
$1,800,000.

Under the terms of the stock purchase agreement, ITC and AST entered into a
reciprocal agreement to sell each other's products over the remainder of 1997
and all of 1998. Royalties earned by AST for sales of their products under this
agreement will be applied to the principal value of the note. As of December 31,
1997, the note's principal had been reduced by $27,000 for such royalties. Under
the terms of the note, AST will make quarterly interest payments to ITC at an
interest rate of 8% and will pay the remaining principal balance at the end of
four years.

10) COMMITMENTS

The Company has entered into separate employment agreements with certain of its
corporate officers which are subject to termination upon death or disability or
upon notice by the Company providing up to 10 months of severance pay. In
addition to basic salary, each of these officers is eligible to receive

24
<PAGE> 27

salary increases, bonuses, stock option grants, pension and profit-sharing
arrangements, and other employee benefits which may from time to time be awarded
or made available.

In December of 1997, and in accordance with the provisions of the Company's
contract with its then Chief Executive Officer, the Company recorded a charge of
approximately $600,000 in compensation related expenses associated with the
termination of the executive's contract.

11) STOCKHOLDERS' EQUITY

The Company instituted an Employee Stock Ownership Plan (ESOP) and Trust for the
benefit of substantially all employees effective January 1, 1992. To establish
the plan, ITC entered into a loan agreement with a bank and borrowed $637,500
for the purchase of 200,000 shares of ITC common stock from DynCorp. ITC pledged
this stock to the bank to collateralize the loan. The provisions of the ESOP
require that, on an annual basis, the greater of 33,334 shares or the amount of
shares equal to five percent of total compensation of eligible employees be
allocated to employee accounts. Each participant then receives shares based on
their relative annual compensation. The Company recognized compensation expense
of approximately $102,000 for both 1997 and 1996, based on the cost of shares
allocated for the period and any interest expense incurred. Contributions to the
ESOP amounted to approximately $135,000 in both 1997 and 1996, including
approximately $6,000 and $16,000 of interest in 1997 and 1996, respectively.

In December 1997, the Company's Board of Directors approved the repurchase of
100,000 shares of the Company's stock through a private purchase transaction and
authorized the Company's management to purchase an additional 100,000 shares
under favorable market prices and conditions. To repurchase the shares, the
Company entered into a loan agreement for $500,000, pledging the repurchased
stock to collateralize the loan. The unallocated shares are not considered
outstanding for earnings per share computations. The fair value of the 103,322
unallocated shares at December 31, 1997 was approximately $375,000. These shares
were used to replenish the Company's ESOP plan which was depleted after the
allocation of shares for 1997.

12) EMPLOYEE 401(k) PLAN

On January 1, 1991, the Company established a 401(k) Plan for the benefit of
substantially all of its employees. Employees can contribute from 1% to 15% of
their salary to the Plan subject to statutory limitations. At the discretion of
the Board of Directors, the Company can elect to make a contribution to the
Plan. The Company did not make contributions to the 401(k) Plan in either 1997
or 1996.

13) QUARTERLY FINANCIAL DATA (UNAUDITED)

Financial data for the interim periods of 1997 and 1996 were as follows (amounts
in thousands except per share amounts):

<TABLE>
<CAPTION>
BASIC EARNINGS
NET NET INCOME (LOSS)
REVENUE (LOSS) PER SHARE (c)
------- ------ -------------
<S> <C> <C> <C>
1996 Quarters
First $ 3,716 $ (397) $ (0.11)
Second 7,605 349 0.10
Third 5,537 (498) (0.14)
Fourth (a) 5,286 (5,113) (1.44)
-------- -------- --------

Total $ 22,144 $ (5,659) $ (1.59)
======== ======== ========
</TABLE>

25
<PAGE> 28

<TABLE>
<S> <C> <C> <C>
1997 QUARTERS
FIRST $ 4,722 $ (456) $ (0.12)
SECOND 4,487 (749) (0.19)
THIRD 7,089 (243) (0.06)
FOURTH (b) 9,284 15 --
-------- -------- --------

TOTAL $ 25,582 $ (1,433) $ (0.37)
======== ======== ========
</TABLE>

(a) Includes pre-tax write-offs of $3,300,000 for capitalized program
development costs and $2,500,000 for acquired research and development (see
notes 1 and 9).

(b) Includes a pre-tax gain of $732,000 recognized on the disposition of
Anderson Soft-Teach, $600,000 of compensation expense related to the
termination of the Company's contract with its former Chief Executive
Officer, and an adjustment to reduce the benefit for income taxes of
$716,000.

(c) The 1996 and the first three quarters of 1997 earnings per share amounts
have been restated to conform with Statement 128.

14) SUBSEQUENT EVENTS

In January of 1998, the Company entered into an exclusive product distribution
agreement with and purchased $1,000,000 of stock of Mentor Networks, Inc.,
located in Nova Scotia. For its investment, the Company acquired 8% of the
outstanding stock of Mentor with an option to acquire an additional 12%.

In February of 1998, the Company signed a letter of intent to acquire Turn-Key
Training Technologies, Inc., located in Grand Rapids, Michigan. The purchase
price for all of the outstanding common stock of Turn-Key is $700,000 in cash.
ITC also agreed to employ the founder and president of Turn-Key, and will enter
into an agreement with him providing for an initial payment of $600,000 cash and
the issuance of 100,000 shares of ITC common stock in consideration of his
employment and certain extended non-competitive covenants. Turn-Key is a
developer and distributor of performance-based training administration software.
The Company expects to complete the acquisition of Turn-Key by the end of March
1998.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

NONE

26
<PAGE> 29

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

(a) Identification of Directors

<TABLE>
<CAPTION>
Name Age Year First Elected Year of Expiration
---- --- ------------------ ------------------
<S> <C> <C> <C>
Daniel R. Bannister 67 1988 1999

John D. Sanders 59 1977 1998
Chairman of the Board

Carl D. Stevens 51 1997 2000

Richard E. Thomas 71 1982 1998

James H. Walton(1) 64 1977 2000
</TABLE>

(b) Identification of Executive Officers

<TABLE>
<CAPTION>
Year First
Name Age Served As Officer
---- --- -----------------
<S> <C> <C>
Anne J. Fletcher, Secretary 35 1995

Christopher E. Mack, Vice President, Treasurer 32 1996
and Chief Financial Officer

William S. Moser, Vice President 53 1998

Harvey L. Shuster, Vice President 52 1998

Carl D. Stevens, President 51 1997
and Chief Executive Officer

Robert F. VanStry, Vice President 47 1983
</TABLE>

- --------------------------------------------------------
1. Mr. Walton resigned his position on the Company's Board of Directors in
February 1998.

27
<PAGE> 30

DANIEL R. BANNISTER, a Director since 1988, is Chairman of the Board of DynCorp,
a leading technology services firm. Previously, he served as President and Chief
Executive Officer of DynCorp, from 1985 until 1997.

ANNE J. FLETCHER is Secretary of ITC. Ms. Fletcher is an attorney with the law
firm of De Martino, Finkelstein, Rosen & Virga. Ms. Fletcher served as in-house
general counsel to ITC from 1994-1996. Prior to joining ITC, she was engaged in
the private practice of law for six years in Fairfax, Virginia. Ms. Fletcher
received her J.D. from George Mason University School of Law and a B.A. from the
State University of New York, College at Oswego.

CHRISTOPHER E. MACK is Vice President, Treasurer and Chief Financial Officer of
ITC. Prior to being named Chief Financial Officer in January 1998, Mr. Mack
served as the Company's Vice President of Finance and Administration and
Treasurer since April 1997. Mr. Mack served as the Company's Chief Operating
Officer from November 1996 to April 1997. Prior to being named COO, Mr. Mack
served as the Company's Controller from December 1993 to November 1996. Prior to
joining ITC in December 1993, Mr. Mack served as Assistant Controller of Bardon,
Inc., an international construction materials firm. Mr. Mack holds a B.S. in
Accounting from Shepherd College and is a C.P.A.

WILLIAM S. MOSER is Vice President of Sales and Marketing of ITC. Mr. Moser
joined ITC in August of 1997, after a 30 year career with IBM. During his career
with IBM, Mr. Moser held numerous sales and marketing management positions
within IBM. In addition, he held several management positions in IBM's Education
and Training Group including Business Alliance Manager for Personal Computer
Skills. He also brings extensive channels marketing experience to ITC. Mr. Moser
holds a B.A. in Marketing from Michigan State University.

JOHN D. SANDERS, a Director since 1977, and Chairman of the Board since 1997,
served as Chairman of TechNews Inc., publishers of Washington Technology
newspaper, from 1987 to 1996, and currently serves as a consultant to Post
Newsweek Business Information, Inc. (formerly TechNews). He is also a registered
representative with Wachtel & Co., Inc., an investment banking firm, a position
held since 1968. Mr. Sanders is a member of the Boards of Directors of: Daedalus
Enterprises, Inc., an electronics specialty manufacturer, and Hadron, Inc., a
technical and engineering services company. He holds a B.E.E. from the
University of Louisville, Kentucky, and an M.S. and Ph.D. in Electrical
Engineering from Carnegie-Mellon University.

HARVEY L. SHUSTER is Vice President of Business Development of ITC. Mr. Shuster
joined ITC in 1993 as part of ITC's acquisition of Comsell Training, Inc. Since
joining ITC, Mr. Shuster has held many management level positions and served in
various capacities from operations to sales. Most recently, Mr. Shuster has been
the Divisional Vice President in charge of the PC Skills product line for the
Company. Prior to ITC's acquisition of Comsell, Mr. Shuster was Chief Operating
Officer of Comsell. Prior to then, Mr. Shuster was in charge of the
MicroComputer Consulting Group for Coopers and Lybrand in the Southeast U.S.
Additionally, Mr. Shuster was a founding member of Peachtree Software, the
microcomputing accounting software package that is now owned by ADP. Mr. Shuster
holds a B.S. in Accounting from Temple University and an M.B.A. in Finance from
Drexel University and is a C.P.A.

CARL D. STEVENS is President and Chief Executive Officer of ITC, having been
named CEO in January 1998. Mr. Stevens joined ITC in February 1997 as Senior
Vice President of Marketing and Strategic Business Development. He was later
appointed President and Chief Operating Officer in June 1997. Prior to joining
ITC, Mr. Stevens was Program Director for Public Sector for IBM responsible for
the sale of personal computers into higher education, K-12, federal, state and
local governments. During his 26 year career with IBM, he held numerous field
and headquarters marketing and management positions. He was Branch Manager for
the Southeastern U.S., managed IBM's New Manager School

28
<PAGE> 31

for experienced managers, held various management positions involving IBM's
Personal Computer Remarketer Channels, and was the Business Alliance Executive
for IBM's Education and Training Division. Mr. Stevens received his education
from Indiana University, where he majored in Marketing and Business Education.

RICHARD E. THOMAS, a Director since 1982, is semi-retired having served as
President of COMSAT RSI from 1994-1996. Prior to that, he was Chairman of the
Board, President and Chief Executive Officer of Radiation Systems, Inc. (RSI), a
communications systems manufacturer, from 1978 until 1994, at which time RSI was
merged into COMSAT Corporation. Mr. Thomas was originally employed by RSI as
Vice President, Operations in 1966.

ROBERT F. VANSTRY is Vice President of ITC and manages the Company's Process and
Manufacturing market sector sales effort and sales support function. During
1997, Mr. VanStry managed the Domestic Sales Force. Mr. VanStry was previously
in charge of ITC's product and technology development. Mr. VanStry joined the
Company in May 1978 as Senior Training Associate and subsequently fulfilled the
responsibilities of Manager of Engineering Projects, Manager of Project
Development, and Vice President of Training Services.

JAMES H. WALTON served as a Director of ITC from 1977 until February 1998. Until
January 1998, Mr. Walton served as Chief Executive Officer and was Chairman of
the Board of Directors prior to April 1997. Prior to the founding of ITC in
1977, he was responsible for audiovisual production at NUS Corporation, an
engineering and consulting firm (1973-1977). Mr. Walton holds a B.S. and M.A.
from the University of Nebraska.

ITEM 10. EXECUTIVE COMPENSATION

The information contained on pages 6, 7 and 8 of ITC's Proxy Statement dated
March 11, 1998, with respect to executive compensation and transactions, is
incorporated herein by reference in response to this item.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The information contained on pages 2 and 3 of ITC's Proxy Statement dated March
11, 1998, with respect to security ownership of certain beneficial owners and
management, is incorporated herein by reference in response to this item.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information contained on page 10 of ITC's Proxy Statement dated March 11,
1998, with respect to certain relationships and related transactions, is
incorporated herein by reference in response to this item.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following are filed as part of this Form 10-KSB:

1. Financial Statements: See Part II, Item 7.
2. Exhibits: See exhibit index, which index is incorporated herein by
reference.

29
<PAGE> 32

(b) Reports on Form 8-K:

On January 13, 1997, the Company filed an 8-K to report the acquisition of
Anderson Soft-Teach (AST) on December 31, 1996.

On February 10, 1997, the Company filed an 8-K to report the resignation of Mr.
Thomas Balderston from his position as a Director of the Company.

On March 13, 1997, the Company filed an amendment to the 8-K filed on January 13
to provide the audited financial statements of Anderson Soft-Teach as of the
date of acquisition and the pro forma financial information required under item
7.

On December 8, 1997, the Company filed an 8-K to report the sale of its
wholly-owned subsidiary, Anderson Soft-Teach, on November 20, 1997.

On January 14, 1998, the Company filed an 8-K to report the appointment of Carl
D. Stevens as Chief Executive Officer in addition to his duties as President of
ITC, replacing J. H. ("Bill") Walton.

30
<PAGE> 33

SIGNATURES

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

ITC LEARNING CORPORATION
(Registrant)

<TABLE>
<S> <C>
BY /s/Carl D. Stevens DATE March 11, 1998
---------------------------------------------- ------------------------------------
Carl D. Stevens, President and
Chief Executive Officer
</TABLE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

<TABLE>
<S> <C>
BY /s/Christopher E. Mack DATE March 11, 1998
---------------------------------------------- ------------------------------------
Christopher E. Mack, Vice President,
Treasurer, and Chief Financial Officer

BY /s/John D. Dobey DATE March 11, 1998
---------------------------------------------- ------------------------------------
John D. Dobey, Corporate Controller

BY /s/Daniel R. Bannister DATE March 11, 1998
---------------------------------------------- ------------------------------------
Daniel R. Bannister, Director

BY /s/John D. Sanders DATE March 11, 1998
---------------------------------------------- ------------------------------------
John D. Sanders, Chairman of the
Board of Directors

BY /s/Richard E. Thomas DATE March 11, 1998
---------------------------------------------- ------------------------------------
Richard E. Thomas, Director
</TABLE>

<PAGE> 34

<TABLE>
<S> <C>
CORPORATE HEADQUARTERS STOCK REGISTRAR AND TRANSFER AGENT

ITC Learning Corporation American Securities Transfer & Trust, Inc.
13515 Dulles Technology Drive 938 Quail Street
Herndon, VA 20171-3413 Suite 101
(800) 638-3757 Lakewood, CO 80215
(703) 713-3335
FAX: (703) 713-0065 STOCK LISTING
Web-site: http://www.itclearning.com
National Market System
NORTH AMERICAN SALES LOCATIONS NASDAQ/NMS Trading Symbol: ITCC

Atlanta, GA MARKET-MAKERS
(770) 984-9881
Koonce Securities, Inc.
Charlotte, NC Ferris, Baker Watts, Incorporated
(704) 364-1223 Moors & Cabot

Fort Myers, FL ANNUAL MEETING
(941) 274-0005
The Annual Meeting of shareholders will be held on
Houston, TX May 7, 1998 at 3:00 pm at the Corporate Offices
(713) 852-0601 located at 13515 Dulles Technology Drive, Herndon,
Virginia 20171.
New York, NY
(718) 465-5121 SHAREHOLDER INQUIRIES

Plymouth, WI Communications concerning transfer requirements,
(414) 893-3900 lost certificates, and changes in address should be
directed to the Stock Registrar and Transfer Agent.
Rochester, NY Other inquiries may be directed to Christopher E.
(716) 223-5009 Mack, CFO.

San Francisco, CA PRINCIPAL BANK
(707) 935-7971
Wachovia Bank
Toronto, Ontario Charlotte, NC
(905) 886-1584
GENERAL COUNSELS
INTERNATIONAL SALES LOCATIONS
Ginsburg, Feldman and Bress, Chartered
London, England Washington, D.C.
44 1234 34-0880
Kirkpatrick & Lockhart LLP
Melbourne, Australia Washington, D.C.
613-9593-9955
INDEPENDENT AUDITORS
Sydney, Australia
612-9438-2500 Ernst & Young LLP
Washington, D.C.
</TABLE>

<PAGE> 35

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------
<S> <C>
3.1 Amended Articles of Incorporation of the Company, incorporated by
reference to the Company's Form 10-QSB for the quarter ended June
30, 1996 filed with the Securities and Exchange Commission ("SEC")
(Commission File No. 33-61393).

3.2 Amended By-Laws of the Company.

4.1 Specimen Certificate for ITC Common Stock, incorporated by
reference to the Company's 10-QSB for the quarter ended June 30,
1997, filed August 6, 1997 with the SEC (Commission File No.
01-13741).

4.2 Registration Rights and Shareholders' Agreement, incorporated by
reference to the Company's Form 8-K filed January 13, 1997 with
the SEC (Commission File No. 0-13741).

10.1 Agreement and Plan of Reorganization By and Among ITC Learning
Corporation, ITC Acquisition Corporation and Anderson Soft-Teach,
incorporated by reference to the Company's Form 8-K filed January
13, 1997 with the SEC (Commission File No. 0-13741).

10.2 Stock Purchase Agreement dated November 20, 1997 by and between
ITC Learning Corporation and Anderson Holdings, Inc., incorporated
by reference to the Company's 8-K filed December 8, 1997 with the
SEC (Commission File No. 0-13741).

10.3 1992 Director Incentive Stock Option Plan, as amended,
incorporated by reference to the Company's 10-KSB for the year
ended December 31, 1996 filed March 14, 1997 with the SEC
(Commission File No. 0-13741).

10.4 1992 Key Employee Incentive Stock Option Plan, as amended,
incorporated by reference to the Company's 10-KSB for the year
ended December 31, 1996 filed March 14, 1997 with the SEC
(Commission File No. 0-13741).

10.5 Employee Stock Ownership Plan, incorporated by reference to the
Company's Form 10-KSB filed March 19, 1992 with the SEC
(Commission File No. 0-13741).

10.6 Employment Agreements with Management

(d) Robert F. VanStry, incorporated by reference to
Pre-Effective Amendment No. 1 to the Registration Statement
on Form SB-2 filed August 16, 1995 with the SEC (Commission
File No. 33-61393).

(g) Christopher E. Mack, incorporated by reference to the
Company's 10-KSB for the year ended December 31, 1996 filed
March 14, 1997 with the SEC (Commission File No. 0-13741).

(i) Carl D. Stevens, incorporated by reference to the Company's
10-QSB for the quarter ended March 31, 1997 filed April 25,
1997 with the SEC (Commission File No. 0-13741).
</TABLE>

<PAGE> 36

<TABLE>
<S> <C>
10.7 Lease dated October 21, 1993 for commercial office space in
Herndon, VA, as amended, incorporated by reference to the
Company's Form 10-KSB for the fiscal year ended December 31, 1995
filed March 15, 1996 with the SEC (Commission File No. 0-13741).

10.8 Lease dated November 30, 1995 for commercial office space in
Atlanta, GA, incorporated by reference to the Company's Form
10-KSB for the fiscal year ended December 31, 1995 filed March 15,
1996 with the SEC (Commission File No. 0-13741).

10.9 Consulting agreement dated August 18, 1997 between ITC Learning
Corporation and Philip J. Facchina.

10.11 IBM Subcontractor Agreement dated January 13, 1997, incorporated
by reference to the Company's 10-QSB for the quarter ended March
31, 1997 filed April 25, 1997 with the SEC (Commission File No.
0-13741).

21.1 Subsidiaries of the Registrant.

23.1 Consent of Ernst and Young LLP, independent auditors.

27.1 Financial Data Schedule
</TABLE>

<PAGE> 1
EXHIBIT 3.2

RESTATED BY-LAWS OF
INDUSTRIAL TRAINING CORPORATION

(effective as of, and with amendments through, January 29, 1998)

ARTICLE I - OFFICES

The principal office of the corporation shall be located in the Commonwealth of
Virginia. The Corporation may have such offices either within or without the
state of incorporation, as the Board of Directors may designate or as the
business of the corporation may from time to time require.

ARTICLE II - STOCKHOLDERS

1. ANNUAL MEETING.

The annual meeting of the stockholders shall be held on or before the 15th day
of June in each year, beginning with the year 1978 at 10:00 a.m., for the
purpose of electing directors and for the transaction of such other business as
may come before the meeting. If the day fixed for the annual meeting shall be a
legal holiday such meeting shall be held on the next succeeding business day.

2. SPECIAL MEETINGS.

Special meetings of the stockholders, for any purpose or purposes, unless
otherwise prescribed by statute, may be called only as provided in the Articles
of Incorporation.

3. PLACE OF MEETING.

The directors may designate any place, either within or without the State unless
otherwise prescribed by statute, as the place of meeting for any annual meeting
or for any special meeting called by the Directors. If no designation is made,
or if a special meeting be otherwise called, the place of meeting shall be the
principal office of the corporation.

4. NOTICE OF MEETING.

Written or printed notice stating the place, day and hour of the meeting and, in
case of a special meeting, the purpose or purposes for which the meeting is
called, shall be delivered not less than ten (10) nor more than ninety (90) days
before the date of the meeting, either personally or by mail, by or at the
direction of the chairman and chief executive officer, or the secretary, or the
officer or persons calling the meeting, to each stockholder of record entitled
to vote at such meeting. If mailed, such notice shall be deemed to be delivered
when deposited in the United States mail, addressed to the stockholder at his
address as it appears on the stock transfer books of the corporation, with
postage thereon prepaid.

<PAGE> 2

5. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE.

For the purpose of determining stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, or stockholders entitled
to receive payment of any dividend, or in order to make a determination of
stockholders for any other proper purpose, the directors of the corporation may
provide that the stock transfer books shall be closed for a stated period but
not to exceed, in any case, ninety (90) days. If the stock transfer books shall
be closed for the purpose of determining stockholders entitled to notice of or
to vote at a meeting of stockholders such books shall be closed for at least ten
(10) days immediately preceding such meeting. In lieu of closing the stock
transfer books, the directors may fix in advance a date as the record date for
any such determination of stockholders, such date in any case to be not more
than ninety (90) days and, in case of a meeting of stockholders, not less than
ten (10) days prior to the date on which the particular action requiring such
determination of stockholders is to be taken. If the stock transfer books are
not closed and no record date is fixed for the determination of stockholders
entitled to notice of or to vote at a meeting of stockholders, or stockholders
entitled to receive payment of a dividend, the date on which notice of the
meeting is mailed or the date on which the resolution of the directors declaring
such dividend is adopted, as the case may be shall be the record date for such
determination of stockholders. When a determination of stockholders entitled to
vote at any meeting of stockholders has been made as provided in this section,
such determination shall apply to any adjournment thereof.

6. VOTING LISTS.

The officer or agent having charge of the stock transfer books for shares of the
corporation shall make, at least ten (10) days before each meeting of the
stockholders, a complete list of the stockholders entitled to vote at such
meeting, or any adjournment thereof, arranged in alphabetical order with the
address of and the number of shares held by each, which list, for a period of
ten (10) days prior to such meeting, shall be kept on file at the principal
office of the corporation and shall be subject to the inspection of any
stockholder at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting and shall be subject
to the inspection of any stockholder during the whole time of the meeting. The
original stock transfer book shall be prima facie evidence as to who are the
stockholders entitled to examine such list or transfer books or to vote at the
meeting of stockholders.

7. QUORUM.

At any meeting of stockholders a majority of the outstanding shares of the
corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than said number of
the outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.

2
<PAGE> 3

8. PROXIES.

At all meetings of stockholders a stockholder may vote by proxy executed in
writing by the stockholder or by his duly authorized attorney in fact. Such
proxy shall be filed with the secretary of the corporation before or at the time
of the meeting.

9. VOTING.

Each stockholder entitled to vote in accordance with the terms and provisions of
the certificate of incorporation and these by-laws shall be entitled to one
vote, in person or by proxy, for each share of stock entitled to vote held by
such stockholders. Upon the demand of any stockholder, the vote for directors
and upon any question before the meeting shall be by ballot. All elections for
directors shall be decided by plurality vote: all other questions shall be
decided by majority vote except as otherwise provided by the Certificate of
Incorporation or the laws of this state.

10. ORDER OF BUSINESS.

The order of business at all meetings of the stockholders, shall be as follows:

1. Roll Call.
2. Proof of notice of meeting or waiver of notice.
3. Reading of minutes of preceding meeting.
4. Election of Directors.
5. Reports of Officers.
6. Unfinished Business.
7. New Business.

ARTICLE III - BOARD OF DIRECTORS

1. GENERAL POWERS.

The business and affairs of the corporation shall be managed by its board of
directors. The directors shall in all cases act as a board, and they may adopt
such rules and regulations for the conduct of their meetings and the management
of the corporation, as they may deem proper, not inconsistent with these by-laws
and the laws of this state.

2. NUMBER, TENURE AND QUALIFICATIONS.

The number of directors of the corporation and the terms of office of the
directors shall be as provided in the Articles of Incorporation.

3
<PAGE> 4

3. REGULAR MEETINGS.

A regular meeting of the directors, shall be held without other notice than this
by-law immediately after, and at the same place as, the annual meeting of
stockholders. The directors may provide, by resolution, the time and place for
the holding of additional regular meetings without other notice than such
resolution.

4. SPECIAL MEETINGS.

Special meetings of the directors may be called by or at the request of the
chairman and chief executive officer or any two directors. The person or persons
authorized to call special meetings of the directors may fix the place for
holding any special meeting of the directors called by them.

5. NOTICE.

Notice of any special meeting shall be given at least 5 days previously thereto
by written notice delivered personally, or by telegram or mailed to each
director at his business address. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail so addressed, with postage
thereon prepaid. If notice be given by telegram, such notice shall be deemed to
be delivered when the telegram is delivered to the telegraph company. The
attendance of a director at a meeting shall constitute a waiver of notice of
such meeting, except where a director attends a meeting for the express purpose
of objecting to the transaction of any business because the meeting is not
lawfully called or convened.

6. QUORUM.

At any meeting of the directors a majority shall constitute a quorum for the
transaction of business, but if less then said number is present at a meeting, a
majority of the directors present may adjourn the meeting from time to time
without further notice.

7. MANNER OF ACTING.

Except as otherwise provided in the Articles of Incorporation or these bylaws,
the act of the majority of the directors present at a meeting at which a quorum
is present shall be the act of the directors.

8. INFORMAL ACTION BY DIRECTORS.

Unless otherwise provided by law, any action required to be taken at a meeting
of the directors, or any other action which may be taken at a meeting of the
directors, may be taken without a meeting if a consent in writing, setting forth
the action so taken, shall be signed by all of the directors entitled to vote
with respect to the subject matter thereof.

4
<PAGE> 5

9. NEWLY CREATED DIRECTORSHIPS AND VACANCIES.

Newly created directorships resulting from an increase in the number of
directors and vacancies occurring in the Board for any reason shall be filled
only as provided in the Articles of Incorporation.

10. REMOVAL OF DIRECTORS.

Any or all of the directors may be removed only as provided in the Articles of
Incorporation.

11. RESIGNATION.

A director may resign at any time by giving written notice to the board, the
chairman and chief executive officer or the secretary of the corporation. Unless
otherwise specified in the notice, the resignation shall take effect upon
receipt thereof by the board or such officer, and the acceptance of the
resignation shall not be necessary to make it effective.

12. COMPENSATION.

Directors shall not receive any stated salary for their service but, by
resolution of the Board, outside directors may be allowed a quarterly retainer
fee and/or a fixed sum for attendance at each regular or special meeting of the
Board; provided that nothing containing herein shall be construed to preclude
any director from serving the corporation in any other capacity and receiving
compensation therefore.

13. PRESUMPTION OF ASSENT.

A director of the corporation who is present at a meeting of the directors at
which action on any corporate matter is taken shall be presumed to have assented
to the action taken unless his dissent shall be entered in the minutes of the
meeting or unless he shall file his written dissent to such action with the
person acting as the secretary of the meeting before the adjournment thereof or
shall forward such dissent by registered mail to the secretary of the
corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.

14. EXECUTIVE AND OTHER COMMITTEES.

The board, by resolution, may designate from among its members an executive
committee and other committees, each consisting of three or more directors. Each
such committee shall serve at the pleasure of the board.

15. INTERESTED DIRECTORS.

Actions of the Board shall not be invalidated or otherwise affected by the fact
that one or more of its members have a personal interest, beyond their role as
directors of this corporation, in the particular action being voted upon,
provided said interested directors disclose to the board their

5
<PAGE> 6

interests in the transaction. Interested directors shall be counted in
determining whether a quorum exists at directors' meetings, may vote with the
same effect as disinterested directors (subject to their having made the
disclosures provided for herein), and shall be relieved from any liability that
might otherwise arise by reason of their contracting with this corporation for
the benefit of themselves or any firm or other corporation in which they are
interested.

16. INDEMNIFICATION.

In the absence of fraud or bad faith, the corporation shall indemnify its
officers and directors, and every former officer and director, to the full
extent authorized or permitted by the laws of the state of incorporation,
against all liability and expenses (including, but not limited to, attorneys'
fees, amounts of any judgment, fine, and amounts paid in settlement) actually
and reasonably incurred by him in connection with or resulting from any action,
suit or proceeding in which such person may become involved as a party or
otherwise by reason of having been an officer or director of the corporation.

17. LIABILITY FOR DIVIDENDS ILLEGALLY DECLARED.

A director shall not be liable for dividends illegally declared, distributions
illegally made to shareholders, or any other action taken in reliance in good
faith upon financial statements of the corporation represented to him to be
correct by the president of the corporation or the officer having charge of its
books of account, or certified by an independent public or certified accountant
to fairly reflect the financial condition of the corporation; nor shall he be
liable if in good faith in determining the amount available for dividends or
distributions he considers the assets to be of their book value.

ARTICLE IV - OFFICERS

1. NUMBER.

The officers of the corporation shall be a president, one or more vice
presidents, a secretary and a treasurer, each of whom shall be elected by the
directors. Such other officers and assistant officers as may be deemed necessary
may be elected or appointed by the directors.

2. ELECTION AND TERM OF OFFICE.

The officers of the corporation to be elected by the directors shall be elected
annually at the first meeting of the directors held after each annual meeting of
the stockholders. Each officer shall hold office until his successor shall have
been duly elected and shall have qualified or until his death or until he shall
resign or shall have been removed in the manner hereinafter provided.

3. REMOVAL.

Any officer or agent elected or appointed by the directors may be removed by the
directors whenever in their judgment the best interests of the corporation would
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed.

6
<PAGE> 7

4. VACANCIES.

A vacancy in any office because of death, resignation, removal, disqualification
or otherwise, may be filled by the directors for the unexpired portion of the
term.

5. PRESIDENT.

The president shall be the chief executive officer of the corporation and,
subject to the control of the directors, shall in general supervise and control
all of the business and affairs of the corporation, and operations of the
corporation and its divisions. In the absence of the chairman of the Board of
Directors, or if there is no such officer, he shall, when present, preside at
all meetings of the stockholders and of the directors. He may sign, with the
secretary or any other proper officer of the corporation thereunto authorized by
the directors, certificates for shares of the corporation, any deeds, mortgages,
bonds, contracts or other instruments which the directors have authorized to be
executed, except in cases where the signing and execution thereof shall be
expressly delegated by the directors or by these by-laws to some other officer
or agent of the corporation, or shall be required by law to be otherwise signed
or executed; and in general shall perform all duties incident to the office of
president and such other duties as may be prescribed by the directors from time
to time.

6. VICE PRESIDENTS.

In the absence of the president or in the event of his death, inability or
refusal to act, one of the vice presidents designated by the board of directors
shall perform the duties of the president, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the president. The
vice president shall perform such other duties as from time to time may be
assigned to him by the president or by the directors.

7. SECRETARY.

The secretary shall keep the minutes of the stockholders' and of the directors'
meetings in one or more books provided for that purpose, see that all notices
are duly given in accordance with the provisions of these bylaws or as required,
be custodian of the corporate records and of the seal of the corporation and
keep a register of the post office address of each stockholder which shall be
furnished to the secretary by such stockholder, have general charge of the stock
transfer books of the corporation and in general perform all duties incident to
the office of secretary and such other duties as from time to time may be
assigned to him by the president or by the directors.

7
<PAGE> 8

8. TREASURER.

If required by the directors, the treasurer shall give a bond for the faithful
discharge of his duties in such sum and with such surety or sureties as the
directors shall determine. He shall have charge and custody of and be
responsible for all funds and securities of the corporation receive and give
receipts for moneys due and payable to the corporation from any source
whatsoever, and deposit all such moneys in the name of the corporation in such
banks, trust companies or other depositories as shall be selected in accordance
with these bylaws and in general perform all of the duties as from time to time
may be assigned to him by the president or by the directors.

9. SALARIES.

The salaries of the officers shall be fixed from time to time by the directors
and no officer shall be prevented from receiving such salary by reason of the
fact that he is also a director of the corporation.

ARTICLE V - CONTRACTS, LOANS, CHECKS AND DEPOSITS

1. CONTRACTS.

Except as provided in the Articles of Incorporation, the directors may authorize
any officer or officers, agent or agents, to enter into any contract or execute
and deliver any instrument in the name of and on behalf of the corporation, and
such authority may be general or confined to specific instances.

2. LOANS.

No loans shall be contracted on behalf of the corporation and no evidences of
indebtedness shall be issued in its name unless authorized by a resolution of
the directors. Such authority may be general or confined to specific instances.

3. CHECKS, DRAFTS, ETC.

All checks, drafts or other orders for the payment of money, notes or other
evidences of indebtedness issued in the name of the corporation, shall be signed
by such officer or officers, agent or agents of the corporation and in such
manner as shall from time to time be determined by resolution of the directors.

4. DEPOSITS.

All funds of the corporation not otherwise employed shall be deposited from time
to time to the credit of the corporation in such banks, trust companies or other
depositories as the directors may select.

8
<PAGE> 9

ARTICLE VI - CERTIFICATES FOR SHARES AND THEIR TRANSFER

1. CERTIFICATES FOR SHARES.

Certificates representing shares of the corporation shall be in such form as
shall be determined by the directors. Such certificates shall be signed by the
president and by the secretary or by such other officers authorized by law and
by the directors. All certificates for shares shall be consecutively numbered or
otherwise identified. The name and address of the stockholders, the number of
shares and date of issue, shall be entered on the stock transfer books of the
corporation. All certificates surrendered to the corporation for transfer shall
be canceled and no new certificate shall be issued until the former certificate
for a like number of shares shall have been surrendered and canceled; except
that in case of a lost, destroyed or mutilated certificate a new one may be
issued therefor upon such terms and indemnity to the corporation as the
directors may prescribe.

2. TRANSFERS OF SHARES.

a. Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it
shall be the duty of the corporation to issue a new certificate to the
person entitled thereto, and cancel the old certificate; every such
transfer shall be entered on the transfer book of the corporation which
shall be kept at its principal office.

b. The corporation shall be entitled to treat the holder of record of any
share as the holder in fact thereof, and, accordingly, shall not be
bound to recognize any equitable or other claim to or interest in such
share on the part of any other person whether or not it shall have
express or other notice thereof, except as expressly provided by the
laws of this state.

ARTICLE VII - FISCAL YEAR

The fiscal year of the corporation shall begin on such date as may be determined
by resolution of the Board of Directors.

ARTICLE VIII - DIVIDENDS

The directors may from time to time declare, and the corporation may pay,
dividends on its outstanding shares in the manner and upon the terms and
conditions provided by law.

ARTICLE IX - SEAL

The directors shall provide a corporate seal which shall be circular in form and
shall have inscribed thereon the name of the corporation, the state of
incorporation, year of incorporation and the words, "Corporate Seal".

9
<PAGE> 10

ARTICLE X - WAIVER OF NOTICE

Unless otherwise provided by law, whenever any notice is required to be given to
any director of the corporation under the provisions of these by-laws or under
the provisions of the Articles of Incorporation, a waiver thereof in writing,
signed by the person or persons entitled to such notice, whether before or after
the time stated therein, shall be deemed equivalent to the giving of such
notice.

ARTICLE XI - AMENDMENTS

These by-laws may be altered, amended or repealed and new by-laws adopted only
by a vote of the directors representing a majority of the entire Board of
Directors.

<PAGE> 1
EXHIBIT 10.9

[ITC LOGO]

CONSULTANT AGREEMENT

THIS AGREEMENT, made as of this 18th day of August, 1997 (the "Effective Date"),
by and between ITC LEARNING CORPORATION, a corporation duly organized and
existing under the laws of the State of Maryland, with principal offices in
Herndon, Virginia (hereinafter referred to as "ITC"), and Philip J. Facchina,
acting personally, of 8128 Boss Street Vienna, VA 22182 (hereinafter referred to
as the "CONSULTANT").

ARTICLE 1
INDEPENDENT CONTRACTOR

The CONSULTANT shall be deemed at all times to be an independent contractor and
the CONSULTANT is not for any purposes an employee or CONSULTANT of ITC and the
CONSULTANT agrees not to make any representation to the contrary. The CONSULTANT
understands and agrees that as an independent contractor he/she does not have
any authority to sign contracts, notes, obligations, to make any purchases or to
acquire or dispose of any property on behalf of ITC. ITC does however, agree to
indemnify, defend and hold harmless CONSULTANT for any claims, or actions which
may result the transactions or transactions contemplated hereby regardless
whether or not CONSULTANT is deemed liable for such claims or actions

ARTICLE 2
CHARACTER AND EXTENT OF SERVICES

The CONSULTANT shall act as an advisor to ITC for the potential sale of the
assets, capital stock, intellectual property or other assets of Anderson
SoftTeach ("Anderson"), a subsidiary of ITC. Sale of any of the foregoing could
be accomplished through the exchange of cash or securities, assumption of debt
or other liabilities, or other mutually agreed upon compensation. In such
capacity, CONSULTANT shall use his best efforts and work with ITC, its officers
and employees, in order to bring forward a term sheet from a potential purchaser
for Anderson, which leads to the successful consummation of the proposed
transaction outlined therein ("Transaction"). In accordance with the
requirements of this engagement, the CONSULTANT shall perform the following
tasks:

- Communicate and coordinate with potential purchasers of Anderson
regarding the timing of due diligence and due diligence procedures;

- Negotiate in good faith with potential purchasers toward a purchase
price acceptable to ITC, which may be accepted or rejected by ITC, in
ITC's sole discretion;

- Assist ITC in structuring and negotiating the terms of the
Transaction.

ITC acknowledges that groups headed by E. Tomaszewicz and S. Roden are potential
purchasers of Anderson, and would be covered by this Agreement.

CONSULTANT will be under the direction of J.H. (Bill) Walton, the Chief
Executive Officer of ITC, or another ITC manager or officer when specifically
designated by Bill Walton.

ARTICLE 3
PERIOD OF PERFORMANCE

The term of this AGREEMENT shall be that period commencing with the Effective
Date through close of business December 31, 1997.

<PAGE> 2
CONSULTANT Agreement with Philip J. Facchina Page 2

ARTICLE 4
TERMINATION

This AGREEMENT may be terminated by either party without cause, upon 7 days
written notice to the other party, or at any time by ITC for non-performance.
Non-performance, which will be determined solely by ITC, includes failure on the
part of CONSULTANT to diligently perform hereunder and/or failure to provide
work acceptable to ITC, or, if requested by ITC, failure to show evidence of
satisfactory progress in terms of producing acceptable work and/or maintaining
schedule.

ARTICLE 5
COMPENSATION

As payment in full for satisfactory completion and acceptance of the services
performed and provided to ITC, ITC will pay CONSULTANT a fee based on the
following schedule:

- - For sales which the aggregate purchase price is less than $5 million, a fee
equal to $25,000 plus one percent (1%) of the aggregate purchase price.

- - For sales which the aggregate purchase price is more than $5 million, a fee
equal to $100,000 plus one percent (1%) of the aggregate purchase price.

As used above, the aggregate purchase price of any transaction will include the
following: the fair market value of all cash, securities or other assets
exchanged or given to ITC in consideration of the purchase, as well as the book
value of all liabilities or debt assumed by purchasers in the transaction. Any
debt financing provided to purchaser by ITC will be included in the
determination of aggregate purchase price.

CONSULTANT's fee will be considered earned upon consummation of the transaction,
and all funds payable to CONSULTANT will be made at closing. CONSULTANT's fee
will be placed in escrow by ITC's attorney at closing and will be remitted
directly to CONSULTANT by the closing attorney.

ARTICLE 6
ACCEPTANCE AND PAYMENT

Acceptance will not occur until the ITC representative has had appropriate time
to review and approve the services performed and/or deliverables provided to
ITC. If ITC considers CONSULTANT'S services to have been satisfactorily
completed, the ITC representative will mark the CONSULTANT'S invoice "accepted
for payment" and sign and date the invoice. Invoices or attachments must specify
and detail the amount of time and service performed on each task.

ALL INVOICES SHOULD BE SUBMITTED TO ITC, ACCOUNTS PAYABLE, 13515 DULLES
TECHNOLOGY DRIVE, HERNDON, VIRGINIA, 20171-3413.

ARTICLE 7
ASSIGNMENT AND SUBCONTRACTING

CONSULTANT'S obligations authorized under this AGREEMENT are not assignable or
transferable and CONSULTANT agrees not to subcontract any of the work authorized
hereunder without prior written approval of ITC.

ARTICLE 10
LIABILITY

ITC specifically agrees by acceptance of this AGREEMENT to save harmless and
indemnify CONSULTANT against all loss, liability, damage, and expense caused by
any conduct or representations made by it to CONSULTANT or third parties related
to the services contemplated by this AGREEMENT. Inasmuch as ITC is the seller of
Anderson and that all assets, liabilities, contracts, agreements,
understandings, partnerships, joint ventures,

<PAGE> 3
CONSULTANT Agreement with Philip J. Facchina Page 3

business agreements and claims, and in general, the corporate, legal, financial,
and accounting affairs of Anderson are under the care, custody and control of
ITC, it is understood that the intent of this provision is to absolve and
protect CONSULTANT from any and all loss, liability, damage, and expense caused
by, or connected with the sale of Anderson by ITC to any party and, the work of
CONSULTANT hereunder or the engagement of CONSULTANT pursuant to this AGREEMENT.
Notwithstanding the foregoing, ITC will not have any obligation to CONSULTANT
for any claim or losses arising from the bad faith, willful misconduct or
negligence of the CONSULTANT. CONSULTANT agrees to indemnify ITC for any claims
or losses arising out of CONSULTANT'S bad faith, willful misconduct or
negligence in the performance of his duties hereunder.

ARTICLE 11
OWNERSHIP OF WORK PRODUCT

All technical data, evaluations, reports and other work product of CONSULTANT
hereunder shall become the property of ITC and shall be delivered to ITC upon
completion of services authorized hereunder. The CONSULTANT hereby releases any
and all claim, right or interest including any claim, right or interest arising
out of or recognized under Title 17 of the United States Code relating to
copyrights, which the undersigned has or may have, now or in the future, in and
to any videotape, book, article, pamphlet, chart, film, filmstrip, handbook,
manual, or other materials produced or hereafter to be produced by ITC (all of
which are hereinafter called the "Work"), including any claim, right or interest
in and to any reproductions and derivative works of the Work. The CONSULTANT
agrees that all such rights, including the right to reproduce, prepare
derivative works of, distribute copies of (by sale or otherwise), perform,
display or otherwise use the Work, have been and shall continue to be the sole
and exclusive property of ITC Learning Corporation.

ARTICLE 12
LEGAL REQUIREMENTS

CONSULTANT shall secure all licenses or permits required by law and shall comply
with all ordinances, laws, rules, and regulations pertaining to its services
hereunder.

ARTICLE 13
GUARANTEES AND WARRANTY

CONSULTANT warrants and guarantees that the work performed hereunder will be in
accordance with generally accepted professional standards.

ARTICLE 14
PROPRIETARY INFORMATION

CONSULTANT shall not, either during or after the term of this AGREEMENT,
disclose to any third party any confidential information relative to the work of
the business of ITC and/or any affiliated corporations, without written consent
of ITC, or as disclosed to a potential purchaser pursuant to a duly executed
non-disclosure or confidentiality agreement between ITC and the potential
purchaser. ITC's representatives shall at all times have access to the work for
purposes of inspecting same and determining that the work is being performed in
accordance with the terms of the AGREEMENT.

ARTICLE 15
WAIVER

The failure of ITC to insist on strict performance of any of the terms and
conditions hereof shall not constitute a waiver of any other provisions or any
default to the CONSULTANT. The terms and conditions of this AGREEMENT shall
survive the period herein stated. The failure of CONSULTANT to insist on strict
performance of any of the terms and conditions hereof shall not constitute a
waiver of any other provisions or any default to ITC. The terms and conditions
of this Article 15 shall survive the period herein stated.

<PAGE> 4
CONSULTANT Agreement with Philip J. Facchina Page 4

ARTICLE 16
ENTIRE AGREEMENT AND AMENDMENTS

This instrument constitutes the entire AGREEMENT between the PARTIES covering
the subject matter. No modifications or amendments shall be valid unless in
writing and signed by the PARTIES.

IN WITNESS WHEREOF, THE PARTIES hereto have caused this AGREEMENT to be duly
executed in their respective names.

For ITC LEARNING CORPORATION For

AGREEMENT Executed By: AGREEMENT Executed By:

/s/ J.H. (Bill) Walton /s/ Philip J. Facchina
- -------------------------------------- ---------------------------
J.H. (Bill) Walton SSN: ###-##-####

Reviewed by /s/ Christopher E. Mack
-----------------------
Christopher E. Mack
Vice President, Finance & Administration

<PAGE> 1
EXHIBIT 21.1

EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT

Activ Training, Ltd.
Organized under the laws of the United Kingdom
Bedford, England

ITC Australasia Pty., Ltd.
Organized under the laws of Australia
Crows Nest, New South Wales, Australia

ComSkill Learning Centers, Inc.
Organized under the laws of the state of Georgia
Herndon, Virginia

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-45036) pertaining to the 1982 Incentive Stock Option Plan, the
Registration Statement (Form S-8 No 333-18941) pertaining to the 1992 Director
Incentive Stock Option Plan and the Registration Statement (Form S-8 No.
333-18939) pertaining to the 1992 Key Employee Stock Option Plan of ITC
Learning Corporation of our report dated February 23, 1998, with respect to the
consolidated financial statements of ITC Learning Corporation included in the
Annual Report (Form 10-KSB) for the year ended December 31, 1997.

/s/ Ernst & Young LLP

Washington, D.C.
March 11, 1998

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S 10-KSB AS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,885,672
<SECURITIES> 0
<RECEIVABLES> 6,422,320
<ALLOWANCES> (254,728)
<INVENTORY> 357,374
<CURRENT-ASSETS> 11,753,890
<PP&E> 1,483,307
<DEPRECIATION> (802,989)
<TOTAL-ASSETS> 19,784,755
<CURRENT-LIABILITIES> 4,409,506
<BONDS> 0
0
0
<COMMON> 389,708
<OTHER-SE> 14,525,245
<TOTAL-LIABILITY-AND-EQUITY> 19,784,755
<SALES> 25,582,153
<TOTAL-REVENUES> 25,582,153
<CGS> 16,202,060
<TOTAL-COSTS> 27,952,370
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 200,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,433,328)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,433,328)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,433,328)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)

</TABLE>