ITC LEARNING CORP, 10QSB, 1999-08-13

ITC LEARNING CORP
10QSB, 1999-08-13
EDUCATIONAL SERVICES

Previous: ROYAL PALM BEACH COLONY LTD PARTNERSHIP, 10-Q, 1999-08-13

Next: FIRST NATIONAL LINCOLN CORP /ME/, 10-Q, 1999-08-13

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

FORM 10-QSB

(MARK ONE)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF EXCHANGE ACT
For the transition period from ________ to _________

COMMISSION FILE NUMBER 0-13741

ITC LEARNING CORPORATION
------------------------
(Name of small business issuer as specified in its charter)

MARYLAND 52-1078263
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

13515 DULLES TECHNOLOGY DRIVE
HERNDON, VIRGINIA 20171
-----------------------
(Address of principal executive offices)

(703) 713-3335
--------------
(Issuer's telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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. [X] Yes [ ] No

As of June 30, 1999, 3,958,245 shares of Common Stock were outstanding.

Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No

<PAGE> 2

ITC LEARNING CORPORATION

FORM 10-QSB

INDEX

<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
----

<S> <C> <C>
Item 1. Financial Statements (Unaudited)

Condensed Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 1999 and 1998............................................................1

Condensed Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998...............................................................................2-3

Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998.............................................................................4

Notes to Condensed Consolidated Financial Statements................................................................5

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................................................................11

PART II - OTHER INFORMATION

Item 1. Legal Proceedings..................................................................................................16

Item 2. Changes in Securities and Use of Proceeds..........................................................................16

Item 3. Defaults Upon Senior Securities....................................................................................16

Item 4. Submission of Matters to a Vote of Security Holders................................................................16

Item 5. Other Information..................................................................................................16

Item 6. Exhibits and Reports on Form 8-K...................................................................................16
</TABLE>

<PAGE> 3
PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ITC LEARNING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

<TABLE>
<CAPTION>
For the 3 Months Ended June 30, For the 6 Months Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues....................... $ 5,469,195 $ 4,040,257 $ 11,171,579 $ 6,874,955
Cost of sales...................... 1,955,446 2,403,292 4,512,674 3,728,289
------------- ------------------ ------------------ ------------------
Gross margin....................... 3,513,749 1,636,965 6,658,905 3,146,666

Sales and marketing expense........ 1,608,863 1,687,852 3,195,061 2,724,732
General and
administrative expense.......... 1,522,112 1,593,713 2,811,303 2,970,249
Equity in earnings of affiliates... (47,160) (94,153) (112,307) (156,953)
------------- ------------------ ------------------ ------------------

Income (loss) before interest
and income taxes............... 429,934 (1,550,447) 764,848 (2,391,362)

Interest income.................... 41,462 80,958 46,967 186,670
Interest expense................... (97,334) (18,062) (160,906) (36,035)
------------- ------------------ ------------------ ------------------

Income (loss) before income taxes.. 374,062 (1,487,551) 650,909 (2,240,727)

Income tax expense (benefit)....... -- (222,515) -- (222,515)
------------- ------------------ ------------------ ------------------

Net income (loss).................. $ 374,062 $ (1,265,036) $ 650,909 $ (2,018,212)
============= ================== ================== ==================

Net income (loss) per common share:
Basic.......................... $ 0.10 $ (0.33) $ 0.17 $ (0.52)
============== ================== =================== ==================

Diluted........................ $ 0.10 $ (0.33) $ 0.17 $ (0.52)
============== ================== =================== ==================
</TABLE>

See accompanying notes to condensed consolidated financial statements.

1
<PAGE> 4

ITC LEARNING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(Unaudited)

Current assets:
<S> <C> <C>
Cash and cash equivalents........................................ $ 313,818 $ 267,045
Accounts receivable, net (notes 2, 4 and 5)...................... 6,748,515 5,992,902
Due from affiliates.............................................. 176,844 117,023
Inventories, net (notes 4 and 5)................................. 838,810 588,971
Prepaid expenses................................................. 244,413 136,730
Income taxes receivable.......................................... 70,471 279,747
------------------ ------------------
Total current assets....................................... 8,392,871 7,382,418

Note receivable (note 3)............................................... 747,628 753,420

Property and equipment (note 5):
Video and computer equipment..................................... 2,403,447 2,162,078
Furniture and fixtures........................................... 212,037 206,313
Leasehold improvements........................................... 40,380 35,092
------------------ ------------------
2,655,864 2,403,483
Less accumulated depreciation and amortization................... (1,665,468) (1,354,854)
------------------ ------------------
Net property and equipment................................. 990,396 1,048,629

Capitalized program development costs, net............................. 5,263,125 5,393,182
Intangible assets, net................................................. 3,790,845 4,060,150
Other ................................................................. 7,099 8,966
------------------ ------------------

Total assets ..................................................... $ 19,191,964 $ 18,646,765
================== ==================
</TABLE>

See accompanying notes to condensed consolidated financial statements.

2
<PAGE> 5

ITC LEARNING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(Unaudited)
Current liabilities:
<S> <C> <C>
Line of credit (note 4).......................................... $ 2,049,000 $ 647,000
Current installments of long-term debt (note 5).................. 305,170 287,283
Accounts payable................................................. 1,347,341 1,973,004
Due to affiliates................................................ 169,256 314,247
Accrued compensation and benefits................................ 512,018 281,234
Deferred revenues................................................ 463,950 420,005
Other accrued expenses........................................... 684,275 1,650,980
Income taxes payable............................................. 40,365 10,161
------------------ ------------------
Total current liabilities.................................. 5,571,375 5,583,914

Deferred lease obligations............................................. 4,730 25,511
Long-term debt (note 5)................................................ 1,296,763 1,439,216
------------------ ------------------
Total liabilities.......................................... 6,872,868 7,048,641

Stockholders' equity (note 5):
Common stock, $0.10 par value, 12,000,000 shares
authorized; 3,958,245 shares issued
and outstanding in 1999 and 1998........................... 395,826 395,826
Additional capital............................................... 16,502,127 16,502,127
Note receivable from ESOP........................................ (393,427) (439,677)
Retained earnings (deficit)...................................... (4,198,716) (4,849,625)
Accumulated other comprehensive income (note 7).................. 13,286 (10,527)
------------------ ------------------
Total stockholders' equity................................. 12,319,096 11,598,124
------------------ ------------------

Total liabilities and stockholders' equity............................. $ 19,191,964 $ 18,646,765
================== ==================
</TABLE>

See accompanying notes to condensed consolidated financial statements.

3
<PAGE> 6

ITC LEARNING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................................... $ 650,909 $ (2,018,212)
Reconciling items:
Provision for doubtful accounts...................................... 200,000 82,500
Depreciation and amortization........................................ 1,948,688 1,123,422
Common stock issued to employees..................................... -- 4,119
Foreign currency translation adjustment.............................. 23,813 (47,811)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable..................... (955,613) 2,262,002
Decrease (increase) in inventories............................. (249,839) 36,191
Increase in prepaid expenses................................... (107,683) (368,613)
Decrease in income taxes receivable............................ 209,276 21,492
Increase in due from affiliates, net........................... (204,812) (124,686)
Decrease in other assets....................................... 7,659 63,460
Increase (decrease) in accounts payable........................ (625,663) 684,295
Decrease in accrued expenses................................... (735,922) (185,001)
Increase (decrease) in deferred revenues....................... 43,945 (138,698)
Decrease in deferred lease obligations......................... (20,781) (9,822)
Increase (decrease) in income tax payable...................... 30,204 (222,982)
Net effect of acquired operating assets and liabilities........ -- (39,866)
------------------ ------------------
Net cash provided by operating activities.................................. 214,181 1,121,790

Cash flows from investing activities:
Capitalized program development costs................................ (1,238,713) (221,704)
Capital expenditures................................................. (252,379) (425,423)
Acquisitions, net of cash acquired and notes payable................. -- (2,654,621)
------------------ ------------------
Net cash used for investing activities..................................... (1,491,092) (3,301,748)

Cash flows from financing activities:
Borrowings under line of credit...................................... 6,861,000 212,000
Repayments under line of credit...................................... (5,459,000) (174,000)
Principal payments on long-term debt................................. (124,566) (41,785)
Issuance of common stock............................................. -- 3,800
Repurchase of common stock........................................... -- (535,848)
Employee stock ownership plan note collections....................... 46,250 51,000
------------------ ------------------
Net cash provided by (used for) financing activities....................... 1,323,684 (484,833)
------------------ ------------------

Net increase (decrease) in cash............................................ 46,773 (2,664,791)

Cash and cash equivalents, beginning of period............................. 267,045 4,885,672
------------------ ------------------
Cash and cash equivalents, end of period................................... $ 313,818 $ 2,220,881
================== ==================
</TABLE>

See accompanying notes to condensed consolidated financial statements.

4
<PAGE> 7

ITC LEARNING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1999

(UNAUDITED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements of ITC Learning Corporation ("ITC"
or the "Company") include the accounts of its wholly owned subsidiaries Activ
Training, Ltd. ("Activ"), ITC Australasia Pty. Ltd. ("ITCA"), Turn-Key Training
Technologies, Inc. ("Turn-Key"), ITC Canada Limited, and ComSkill Learning
Centers, Inc. ("ComSkill").

The Company is a full-service training company specializing in the
development, production, marketing and sale of multimedia and
technology-delivered training solutions designed to improve employee skills in
business, industry, education and government. The Company operates in four
reportable segments: U.S., Canada, Australia and the United Kingdom.

Significant intercompany accounts and transactions have been eliminated in
consolidation. In the opinion of the Company's management, the interim condensed
consolidated financial statements include all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of the results
for the interim periods. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Certain prior year amounts
have been reclassified to improve comparability to current year presentations.
The interim condensed consolidated financial statements should be read in
conjunction with the Company's December 31, 1998 and 1997 audited financial
statements included with the Company's filing on Form 10-KSB. The interim
operating results are not necessarily indicative of the operating results for
the full fiscal year.

Revenues and Costs

In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, Software Revenue
Recognition, which supercedes SOP 91-1. The provisions of SOP 97-2 took effect
in fiscal years beginning after December 15, 1997 and clarify rules of revenue
recognition related to customer acceptance, product upgrades and post-contract
customer support. In March 1998, the AICPA issued SOP 98-4, which defers for one
year the implementation of certain provisions of SOP 97-2. The Company
implemented SOP 97-2 as amended by SOP 98-4 for transactions entered into
beginning January 1, 1998. In December 1998, the AICPA issued SOP 98-9, which
extends the deferral date of implementation of certain provisions of SOP 97-2 to
2000 for the Company and amends the method of revenue recognition in some
circumstances. The Company does not anticipate that the adoption of this SOP
will have a significant impact on its results of operations or financial
position.

Revenues include both off-the-shelf and custom courseware sales,
courseware licenses, consulting service revenues and hardware revenues. The
Company recognizes revenues from 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 a 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

5
<PAGE> 8
ITC LEARNING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

financial statements, as are related production, selling and distribution costs.
Amounts due to co-owners of the affiliated venture/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 the
delivery of the initial copy of each product licensed, and related duplication
costs are accrued based on estimates. Revenues from consulting services are
recognized as services are performed.

Net Income (Loss) Per Common Share

Basic earnings per common share is computed based on the weighted average
number of common shares outstanding during the year. Diluted earnings per common
share is computed based on the weighted average number of common shares
outstanding plus the effect of stock options and other potentially dilutive
common stock equivalents. The dilutive effect of stock options and other
potentially dilutive common stock equivalents is determined using the treasury
stock method based on the Company's average stock price.

The details of the earnings per share calculation for the quarters and the
six months ended June 30, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
Income Per Share
(Loss) Shares Amount
------ ------ ------
QUARTER ENDED JUNE 30, 1999
<S> <C> <C> <C>
Earnings per share of common stock - basic............. $ 374,062 3,879,923 $ 0.10
Dilutive securities:
Stock options.................................... -- 48,982 --
---------------- ---------------- ----------------
Earnings per share of common stock - diluted........... $ 374,062 3,928,905 $ 0.10
---------------- ---------------- ----------------

QUARTER ENDED JUNE 30, 1998
Loss per share of common stock - basic................. $ (1,265,036) 3,890,339 $ (0.33)
Dilutive securities:
Stock options.................................... -- -- --
---------------- ---------------- -----------------
Loss per share of common stock - diluted............... $ (1,265,036) 3,890,339 $ (0.33)
---------------- ---------------- -----------------

SIX MONTHS ENDED JUNE 30, 1999
Earnings per share of common stock - basic............. $ 650,909 3,884,923 $ 0.17
Dilutive securities:
Stock options.................................... -- 49,014 --
---------------- ---------------- ----------------
Earnings per share of common stock - diluted........... $ 650,909 3,933,937 $ 0.17
---------------- ---------------- ----------------

SIX MONTHS ENDED JUNE 30, 1998
Loss per share of common stock - basic................. $ (2,018,212) 3,890,389 $ (0.52)
Dilutive securities:
Stock options.................................... -- -- --
---------------- ---------------- -----------------
Loss per share of common stock - diluted............... $ (2,018,212) 3,890,389 $ (0.52)
---------------- ---------------- -----------------
</TABLE>

6
<PAGE> 9
ITC LEARNING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

NOTE 2 - ACCOUNTS RECEIVABLE

Accounts receivable include the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(Unaudited)

<S> <C> <C>
Trade accounts receivable..................................... $ 6,870,398 $ 6,014,595
Unbilled contract receivables................................. 161,941 37,728
Less allowance for doubtful accounts.......................... (289,806) (89,421)
---------------- ----------------
Trade accounts receivable, net............................ 6,742,533 5,962,902
Other receivables............................................. 5,982 30,000
---------------- ----------------
$ 6,748,515 $ 5,992,902
================ ================
</TABLE>

NOTE 3 - NOTE RECEIVABLE

On November 20, 1997 the Company entered into a stock purchase agreement
with Anderson Holdings Inc., an investor group headed by a former employee of
the Company, to sell all of the Company's stock in its Anderson Soft-Teach
subsidiary ("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. Under the terms of the note, AST makes quarterly interest
payments to ITC at an interest rate of 8%, and will repay the principal balance
in 2001.

NOTE 4 - LINE OF CREDIT

On August 11, 1999, the Company entered into a new line of credit agreement
with its principal lender for a two-year term. Under the provisions of the
new agreement, the Company increased its borrowing capacity by $1,000,000 to
$4,000,000. The Company collateralized the credit facility by granting the bank
a security interest in the assets of the Company. The agreement requires
maintenance of certain financial ratios (minimum working capital and tangible
net worth) and contains certain restrictive covenants which limit borrowings and
the ability to merge or dispose of assets.

At June 30, 1999 and December 31, 1998, the balances outstanding on the
line of credit were $2,049,000 and $647,000, respectively. Interest on the
facility is calculated at the U.S. prime rate plus 1% and is payable monthly on
any outstanding balance.

7
<PAGE> 10
ITC LEARNING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

NOTE 5 - LONG-TERM DEBT

<TABLE>
<CAPTION>
Long-term debt consists of the following: June 30, December 31,
1999 1998
---- ----
(Unaudited)

<S> <C> <C>
8.5% note payable to the Company's principal lender due in $ 370,914 $ 415,549
monthly principal and interest installments of $10,258 through December 2002,
collateralized by the assignment of interest in the Company's accounts
receivable, inventory and property and equipment.

8.0% note payable to Nova Scotia Business Development 1,231,019 1,310,950
Corporation ("NSBDC") due in monthly interest installments (beginning October 31, 1998)
and quarterly principal installments (beginning March 31, 1999), maturing in December
2003. The NSBDC has a subordinated interest position to the Company's principal lender,
in the receivables and inventory of ITC Canada Limited. Additionally, the NSBDC's
interest in the fixed assets and intellectual property of ITC Canada Limited ranks pari
passu with the Company's principal lender.
--------------- ----------------
1,601,933 1,726,499

Less amount classified as current (305,170) (287,283)
--------------- ----------------
$ 1,296,763 $ 1,439,216
--------------- ----------------
</TABLE>

8
<PAGE> 11
ITC LEARNING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

NOTE 6 - SEGMENT INFORMATION

The following tables identify revenues and profit or loss by reportable
segment for the quarters and the six months ended June 30, 1999 and 1998
(amounts in thousands):

QUARTER ENDED JUNE 30, 1999

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
United United
States Canada Kingdom Australia Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers....... $3,998 $566 $587 $318 $5,469
Intersegment revenues.................. 707 249 -- -- 956
Segment income (loss) before taxes..... 576 (181) (51) 30 374
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>

QUARTER ENDED JUNE 30, 1998

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
United United
States Canada(1) Kingdom Australia Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers....... $2,937 $-- $695 $408 $4,040
Intersegment revenues.................. 809 -- -- -- 809
Segment loss before taxes.............. (1,104) -- (302) (82) (1,488)
- --------------------------------------------------------------------------------------------------------------------------------
(1) Canadian subsidiary commenced operations September 25, 1998.
</TABLE>

SIX MONTHS ENDED JUNE 30, 1999

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
United United
States Canada Kingdom Australia Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers....... $8,202 $1,182 $1,253 $535 $11,172
Intersegment revenues.................. 1,207 249 -- -- 1,456
Segment income (loss) before taxes..... 1,134 (409) (98) 24 651
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>

SIX MONTHS ENDED JUNE 30, 1998

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
United United
States Canada(1) Kingdom Australia Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers....... $4,685 $-- $1,502 $688 $6,875
Intersegment revenues.................. 809 -- -- -- 809
Segment income (loss) before taxes..... (2,465) -- 171 53 (2,241)
- --------------------------------------------------------------------------------------------------------------------------------
(1) Canadian subsidiary commenced operations September 25, 1998.
</TABLE>

9
<PAGE> 12
ITC LEARNING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

NOTE 7 - COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss), net of related tax, for the
six months ended June 30, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
---- ----
<S> <C> <C>
Net income (loss)................................................... $ 650,909 $(2,018,212)
Foreign currency translation adjustment............................. 23,813 (47,811)
---------------- -----------
Comprehensive income (loss) $ 674,722 $(2,066,023)
---------------- -----------
</TABLE>

The components of accumulated other comprehensive income, net of related
tax, at June 30, 1999 and December 31, 1998 are as follows:

<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Cumulative foreign currency translation adjustment.................... $ 13,286 $ (10,527)
================ ================
</TABLE>

NOTE 8 - SUBSEQUENT EVENT

On August 10, 1999 the Company executed a letter of intent with Thoma
Cressey Fund VI, LP ("TCEP"), a private equity fund managed by Thoma Cressey
Equity Partners, Inc., to invest $20 million in ITC. The investment by TCEP is
expected to be in the form of convertible preferred stock, which will be
convertible into the Company's common stock at $5.00 per share, resulting in
approximately 50% of the Company's common stock. The preferred stock will also
carry a 6% per annum paid-in-kind stock dividend. TCEP will have the ability to
elect a majority of the Company's board of directors, appoint a majority to the
Company's finance and compensation committees and be entitled to certain
contractual commitments by the Company including redemption and registration
rights. Prior to obtaining shareholder approval, TCEP may elect to invest
approximately $5 million through a convertible note, which would carry similar
terms to the preferred stock and be convertible into preferred stock upon
receipt of shareholder approval.

Subject to shareholder approval, the Company anticipates completing this
transaction during the fourth quarter of 1999. This is a forward-looking
statement. See Forward-Looking Statements and Risk Factors for Further
Discussion.

10
<PAGE> 13

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

Overview of Business

ITC Learning Corporation ("ITC" or the "Company") develops, markets and
sells multimedia and technology-delivered training solutions designed to improve
employee skills in business, industry, education and government. ITC was
incorporated under the laws of the State of Maryland on January 28, 1977. The
Company's training solutions include a state-of-the-art training management
system, approximately 600 training titles, CD-ROM, Internet, intranet and
videotape delivery capabilities and customer support and implementation
services. The Company's portfolio of products is one of the largest libraries of
interactive CD-ROM and technology-delivered training programs available today,
having improved productivity in major corporations, government agencies and
school systems across the United States. ITC's training programs combine
full-motion video, audio, animation, graphics, and text into a single learning
presentation. The Company has a worldwide customer base of approximately 5,000
organizations.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

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
words "believe," "expect," "anticipate" and "project," and similar expressions
identify forward-looking statements, which speak only as of the date the
statement was made. Such statements may include, but not be limited to,
projections of revenues, income or loss, expenses, plans, as well as assumptions
relating to the foregoing. Forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
results could differ materially from those described in forward-looking
statements as a result of the risks set forth in the following discussion, among
others.

Risk Factors

A number of factors could contribute to significant fluctuations in
operating results, which may result in volatility in the price of the Company's
common stock. These include the size and timing of orders and shipments, the mix
of ITC-developed products and third party products, the mix of sales from the
Company's direct and indirect distribution channels, the introduction and
acceptance of new products, the Company's ability to renew or replace its
existing line of credit under favorable terms and conditions, and the degree to
which the market understands and accepts the Company's role as a provider of
training solutions.

In addition, the Company faces certain general business risks which could
materially and adversely impact future operating results. These include, but are
not limited to, changes in economic conditions, the cost of labor and raw
materials, changes in technology and general competitive factors.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1999 ("SECOND QUARTER OF 1999") COMPARED WITH THE
THREE MONTHS ENDED JUNE 30, 1998 ("SECOND QUARTER OF 1998")

Revenues

Revenues for the second quarter of 1999 totaled $5,469,000, as compared to
$4,040,000 for the second quarter of 1998, representing an increase of
$1,429,000 or 35%. The increase in revenues was attributable to increased sales
of the Company's Enterprise Training Management Software - AdminSTAR(TM), as
well as the inclusion of revenues generated from the Company's Canadian
subsidiary which commenced operations on September 25, 1998. Revenues generated
from products and businesses acquired during 1998, including

11
<PAGE> 14

AdminSTAR(TM), increased from $156,000 to $2,950,000, or 54% of total revenues
for the quarter ended June 30, 1999. Revenues generated from the Company's
Enterprise Training Management Software - AdminSTAR(TM) were $2,218,000 for the
second quarter of 1999, of which $2,000,000 was from one customer.

During the second quarter of 1999, ITC recorded $264,000 in hardware
revenue, as compared to $318,000 recorded during the second quarter of 1998,
representing a decrease of $54,000, primarily due to decreased customer demand
for the hardware component of ITC's training solutions. While the Company will
continue to fulfill customers' hardware requirements as a component of its
training solutions, the Company does not anticipate significant revenue growth
from hardware sales. This is a forward-looking statement. See Forward-Looking
Statements and Risk Factors for Further Discussion.

Cost of Sales and Gross Margin

Cost of sales for the second quarter of 1999, which include courseware and
hardware costs, totaled $1,955,000, resulting in gross margin of $3,514,000 or
64% of total revenues, as compared to cost of sales of $2,403,000 resulting in
gross margin of $1,637,000 or 41% of total revenues for the second quarter of
1998, an increase in gross margin of $1,877,000 and an increase in gross margin
percentage of 23%. The increase in total gross margin was primarily due to
increased revenues during the second quarter of 1999 as compared to the second
quarter of 1998. The increase in gross margin percentage was due to an increased
volume of transactions generated by the Company's direct sales force, resulting
in decreased reseller or third party costs, and significantly higher gross
margin per sale.

Selling, General and Administrative Expenses

Selling, general and administrative expenses totaled $3,131,000 for the
second quarter of 1999, as compared to $3,282,000 for the second quarter of
1998, representing a decrease of $151,000 or 5%.

Selling expenses consist primarily of salaries of sales personnel, travel,
advertising, marketing and promotional expenses. Selling expenses for the second
quarter of 1999 totaled $1,609,000, as compared to $1,688,000 for the second
quarter of 1998. The decrease in selling expenses of $79,000 or 5% was due to an
overall reduction in marketing expenditures, offset by slightly higher direct
sales costs as a result of business acquired during 1998. Selling expenses as a
percentage of revenues decreased to 29% in the second quarter of 1999 from 42%
in the second quarter of 1998 primarily due to higher revenues in relation to
static sales and marketing costs.

General and administrative expenses consist of the costs of developing new
products and the costs of the Company's executive management and support
functions such as customer assurance, product fulfillment, human resources, and
finance and administration. General and administrative expenses for the second
quarter of 1999 totaled $1,522,000, as compared to $1,594,000 for the second
quarter of 1998. The decrease in general and administrative expenses of $72,000
or 5% was primarily due to decreased personnel related costs, offset by general
and administrative expenses associated with the Company's Canadian subsidiary
which commenced operations on September 25, 1998. General and administrative
expenses as a percentage of revenue decreased to 28% in the second quarter of
1999 from 39% in the second quarter of 1998, primarily due to higher revenues in
relation to a static cost structure.

Income Before Income Taxes and Net Income

Operations for the second quarter of 1999 resulted in pre-tax income of
$374,000, as compared to a pre-tax loss of $1,488,000 for the second quarter of
1998. The resulting net income of $374,000 or $0.10 per diluted share compares
with a net loss of $1,265,000 or $0.33 per share in the second quarter of 1998.
The higher pre-tax and net income for the second quarter of 1999 is primarily
due to increased sales revenues and resulting gross margin as compared to the
second quarter of 1998.

12
<PAGE> 15

SIX MONTHS ENDED JUNE 30, 1999 ("FIRST HALF OF 1999") COMPARED WITH THE SIX
MONTHS ENDED JUNE 30, 1998 ("FIRST HALF OF 1998")

Revenues

Revenues for the first half of 1999 totaled $11,172,000 as compared to
$6,875,000 for the first half of 1998, representing an increase of $4,297,000 or
63%. The increase in revenues was attributable to an overall increase in sales
of the Company's core technology-delivered multimedia courseware products, as
well as revenues associated with products and businesses acquired in 1998.
Revenues from sales of the Company's Enterprise Training Management Software -
AdminSTAR(TM) (acquired in March of 1998) totaled $2,520,000 during the first
half of 1999 as compared to $182,000 during the first half of 1998, representing
an increase of $2,338,000. Total revenues from products and businesses acquired
during 1998 amounted to $3,843,000 during the first half of 1999, accounting for
the majority of the revenue increase as compared to the first half of 1998.

During the first half of 1999, ITC recorded $439,000 in hardware revenue,
as compared to $382,000 recorded during the first half of 1998, representing in
increase of $57,000.

Cost of Sales and Gross Margin

Cost of sales for the first half of 1999 totaled $4,513,000 resulting in a
gross margin of $6,659,000 or 60% of total revenues, as compared to cost of
sales of $3,728,000 resulting in gross margin of $3,147,000 or 46% of total
revenues for the first half of 1998. The increase in total gross margin was
primarily due to increased revenues during the first half of 1999 as compared to
the first half of 1998. The increase in gross margin percentage was due to a
normal fluctuation in sales channel mix from resellers or third party agents to
direct sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses totaled $6,006,000 for the
first half of 1999 as compared to $5,695,000 for the first half of 1998,
representing an increase of $311,000 or 5%.

Selling expenses for the first half of 1999 totaled $3,195,000 as compared
to $2,725,000 for the first half of 1998, representing an increase of $470,000
or 17%. The increase was due to the expansion of sales and marketing efforts
focused on products and businesses acquired during 1998 and the Company's
expansion into new sales territories during the fourth quarter of 1998. For the
first half of 1999, selling expenses as a percentage of revenues decreased to
29% as compared to 40% for the first half of 1998. The decrease of 11% was the
result of achieving higher revenues while maintaining a static cost structure.

General and administrative expenses for the first half of 1999 totaled
$2,811,000 as compared to $2,970,000 for the first half of 1998, representing a
decrease of $159,000 or 5%. The decrease was due to lower personnel related
costs, offset by higher general and administrative expenses associated with the
Company's Canadian subsidiary which commenced operations on September 25, 1998.
General and administrative expenses as a percentage of revenues decreased to 25%
in the first half of 1999 from 43% in the first half of 1998. The decrease of
18% was the result of achieving higher revenues while maintaining a static cost
structure.

Income Before Income Taxes and Net Income

Operations for the first half of 1999 resulted in pre-tax income of
$651,000, as compared to a pre-tax loss of $2,241,000 for the first half of
1998. The resulting net income of $651,000 or $0.17 per diluted share compares
with a net loss of $2,018,000 or $0.52 per share in the first half of 1998. The
increase in net income of $2,669,000 is due to increased sales revenue and
resulting gross margin as compared to the first half of 1998.

13
<PAGE> 16

CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES

Working capital at June 30, 1999 was $2,821,000 as compared to $1,799,000
at December 31, 1998, an increase of $1,022,000 or 57%, primarily due to
accounts receivable growth as a result of increased sales, lower accounts
payable balances, offset by increased utilization of the Company's line of
credit during the second quarter of 1999.

Cash provided by operating activities totaled $214,000 for the first half
of 1999, as compared to cash provided by operating activities of $1,122,000 for
the first half of 1998, a decrease of $908,000. The decrease is due to slower
turnover of operating assets in relation to operating liabilities during the
first half of 1999 as compared to the first half of 1998.

Cash used for investing activities totaled $1,491,000 for the first half
of 1999, as compared to cash used for investing activities of $3,302,000 for the
first half of 1998, a decrease of $1,811,000. The decrease is primarily
attributable to the absence of acquisition activity in 1999 as compared to 1998,
partially offset by higher product development costs.

Cash provided by financing activities totaled $1,324,000 for the first half
of 1999, as compared to cash used for financing activities of $485,000 for the
first half of 1998, an increase of $1,809,000. The increase is principally
attributable to the Company's increased utilization of its line of credit as
compared to 1998, and the absence of a stock repurchase transaction, which
occurred during the first half of 1998. On August 11, 1999, the Company entered
into a new line of credit agreement with its principal lender for a two-year
term. Under the provisions of the new agreement, the Company increased its
borrowing capacity by $1,000,000 to $4,000,000. The Company collateralized the
credit facility by granting the bank a security interest in the assets of the
Company.

The Company believes that cash on hand, anticipated cash flows from 1999
operations and its existing line of credit will be sufficient to meet the
Company's cash requirements for at least the next twelve months. Anticipated
cash flows from 1999 operations are largely dependent upon the Company's ability
to achieve its sales and gross profit objectives for its currently existing
products, new products launched in 1999 and products resulting from its 1998
acquisitions. However, the Company will continue to evaluate alternative sources
of liquidity available to it, including expansion of existing or development of
alternative sources of bank financing and equity or debt securities offerings,
to satisfy ongoing working capital and capital expenditure requirements, as well
as provide additional funding to execute its long-term strategic plans. These
are forward-looking statements. See Forward-Looking Statements and Risk Factors
for Further Discussion.

SOFTWARE REVENUE RECOGNITION

In December 1998, the AICPA issued SOP 98-9, which extends the deferral
date of implementation of certain provisions of SOP 97-2 to 2000 for the
Company, and amends the method of revenue recognition in some circumstances. The
Company does not anticipate that the adoption of the SOP will have a significant
effect in its results of operations or financial position.

14
<PAGE> 17
IMPLICATIONS OF YEAR 2000

The Year 2000 ("Y2K") 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 internal or external hardware or software packages 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 products, or potential product
liability. In addition, disruptions in the economy generally resulting from Year
2000 issues could have a material adverse affect on the Company.

The Company began an assessment of the implications of the Year 2000 issue
during late 1997. Since then, the Company has made substantial progress towards
eliminating its exposure to Y2K related issues. The Company's plan to resolve
the Year 2000 issue has involved the following four phases: assessment,
remediation, testing, and implementation. Through June 30, 1999, the Company has
substantially completed the assessment, remediation and testing of its
courseware products and its operating infrastructure, and believes its products
and mission critical operating functions to be year 2000 compliant. The Company
plans on completing the final phase of its Y2K plan by September 30, 1999.
Management estimates the total costs to mitigate the Company's Y2K exposure
will total $400,000, of which $325,000 has been incurred to date. Versions of
the Company's legacy products, which are analog-laserdisc delivered products,
are not Year 2000 compliant. This is primarily due to the authoring language
that the products were developed in as well as the operating systems and
computer equipment that delivered the laserdisc training programs. The Company
does not plan to modify the analog-laserdisc product to become Year 2000
compliant. The Company ceased sales and marketing efforts of the
analog-laserdisc products in 1996; therefore, any impact on results of
operations or financial position is not expected to be material. Commercially
viable courseware products and operating applications that were found to be
non-compliant will be reprogrammed or replaced by September 30, 1999. In
addition, the Company has gathered information about the Year 2000 compliance
status of its significant suppliers, vendors, and subcontractors and continues
to monitor their compliance, however the Company believes non-compliance of
its suppliers and vendors will not represent a significant threat due to the
nature of its raw materials and existing alternatives in the marketplace. These
are forward-looking statements. See Forward-Looking Statements and Risk Factors
for Further Discussion.

The most reasonably likely worst case scenario, relating to Y2K
compliance, would be failure of the Company's courseware products and its
internal operating infrastructure. Failure of the Company's courseware products
as a result of the Y2K bug, would require the Company to incur significant
remediation costs and could potentially result in significant litigation costs,
both which would have a material negative impact on the Company's results of
operations and financial position. Failure of the Company's operating
infrastructure would cause a significant disruption in the Company's ability to
process transactions, fulfill orders, support customers and administer its
business.

The Company has contingency plans for all mission critical applications.
These contingency plans involve, among other actions, manual workarounds,
increasing inventories, and adjusting staffing strategies.

SUBSEQUENT EVENT

15
<PAGE> 18

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

The Company held its annual meeting of shareholders on May 5, 1999. There
was one agenda item submitted to a vote of security holders, the election of two
directors to the Company's Board of Directors. The shareholders elected Robert
Spillane and re-elected Daniel R. Bannister, the nominees recommended by the
Board of Directors, to serve on the Board, each for a term of three years. The
number of votes cast in favor of Dr. Spillane's election was 2,536,720, with
390,140 votes against and 1,031,345 abstaining. The number of votes cast in
favor of Mr. Bannister's re-election was 2,328,609, with 598,251 votes against
and 1,031,345 abstaining. John D. Sanders, Richard E. Thomas, Carl D. Stevens
and Peter Li each continued in office as directors after the annual meeting.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A. Exhibits

EXHIBIT
NO. DESCRIPTION
- -----------------------------------------------------------------------------

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.
0-13741).

3.2 Amended By-Laws of the Company, incorporated by reference
to the Company's Form 10-KSB for the fiscal year ended
December 31, 1997, filed March 13, 1998 with the SEC
(Commission File No. 0-13741).

4.1 Specimen Certificate for ITC Common Stock, incorporated by
reference to the Company's 10-QSB for the quarter ended
March 31, 1998, filed May 1, 1998 with the SEC (Commission
File No. 0-13741).

10.1 Employment Agreement with Christopher E. Mack dated
January 7, 1998 (filed herewith).

10.2 Employment Agreement with Carl D. Stevens dated January 7,
1998 (filed herewith).

27.1 Financial Data Schedule (filed herewith).

B. Reports on Form 8-K:

None.

16
<PAGE> 19

SIGNATURES

In accordance with the requirements of the Exchange Act, 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 August 13, 1999
--------------------------------------------------------------- ------------------------------
Carl D. Stevens, President,
Chief Executive Officer and Director

By: /s/Christopher E. Mack DATE August 13, 1999
--------------------------------------------------------------- ------------------------------
Christopher E. Mack, Vice President,
Treasurer, and Chief Financial Officer

By: /s/Matthew C. Sysak DATE August 13, 1999
--------------------------------------------------------------- ------------------------------
Matthew C. Sysak, Corporate Controller
</TABLE>

<PAGE> 1
EXHIBIT 10.1

ITC LEARNING CORPORATION

EMPLOYMENT AGREEMENT

This Employment Agreement (the "Agreement") is made and entered into
effective as of the 7th day of January, 1998 (the "Effective Date") by and
between ITC Learning Corporation (the "Company") and Christopher E. Mack (the
"Executive").

RECITALS

A. The Company is duly organized and validly existing as a corporation in
good standing under the laws of the State of Maryland. The Company is engaged in
the business of developing, marketing, and selling training materials, primarily
in multimedia platforms.

B. The Executive is presently in the employ of the Company and the
Company has offered to continue to employ the Executive as an Executive Officer
of the Company.

C. The parties hereto believe that it is in their best interests to
provide for the specific terms and conditions of employment and to impose
restrictions upon the parties in the event of the termination of the employment
relationship.

NOW, THEREFORE, in consideration of the mutual promises and covenants as
hereinafter set forth, and of other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

1. Employment. The Company agrees to employ the Executive as an Executive
Officer of the Company in accordance with the terms and conditions set forth in
this Agreement. The Executive shall have such specific duties as may be
reasonably assigned to him from time to time by the Board of Directors of the
Company or its designee.

2. Acceptance and Standards. The Executive hereby accepts employment with
the Company in accordance with the terms and conditions set forth in this
Agreement. During the term of this Agreement, and subject to the provisions of
Sections 5 and 6 of this Agreement, the Executive agrees to devote his full
business time and services and his best efforts to the faithful performance of
the duties which may be reasonably assigned to him and which are consistent with
his position under Section 1 of this Agreement. The parties hereto agree and
acknowledge that this Agreement shall replace and supercede that certain
employment agreement dated November 30, 1996 by and between the Executive and
the Company and that the earlier employment agreement shall be of no further
force or effect.

<PAGE> 2

3. Compensation.

a. In General. For all services rendered by the Executive under this
Agreement, the Company shall provide the Executive with the various forms of
compensation and benefits set forth in this Section 3.

b. Basic Compensation. The Company shall, subject to the approval of
the Board of Directors of the Company, pay the Executive a basic salary of
$125,000 per year, payable in periodic installments in accordance with the
Company's normal payroll practices for salaried employees.

c. Vehicle. The Executive shall receive the use of a Company vehicle
selected by the Company, in its reasonable discretion.

d. Reimbursements of Expenses. The Company agrees to reimburse the
Executive for all reasonable expenses (determined in the sole discretion of the
Company and in accordance with corporate policies which may be promulgated in
the Company's Employee Handbook or other published corporate policies) incurred
by the Executive in the course of the pursuance of his duties hereunder in
accordance with the Company's then current reimbursement policy.

e. Working Facilities. The Company, at its own cost, shall furnish
the Executive with an office together with supplies, equipment, and such other
facilities and services suitable to his position and adequate for the
performance of his duties.

g. Discretionary Salary Adjustment and/or Bonus. Once each year,
consideration shall be given by the Board of Directors of the Company, within
its sole discretion (upon the recommendation of the Chief Executive Officer of
the Company and after the Chief Executive Officer of the Company and the
Executive have met to review Executive's performance), to a salary adjustment
for the Executive, and, if so, in what amount; provided, however, that the
Executive's salary shall not be decreased below the amount set forth in
paragraph 3.b. above if the Executive remains as Chief Financial Officer of the
Company and is satisfactorily performing his duties in that capacity. The
Executive shall, to the extent permitted by the Board of Directors of the
Company, also participate in the Company's Incentive Compensation Plan, if any,
commencing with the Company's fiscal year to end December 31, 1998 if the
Executive complies with the eligibility requirements thereunder and

2
<PAGE> 3
otherwise in a manner consistent with the Company's then current normal policies
and procedures.

4. Term. The initial term of this Agreement shall begin on the Effective
Date and shall continue thereafter for a period of one (1) year, and thereafter
shall, without further action on the part of Executive or the Company, be
extended for additional one (1) year terms, provided that neither Executive or
the Company have given notice of termination, or otherwise terminated this
Agreement in accordance with the provisions of Section 5 of this Agreement.

5. Termination. Unless the parties otherwise agree in writing,
termination of this Agreement in accordance with the provisions of this Section
shall also constitute termination of the Executive's employment with the Company
without the need for further notice or action by either party.

a. Incapacity. In the event the Executive shall be unable to perform
his duties owing to illness or other incapacity for a period of more than 90
consecutive days or an aggregate of 120 days in any 12-month period, the Company
may, at its option, by written notice addressed to the Executive, and sent
subsequent to such 90 days or 120 days, terminate this Agreement as of a date to
be specified in such notice, but not less than 30 days after the date of the
sending of such notice; provided, however, that if prior to the date specified
in such notice the Executive's illness or other incapacity shall have terminated
and he shall have satisfactorily taken up and performed his duties under this
Agreement, the notice of termination shall be disregarded, and this Agreement
shall continue in full force and effect. (See Sections 10 and 11 of this
Agreement for medical, sick leave, and disability benefits.)

b. Death. In the event of the Executive's death during the term of
his employment hereunder, this Agreement shall terminate as of the date of
death, and the Executive's spouse, or other such person whom the Executive shall
have designated in writing to the Company, shall be paid the unpaid portion, if
any, of the Executive's then prevailing salary prorated to the date of the
Executive's death. The Company shall also pay to such spouse, or such other
designated person, a death benefit consistent with the Company's then current
normal policies, if any.

c. Withdrawal from Business. The Company shall terminate this
Agreement upon 60 days written notice to the Executive of a bona fide decision
by the Company to wind up its business and liquidate its assets (other than in
connection with a merger, consolidation, or other event specified in Section 7),
and all rights and obligations of both parties are hereto (except those under
Section 6.d. hereof) shall cease upon such termination. In this event, the
Executive shall be paid the unpaid portion, if any, of his then prevailing
salary prorated to the date of termination.

3
<PAGE> 4

the Executive which constitutes gross misconduct; (iii) a violation of a federal
or state law, rule or regulation applicable to the business of the Company; or
(iv) the conviction of the Executive of, or entry by the Executive of a guilty
or no contest plea to, a felony. No compensation or benefits shall be paid or
provided to the Executive under this Agreement on account of a termination for
Cause, or for periods following the date when such a termination of employment
is effective.

e. Termination by the Company with Notice. The Company may terminate
this Agreement for a reason not set forth in Section 5.a., 5.c., or 5.d. at any
time upon 60 days written notice to the Executive and, in addition, the Company
shall pay to the Executive a termination allowance (the "Termination Allowance")
equal to ten (10) months' salary, based upon his then-prevailing annual salary
rate. The Termination Allowance may, at the option of the Company, be paid in
periodic installments over the first 10 months following termination in
accordance with the Company's regular payroll periods or over such lesser period
as the Company may determine.

f. Termination by the Executive with Notice. The Executive may
terminate this Agreement at any time upon 120 days written notice to the
Company, in which event the Executive shall be paid through the date of
termination. During a period of 180 days following any such termination by the
Executive, the Executive agrees to provide such consulting services to the
Company as it may reasonably request, at such time or times within such period
as may be mutually agreed upon between the Company and the Executive. The
Executive shall be compensated for any such consulting services at 120% of the
daily rate when last employed by the Company plus reimbursement for any
reasonable out-of-pocket expenses incurred by the Executive in rendering such
consulting services.

6. Outside Business Interests, Employee Solicitation, and Company
Property.

a. Without the written consent of the Board of Directors of the
Company, which consent shall not be unreasonably withheld, the Executive agrees
that during the term of this Agreement he will not be affiliated with any
competitor, supplier, or customer of the Company, as an officer, director,
partner, employee, agent, consultant (or similar capacity) or more than 1%
stockholder.

b. The Executive further agrees that during the term of this
Agreement he will not, directly or indirectly, encourage employees of ITC
(hereinafter meaning the Company and/or any of its subsidiary companies or
divisions now existing or hereafter formed) to leave the employ of ITC for the
purpose of seeking or obtaining employment in any other activity with which the
Executive intends to become affiliated.

c. The Executive further agrees that during a period of two (2)
years following the termination of employment, regardless of the reasons for
such termination, he will not, directly or indirectly, solicit, attempt to hire,
or encourage employees of ITC to leave the employ of ITC.

4
<PAGE> 5

d. The Executive further agrees that during the term of this
Agreement and following the termination of his employment he will not, other
than in the normal and valid course of his employment with the Company, directly
or indirectly, take with him or use any ITC property, such as drawings, reports,
data or proposals, design or manufacturing information, wage and salary
information, records or the like relating or peculiar to ITC's products,
research or development or other activities, nor disclose to any others
information of a privileged nature.

e. The Executive further agrees that during the term of this
Agreement and during a period of two (2) years following the termination of his
employment, he will not, directly or indirectly, participate (on his own behalf
or on behalf of any other corporation, venture, or enterprise engaged in
commercial activities) in any proposals which were the subject of outstanding
bids or solicitations of ITC or of bids or solicitations in preparation by ITC
during his employment by the Company.

f. The Executive further agrees that in the event his employment is
terminated, and without regard for the reason for said termination, for a period
of one (1) year following such termination of employment, he will not engage,
directly or indirectly, as proprietor, partner, shareholder, director, officer,
employee, agent, consultant, or in any other capacity or manner whatsoever, in
any business activity competitive with the business of ITC, as constituted
during his employment and on the date of termination of his employment. If any
court of competent jurisdiction shall determine this covenant to be
unenforceable as to either the term or scope imposed above, then this covenant
nevertheless shall be enforceable by such court as to such shorter term or
lesser scope as may be determined by the court to be reasonable and enforceable.

g. The Executive further agrees that the provisions of this Section
6 are of vital importance to the Company and incorporate crucial Company
policies and a means of safeguarding valuable proprietary rights and interests
of ITC. Accordingly, the Executive agrees that the Company shall be entitled to
injunctive relief, in addition to all other remedies permitted by the law, to
enforce the provisions of this Section 6.

7. Merger or Acquisition. In the event the Company should consolidate
with, or merge into another corporation, or transfer all or substantially all of
its assets to another entity, this Agreement shall continue in full force and
effect and be binding upon the Company's successor or transferee.

8. Personnel Policies. To the extent not otherwise set forth herein, the
terms and conditions of the Executive's employment and benefits shall be
governed by the then prevailing operating and personnel policies of the Company.
Executive hereby waives any past, present or future entitlement, if any, to
termination pay offered by the Company to its non-contract employees.

9. Vacations. The Executive shall be entitled to a reasonable vacation
during each year of his term of employment, as approved by the Chief Executive
Officer of the Company.

5
<PAGE> 6

10. Medical Expenses. Recognizing that the continued good health of the
Executive and his family is of vital concern to the Company, since such good
health is directly related to the services which the Executive will be expected
to render to the affairs of the Company, the Executive agrees to undergo a
thorough and complete medical examination at least once during each year of his
term of employment. The executive further agrees to have the examining physician
report the findings of each examination to the Company, if so requested.
Moreover, in keeping with the Company's objectives in this regard, the Company
agrees to reimburse the Executive up to $1,000 during each calendar year of this
Agreement for those reasonable medical (including the aforementioned annual
medical examination), dental, and optical expenses incurred by the Executive
during each such year on behalf of himself and his immediate family if such
expenses are not otherwise reimbursed to the Executive through insurance. The
unused reimbursement in one calendar year will be carried forward up to a
maximum of $3,000; expenses not reimbursed in one calendar year can be submitted
for reimbursement in subsequent years. The Company, at its own expense, shall
also provide the Executive with medical insurance coverage under its group
medical insurance plan.

11. Sick Leave Benefits and Disability Insurance. During his absence owing
to illness or other incapacity, the Executive shall be paid sick leave benefits
at his then prevailing salary rate, reduced by the amount, if any, of worker's
compensation or disability benefits under the Company's group disability
insurance plan. The Company, at its own expense, shall provide the Executive
with disability benefits under its group disability insurance plan.

12. Life Insurance. The Company, at its own expense, shall provide the
Executive with life insurance benefits under its group life insurance plan.

13. Breach of Agreement. In addition to any other remedy available to the
Company in the event of a material breach by the Executive of any of the
covenants set forth in this Agreement, the Company's obligation to pay the
Executive any incentive payouts, deferred compensation, termination allowance,
or other benefits accrued but unpaid as of the date of such breach (except any
vested rights the Executive may have under a Company Profit Sharing Retirement
Plan), if any, shall terminate, as will the Executive's right to exercise any
unexercised stock options.

14. Change of Control.

a. In General. For purposes of this Agreement, a "Change of Control"
shall be the occurrence of any one or more of the following events, and the
effective date of a Change of Control shall be the effective date on which such
event occurs:

(i) A merger or consolidation of the Company with another
corporation, and as a result of such merger or consolidation, less than 65% of
the outstanding voting securities of the surviving or resulting corporation
shall be owned in the aggregate by the former shareholders of the Company, as
the same shall have existed immediately prior to such merger or consolidation,

6
<PAGE> 7

(ii) A sale of substantially all of the assets of the Company to
another corporation which is not a wholly-owned subsidiary of the Company; or

(iii) Any arrangement that gives to an entity or person (or group
of entities or persons acting in concert) the power to name a majority of the
Board of Directors of the Company;

b. Consequences of a Change of Control.

(i) In the event of a Change of Control that has been approved
and recommended by the Company's Board of Directors, the Executive shall be
entitled to remain in the employ of the Company, in a manner consistent with the
terms of this Agreement. If within one (1) year of the effective date of a
Change of Control the Executive's employment with the Company is terminated by
the Company for any reason other than that set forth in Section 5.d. above, the
Company shall pay the Executive the unpaid portion, if any, of his then
prevailing salary prorated to the date of termination and, in addition, the
Company shall pay to the Executive a Termination Allowance equal to 12 months'
salary, based upon his then prevailing annual salary rate, less such number of
months salary that the Executive actually received from the effective date of
the Change of Control through the date of termination. The Termination Allowance
may, at the option of the Company, be paid in periodic installments over the
number of months' salary, to be paid in accordance with the Company's regular
payroll periods or over such lesser period as the Company may determine with the
concurrence of the Executive. The Termination Allowance referred to in this
Section 14.b. shall be in addition to, and not in lieu of, any Termination
Allowance payable under Section 5.e.

(ii) In the event that a Change of Control occurs as a result of
a transaction which has not been approved or recommended by the Company's Board
of Directors, then, in such event, at the time such transaction or tender offer
is completed, the Company shall pay to the Executive an amount equal to 24
months' salary based upon his then prevailing annual salary rate.

15. Disputes and Arbitration. Any dispute arising out of or concerning
this Agreement, which is not disposed of by agreement between the two parties,
shall be decided by an Arbitrator, located in the metropolitan Washington, D.C.
area, chosen by the parties. Either party may initiate an arbitration action by
a written notification to the other. The parties agree to choose the Arbitrator
within 15 days thereafter. The Arbitrator will follow the rules for arbitration
of the American Arbitration Association to the extent that said rules are not
inconsistent with the terms and conditions of this Section. The decision of the
Arbitrator shall be final and conclusive in the absence of statutory grounds for
setting it aside. Neither party shall be reimbursed for the costs that he or it
may sustain in connection with an arbitration under this Agreement.

16. Alteration, Amendment, or Termination. No change or modification of
this Agreement shall be valid unless the same is in writing and signed by the
parties hereto. No

7
<PAGE> 8

waiver of any provision of this Agreement shall be valid unless in writing and
signed by the person against whom it is sought to be enforced. The failure of
any party at any time to insist upon strict performance of any condition,
promise, agreement, or understanding set forth herein shall not be construed as
a waiver or relinquishment of the right to insist upon strict performance of the
same condition, promise, agreement, or understanding at a future time. The
invalidity or unenforceability of any particular provision of this Agreement
shall not affect the other provisions hereof, and this Agreement shall be
construed in all respects as if such invalid or unenforceable provisions were
omitted.

17. Integration. This Agreement sets forth (and is intended to be an
integration of) all of the promises, agreements, conditions, understandings,
warranties, and representations, oral or written, express or implied, among them
with respect to the terms of the employment relationship and there are no
promises, agreements, conditions, understandings, warranties, or
representations, oral or written, express or implied, among them with respect to
the terms of the employment relationship other than as set forth herein.

18. Conflicts of Law. This Agreement shall be subject to and governed by
the laws of the Commonwealth of Virginia irrespective of the fact that one or
more of the parties is now or may become resident of a different state.

19. Benefits and Burden. This Agreement shall inure to the benefit of, and
shall be binding upon, the parties hereto and their respective successors,
heirs, and personal representatives. This Agreement shall not be assignable.

* * * * * * * * * *

8
<PAGE> 9

IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date and year first above written.

WITNESS/ATTEST: COMPANY:

ITC LEARNING CORPORATION

By:
- ------------------------------- ---------------------------
Name:
Title:

WITNESS: EXECUTIVE:

- ------------------------------- -------------------------------
CHRISTOPHER E. MACK

<PAGE> 1
EXHIBIT 10.2

ITC LEARNING CORPORATION

EMPLOYMENT AGREEMENT

RECITALS

B. The Executive is presently in the employ of the Company and the
Company has offered to continue to employ the Executive as an Executive Officer
of the Company.

2. Acceptance and Standards. The Executive hereby accepts employment with
the Company in accordance with the terms and conditions set forth in this
Agreement. During the term of this Agreement, and subject to the provisions of
Sections 5 and 6 of this Agreement, the Executive agrees to devote his full
business time and services and his best efforts to the faithful performance of
the duties which may be reasonably assigned to him and which are consistent with
his position under Section 1 of this Agreement. The parties hereto agree and
acknowledge that this Agreement shall replace and supercede that certain
employment agreement dated March 1, 1997 by and between the Executive and the
Company and that the earlier employment agreement shall be of no further force
or effect.

<PAGE> 2

3. Compensation.

b. Basic Compensation. The Company shall, subject to the approval of
the Board of Directors of the Company, pay the Executive a basic salary of
$180,000 per year, payable in periodic installments in accordance with the
Company's normal payroll practices for salaried employees.

c. Vehicle. The Executive shall receive the use of a Company vehicle
selected by the Company, in its reasonable discretion.

f. Fringe Benefits. Nothing herein shall affect the eligibility of
the Executive to receive salary increases, bonus awards, stock option grants,
pension or profit-sharing agreements, employee benefits and the like which the
Company may, in its sole discretion, from time to time grant or make available
to the Executive. The Executive may participate in the Company's health and
medical plan, dental plan, 401(k) plan and Employee Stock Ownership Plan
("ESOP") if the Executive complies with the eligibility requirements thereunder
and otherwise in a manner consistent with the Company's then current normal
policies and procedures. The parties agree that in lieu of the Executive's
participation in the Company's medical and dental plan(s), the Executive shall
participate in an IBM benefits program ("IBM Benefits Program"). The Company
agrees that it shall reimburse Executive in an amount not to exceed $600.00 per
month for Executive's participation in the IBM Benefits Program. Such
reimbursement shall be made during the initial term and renewal term, if any, of
this Agreement, unless earlier terminated. The parties agree that in the event
the IBM Benefits Program is discontinued for any reason during the initial term,
or any renewal term, of this Agreement, Executive may participate in the
Company's medical and dental plan(s).

g. Discretionary Salary Increase and/or Bonus. Once each year,
consideration shall be given by the Board of Directors of the Company, within
its sole discretion, to a salary adjustment for the Executive, and if so, in
what amount; provided, however, that the Executive's salary shall not be
decreased below the amount set forth in

2
<PAGE> 3

paragraph 3.b. above if the Executive remains as Chief Executive Officer of the
Company and is satisfactorily performing his duties in that capacity. The
Executive shall, to the extent permitted by the Board of Directors of the
Company, also participate in the Company's Incentive Compensation Plan, if any,
commencing with the Company's fiscal year to end December 31, 1998 if the
Executive complies with the eligibility requirements thereunder and otherwise in
a manner consistent with the Company's then current normal policies and
procedures.

3
<PAGE> 4

d. Termination by the Company for Cause. The Company may immediately
terminate the Executive's employment for Cause (as hereinafter defined) by
giving the Executive notice in writing of such termination. The term "Cause"
shall mean: (i) a breach by the Executive of any of his material obligations
under this Agreement; (ii) any act by the Executive which constitutes gross
misconduct; (iii) a violation of a federal or state law, rule or regulation
applicable to the business of the Company; or (iv) the conviction of the
Executive of, or entry by the Executive of a guilty or no contest plea to, a
felony. No compensation or benefits shall be paid or provided to the Executive
under this Agreement on account of a termination for Cause, or for periods
following the date when such a termination of employment is effective.

6. Outside Business Interests, Employee Solicitation, and Company
Property.

4
<PAGE> 5

5
<PAGE> 6

or future entitlement, if any, to termination pay offered by the Company to its
non-contract employees.

9. Vacations. The Executive shall be entitled to a reasonable vacation of
not less than three (3) weeks per year during each year of his term of
employment.

12. Life Insurance. The Company, at its own expense, shall provide the
Executive with life insurance benefits under its group life insurance plan.

14. Change of Control.

6
<PAGE> 7

(ii) A sale of substantially all of the assets of the Company to
another corporation which is not a wholly-owned subsidiary of the Company; or

(iii) Any arrangement that gives to an entity or person (or group
of entities or persons acting in concert) the power to name a majority of the
Board of Directors of the Company.

b. Consequences of a Change of Control.

7
<PAGE> 8

be final and conclusive in the absence of statutory grounds for setting it
aside. Neither party shall be reimbursed for the costs that he or it may sustain
in connection with an arbitration under this Agreement.

16. Alteration, Amendment, or Termination. No change or modification of
this Agreement shall be valid unless the same is in writing and signed by the
parties hereto. No waiver of any provision of this Agreement shall be valid
unless in writing and signed by the person against whom it is sought to be
enforced. The failure of any party at any time to insist upon strict performance
of any condition, promise, agreement, or understanding set forth herein shall
not be construed as a waiver or relinquishment of the right to insist upon
strict performance of the same condition, promise, agreement, or understanding
at a future time. The invalidity or unenforceability of any particular provision
of this Agreement shall not affect the other provisions hereof, and this
Agreement shall be construed in all respects as if such invalid or unenforceable
provisions were omitted.

* * * * * * * * * * *

8
<PAGE> 9

IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date and year first above written.

WITNESS/ATTEST: COMPANY:

ITC LEARNING CORPORATION

By:
- --------------------------- ---------------------------
Name:
Title:

WITNESS: EXECUTIVE:

- --------------------------- -------------------------------
CARL D. STEVENS

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGSITRANT'S 10-QSB AS FOR THE QUARTER ENDED JUNE 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 313,818
<SECURITIES> 0
<RECEIVABLES> 7,038,321
<ALLOWANCES> (289,806)
<INVENTORY> 838,810
<CURRENT-ASSETS> 8,392,871
<PP&E> 2,655,864
<DEPRECIATION> (1,665,468)
<TOTAL-ASSETS> 19,191,964
<CURRENT-LIABILITIES> 5,571,375
<BONDS> 0
0
0
<COMMON> 395,826
<OTHER-SE> 11,923,270
<TOTAL-LIABILITY-AND-EQUITY> 19,191,964
<SALES> 5,469,195
<TOTAL-REVENUES> 5,469,195
<CGS> 1,955,446
<TOTAL-COSTS> 3,083,815
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 185,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 374,062
<INCOME-TAX> 0
<INCOME-CONTINUING> 374,062
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 374,062
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10

</TABLE>