Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(MARK ONE)

RQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED OCTOBERJULY 31, 20082009
 
OR
 
£TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGESECURITIESEXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM  ________ TO                                                                                         ________

COMMISSION FILE NUMBER 000-25674

SKILLSOFT PUBLIC LIMITED COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

REPUBLIC OF IRELANDRepublic of IrelandN/ANone
(STATE OR OTHER JURISDICTION OFState or Other Jurisdiction of(I.R.S. EMPLOYEREmployer
INCORPORATION OR ORGANIZATION)Incorporation or Organization)IDENTIFICATION NO.Identification No.)
  
107 NORTHEASTERN BOULEVARDNortheastern Boulevard03062
Nashua, New Hampshire(Zip Code)
(Address of Principal Executive Offices) 
NASHUA, NEW HAMPSHIRE03062
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:Registrant’s Telephone Number, Including Area Code: (603) 324-3000

Not Applicable
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was require to submit and post such files).
Yes £ No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer R
 Accelerated filer £
 
 
Non-accelerated filer £
Smaller reporting company £
 
  (Do not check if a smaller reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes  £ No R

On December 5, 2008,September 4, 2009, the registrant had outstanding 101,672,676 95,362,595 Ordinary Shares (issued or issuable in exchange for the registrant’s outstanding American Depositary Shares).


 



SKILLSOFT PLC

FORM 10-Q
FOR THE QUARTER ENDED OCTOBERJULY 31, 20082009
TABLE OF CONTENTSINDEX

 PAGE NO.
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  4140
  4241
  4241
  4341
  4341
  4442
   4543 
EX-31.1 Section 302 Certification of CEOEX-10.2 2001 Outside Director Option Plan, as amended  
 
EX-31.2 Certification of SkillSoft PLC's Chief Financial Officer, Section 302
EX-32.1 Certification of SkillSoft PLC's Chief Executive Officer, Section 906  
EX-32.2 Section 906 Certification of CFOSkillSoft PLC's Chief Financial Officer, Section 906 

 
~ 2 ~


PART I — FINANCIAL INFORMATION

ITEM 1. — UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SKILLSOFT PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

  
JULY 31,
2009
(Unaudited)
  
JANUARY 31,
2009
 
ASSETS
Current assets:        
Cash and cash equivalents
 
$
63,510
  
$
37,853
 
Short-term investments
  
4,265
   
1,099
 
Restricted cash
  
3,907
   
3,790
 
Accounts receivable, net
  
62,930
   
146,362
 
Prepaid expenses and other current assets
  
15,897
   
18,286
 
Deferred tax assets
  
31,976
   
26,444
 
Total current assets
  
182,485
   
233,834
 
Property and equipment, net
  
6,522
   
7,661
 
Intangible assets, net
  
8,836
   
13,472
 
Goodwill
  
238,550
   
238,550
 
Deferred tax assets
  
61,862
   
78,223
 
Other assets
  
7,809
   
3,360
 
Total assets
 
$
506,064
  
$
575,100
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:        
Current maturities of long term debt
 
$
968
  
$
1,253
 
Accounts payable
  
1,636
   
5,648
 
Accrued compensation
  
10,101
   
13,513
 
Accrued expenses
  
16,179
   
23,760
 
Deferred revenue
  
155,245
   
201,518
 
Total current liabilities
  
184,129
   
245,692
 
         
Long term debt
  
93,856
   
122,131
 
Other long term liabilities
  
3,168
   
3,221
 
Total long term liabilities
  
97,024
   
125,352
 
Commitments and contingencies (Note 11)        
Shareholders’ equity:        
Ordinary shares, €0.11 par value: 250,000,000 shares authorized; 95,924,298 and 98,892,249 shares issued at July 31, 2009 and January 31, 2009, respectively  
10,150
   
10,600
 
Additional paid-in capital
  
490,570
   
509,177
 
Treasury stock, at cost, 174,200 and 830,802 ordinary shares at July 31, 2009 and January 31, 2009, respectively  
(1,398
)
  
(5,317
)
Accumulated deficit
  
(274,924
)
  
(310,874
)
Accumulated other comprehensive income
  
513
   
470
 
Total shareholders’ equity
  
224,911
   
204,056
 
Total liabilities and shareholders’ equity
 
506,064
  
$
575,100
 


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

3


  OCTOBER 31, 2008 (Unaudited)  JANUARY 31, 2008 
ASSETS 
Current Assets:      
Cash and cash equivalents $64,764  $76,059 
Short-term investments  8,804   13,525 
Restricted cash  3,745   3,963 
Accounts receivable, net  72,546   171,708 
Prepaid expenses and other current assets  19,114   29,061 
Deferred tax assets  10,326   13,476 
Total current assets  179,299   307,792 
Property and equipment, net  7,914   7,210 
Intangible assets, net  16,242   29,887 
Goodwill  256,606   256,196 
Deferred tax assets  75,005   87,866 
Other assets  3,702   7,730 
Total assets $538,768  $696,681 
LIABILITIES AND STOCKHOLDERS' EQUITY 
Current Liabilities:        
Current maturities of long term debt $1,455  $2,000 
Accounts payable  1,772   2,139 
Accrued compensation  7,952   24,577 
Accrued expenses  19,528   29,507 
Deferred revenue  142,642   219,161 
Total current liabilities  173,349   277,384 
         
Long-term debt  142,242   197,000 
Other long-term liabilities  5,932   9,209 
Total long-term liabilities  148,174   206,209 
Commitments and contingencies (Note 12)        
Shareholders' equity:        
Ordinary shares, €0.11 par value: 250,000,000 shares authorized; 104,088,871 and 111,663,813 shares issued at October 31, 2008 and January 31, 2008, respectively  11,342   12,397 
Additional paid-in capital  541,967   591,303 
Treasury stock, at cost, 657,100 and 6,533,884 ordinary shares at October 31, 2008 and January 31, 2008, respectively  (5,401)  (24,524)
Accumulated deficit  (329,678)  (361,663)
Accumulated other comprehensive loss  (985)  (4,425)
Total stockholders' equity  217,245   213,088 
Total liabilities and stockholders' equity $538,768  $696,681 
SKILLSOFT PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED, IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

  
THREE MONTHS ENDED
JULY 31,
  
SIX MONTHS ENDED
JULY 31,
 
  
2009
  
2008
  
2009
  
2008
 
Revenue
 
$
78,926
  
$
83,332
  
 $
155,365
  
$
164,975
 
Cost of revenue (1)
  
7,524
   
9,830
   
14,997
   
18,639
 
Cost of revenue – amortization of intangible assets  
32
   
1,740
   
64
   
3,480
 
Gross profit
  
71,370
   
71,762
   
140,304
   
142,856
 
Operating expenses:                
Research and development (1)  
9,706
   
12,519
   
18,704
   
25,998
 
Selling and marketing (1)
  
24,387
   
26,099
   
46,798
   
55,798
 
General and administrative (1)  
9,400
   
9,433
   
17,157
   
18,324
 
Amortization of intangible assets  
2,117
   
2,741
   
4,572
   
5,737
 
Merger and integration related expenses  
-
   
240
   
-
   
761
 
Restructuring
  
4
   
-
   
56
   
-
 
SEC investigation
  
-
   
(13
)
  
-
   
49
 
Total operating expenses
  
45,614
   
51,019
   
87,287
   
106,667
 
Operating income
  
25,756
   
20,743
   
53,017
   
36,189
 
Other (expense) income, net
  
(605
)
  
6
   
(1,223
)
  
(397
)
Interest income
  
68
   
575
   
138
   
1,192
 
Interest expense
  
(2,032
)
  
(3,664
)
  
(4,477
)
  
(7,650
)
Income before provision for income taxes from continuing operations  
23,187
   
17,660
   
47,455
   
29,334
 
Provision for income taxes
  
6,016
   
6,845
   
11,505
   
11,352
 
Income from continuing operations  
17,171
   
10,815
   
35,950
   
17,982
 
Income from discontinued operations, net of income tax expense of $1.4 million and $1.3 million for the three and six months ended July 31, 2008  
-
   
2,067
   
-
   
1,974
 
Net income
 
$
17,171
  
$
12,882
  
$
35,950
  
$
19,956
 
Net income per share (Note 9):                
Basic – continuing operations 
$
0.18
  
$
0.10
  
$
0.37
  
$
0.17
 
Basic – discontinued operations 
$
0.00
  
$
0.02
  
$
0.00
  
$
0.02
 
  
$
0.18
  
$
0.12
  
$
0.37
  
$
0.19
 
Basic weighted average shares outstanding  
96,395,118
   
104,877,548
   
97,056,558
   
105,081,727
 
Diluted – continuing operations 
$
0.17
  
$
0.10
  
$
0.36
  
$
0.16
 
Diluted – discontinued operations 
$
0.00
  
$
0.02
  
$
0.00
  
$
0.02
 
  
$
0.17
  
$
0.12
  
$
0.36
  
$
0.18
 
Diluted weighted average shares outstanding  
98,381,904
   
108,712,224
   
98,622,364
   
109,231,394
 
____________
(1)Share-based compensation included in cost of revenue and operating expenses:

  
THREE MONTHS ENDED
JULY 31,
  
SIX MONTHS ENDED
JULY 31,
 
  
2009
  
2008
  
2009
  
2008
 
Cost of revenue
 
$
28
  
$
67
  
 $
49
  
$
111
 
Research and development
  
247
   
231
   
516
   
468
 
Selling and marketing
  
604
   
444
   
1,239
   
1,022
 
General and administrative
  
711
   
736
   
1,407
   
1,481
 


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

 
 
~ 3 ~4


SKILLSOFT PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)THOUSANDS)


  THREE MONTHS ENDED  NINE MONTHS ENDED 
  OCTOBER 31,  OCTOBER 31, 
  2008  2007  2008  2007 
Revenues $83,064  $75,124  $248,039  $203,733 
Cost of revenues (1)  9,374   8,282   28,013   23,827 
Cost of revenues - amortization of intangible assets  1,690   1,740   5,170   3,683 
Gross profit  72,000   65,102   214,856   176,223 
Operating expenses:                
Research and development (1)  12,138   13,710   38,136   35,315 
Selling and marketing (1)  26,387   25,227   82,185   71,489 
General and administrative (1)  9,130   9,449   27,454   25,572 
Amortization of intangible assets  2,738   3,634   8,475   7,955 
Merger and integration related expenses  -   2,616   761   11,144 
SEC investigation  -   105   49   1,328 
Total operating expenses  50,393   54,741   157,060   152,803 
Operating income  21,607   10,361   57,796   23,420 
Other income (expense), net  752   (642)  (282)  (1,026)
Interest income  248   654   1,440   2,990 
Interest expense  (3,103)  (3,927)  (10,116)  (7,741)
Income before provision (benefit) for income taxes from continuing operations  19,504   6,446   48,838   17,643 
Provision (benefit) for income taxes  7,438   270   18,790   (7,886)
Income from continuing operations  12,066   6,176   30,048   25,529 
(Loss) income from discontinued operations, net of income taxes (2)  (37)  (351)  1,937   173 
Net income $12,029  $5,825  $31,985  $25,702 
Net income per share (Note 10):                
Basic - continuing operations $0.12  $0.06  $0.29  $0.25 
Basic - discontinued operations $(0.00) $(0.00) $0.02  $0.00 
  $0.12  $0.06  $0.31  $0.25 
Basic weighted average common shares outstanding  104,182,736   104,789,720   104,779,876   104,165,555 
Diluted - continuing operations $0.11  $0.06  $0.28  $0.24 
Diluted - discontinued operations $(0.00) $(0.00) $0.02  $0.00 
  $0.11  $0.05 $0.29 $0.24 
Diluted weighted average common  shares outstanding  107,500,272   108,552,456   108,656,388   108,018,673 
 ________
†           Does not add due to rounding.
(1)  Share-based compensation included in cost of revenues and operating expenses:
  
SIX MONTHS ENDED
JULY 31,
 
  
2009
  
2008
 
Cash flows from operating activities:        
Net income
 
$
35,950
  
$
19,956
 
Adjustments to reconcile net income to net cash provided by operating activities:        
Share-based compensation
  
3,211
   
3,082
 
Depreciation and amortization
  
2,598
   
2,862
 
Amortization of intangible assets
  
4,636
   
9,217
 
Provision for bad debts
  
529
   
48
 
Provision for income tax — non-cash
  
6,646
   
9,386
 
Gain on sale of discontinued operations
  
-
   
(3,386
)
Non-cash interest expense
  
576
   
636
 
Tax benefit related to exercise of non-qualified stock options
  
(22
)
  
(673
)
Changes in current assets and liabilities:        
Accounts receivable
  
85,900
   
88,805
 
Prepaid expenses and other current assets
  
2,769
   
(965
)
Accounts payable
  
(4,039
)
  
1,091
 
Accrued expenses, including long-term
  
(12,005
)
  
(17,400
)
Deferred revenue
  
(51,980
)
  
(52,959
)
Net cash provided by operating activities
  
74,769
   
59,700
 
Cash flows from investing activities:        
Purchases of property and equipment
  
(1,432
)
  
(2,687
)
Cash paid for business acquisitions
  
-
   
(250
)
Purchases of investments
  
(5,512
)
  
(9,745
)
Maturity of investments
  
2,350
   
15,237
 
(Increase) decrease in restricted cash, net
  
(117
)
  
5
 
Cash received from sale of discontinued operations
  
-
   
6,903
 
Net cash (used in) provided by investing activities
  
(4,711
)
  
9,463
 
Cash flows from financing activities:        
Exercise of share options
  361   
7,769
 
Proceeds from employee share purchase plan
  1,164   
2,012
 
Principal payments on long term debt
  (28,560
)
  
(54,940
)
Acquisition of treasury stock
  (19,896
)
  
(27,171
)
Tax benefit related to exercise of non-qualified stock options
  22   
673
 
Net cash used in financing activities
  (46,909
)
  
(71,657
)
Effect of exchange rate changes on cash and cash equivalents
  2,508   
304
 
Net increase (decrease) in cash and cash equivalents
  25,657   
(2,190
)
Cash and cash equivalents, beginning of period
  37,853   
76,059
 
Cash and cash equivalents, end of period
 
$
63,510  
$
73,869
 

  THREE MONTHS ENDED OCTOBER 31,  NINE MONTHS ENDED OCTOBER 31, 
  2008  2007  2008  2007 
Cost of revenues $52  $54  $163  $119 
Research and development  227   226   695   659 
Selling and marketing  412   442   1,434   1,309 
General and administrative  731   657   2,212   1,921 
(2)  Discontinued operations:
Income tax (benefit) expense$(25 )$(311$1,306$76

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

 
 
~ 4 ~5



SKILLSOFT PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)

 NINE MONTHS ENDED 
 OCTOBER 31, 
 2008  2007 
Cash flows from operating activities from continuing operations:     
Income from continuing operations$30,048  $25,529 
Adjustments to reconcile net income from continuing operations       
    to net cash provided by operating activities:       
Share-based compensation 4,504   4,008 
Depreciation and amortization 3,921   5,481 
Amortization of intangible assets 13,645   11,638 
(Recovery of) provision for bad debts (187)  470 
Provision (benefit) for income taxes - non-cash 15,727   (8,986)
Non-cash interest expense 898   481 
Realized loss on sale of assets, net -   (58)
Tax benefit related to exercise of non-qualified stock options (1,247)  - 
Changes in current assets and liabilities, net of acquisitions:       
Accounts receivable 92,756   36,344 
Prepaid expenses and other current assets 7,907   14,145 
Accounts payable (858)  (1,313)
Accrued expenses, including long-term (23,395)  (45,563)
Deferred revenue (68,608)  (33,707)
Deferred tax asset 306   - 
    Net cash provided by operating activities from continuing operations 75,417   8,469 
Cash flows from investing activities from continuing operations:       
Purchases of property and equipment (4,066)  (2,321)
Cash used in purchase of business, net of cash acquired (250)  (278,923)
Purchases of investments (18,545)  (9,575)
Maturities of investments 23,337   48,378 
Release of restricted cash, net 218   16,183 
    Net cash provided by (used in) investing activities from continuing operations 694   (226,258)
Cash flows from financing activities from continuing operations:       
Borrowings under long term debt, net of debt financing costs -   194,133 
Exercise of stock options 16,412   8,280 
Proceeds from employee stock purchase plan 3,063   2,776 
Principal payment on long term debt (55,303)  (500)
Acquisition of treasury stock (56,495)  - 
Tax benefit related to exercise of non-qualified stock options 1,247   - 
Net cash (used in) provided by financing activities from continuing operations (91,076)  204,689 
Change in cash from discontinued operations 6,880   (7,013)
Effect of exchange rate changes on cash and cash equivalents (3,210)  1,864 
Net increase in cash and cash equivalents (11,295)  (18,249)
Cash and cash equivalents, beginning of period 76,059   48,612 
Cash and cash equivalents, end of period$64,764  $30,363 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

~ 5 ~


SKILLSOFT PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. THE COMPANY

SkillSoft PLC (the Company or SkillSoft) was incorporated in Ireland on August 8, 1989. The Company is a leading softwareSoftware as a serviceService (SaaS) provider of on-demand e-learning and performance support solutions for global enterprises, government, education and small to medium-sized businesses. SkillSoft helps companies to maximize business performance through a combination of content, online information resources, flexible technologies and support services. SkillSoft is the surviving corporation in a merger between SmartForce PLC and SkillSoft Corporation on September 6, 2002 (the SmartForce Merger). On May 14, 2007,References in this Form 10-Q to our fiscal year refer to the Company acquired NETg from The Thomson Corporation for approximately $254.7 million in cash (see Note 6)fiscal year ended January 31 of that year (e.g., fiscal 2010 is the fiscal year ended January 31, 2010).

2. BASIS OF PRESENTATION

The accompanying, unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of management, the condensed consolidated financial statements reflect all material adjustments (consisting only of those of a normal and recurring nature) which are necessary to present fairly the consolidated financial position of the Company as of OctoberJuly 31, 2008,2009 and the results of its operations for the three and nine months ended October 31, 2008 and 2007 and cash flows for the ninethree and six months ended OctoberJuly 31, 20082009 and 2007.2008. These condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2008.2009. The results of operations for the interim periodsperiod are not necessarily indicative of the results of operations to be expected for the full fiscal year. Certain presentational changes have been made to the prior year condensed consolidated statements of cash flows related to discontinued operations to conform with the current year presentation. Certain reclassifications have been made to the prior year condensed consolidated income statements between interest expense and other expense, net to conform with the current year presentation.

3. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND INVESTMENTS

The Company considers all highly liquid investments with original maturities of 90 days or less at the time of purchase to be cash equivalents. At OctoberJuly 31, 20082009, cash equivalents consisted mainly of high-grade commercial paper, corporate bonds and federal agency notes. At January 31, 2008,2009, cash equivalents consisted mainly of commercial paper and federal agency notes and treasury bills.notes.

At OctoberJuly 31, 2008,2009, the Company had approximately $3.7$3.9 million of restricted cash:cash; approximately $2.7 million is held voluntarily to defend named former executives and board members of SmartForce PLC for actions arising out of thean SEC investigation and litigation related to the 2002 securities class action and approximately $1.0$1.2 million is held in certificates of depositscertificates-of-deposits with a commercial bank pursuant to terms of certain facilities lease agreements.

The Company accounts for certain investments in high-grade commercial paper, corporate debt securities, certificates of depositbonds, certificates-of-deposit and federal agency notes in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS No. 115). Under SFAS No. 115, securities that the Company does not intend to hold to maturity or for trading purposes are reported at market value, and are classified as available for sale. At OctoberJuly 31, 2008,2009, the Company’s investments were classified as available for sale and had an average maturity of approximately 2663 days.

6


Cash and cash equivalents and available for sale short-term investments as of July 31, 2009 was as follows (in thousands):

Description Contracted Maturity Cost  Gross Unrealized Gains  Gross Unrealized Losses  Fair Value 
Cash and cash equivalents:              
Cash
 
N/A
 
$
61,674
  
$
-
  
$
-
  
$
61,674
 
Commercial paper
 
0-3 months
  
950
   
-
   
-
   
950
 
Federal agency notes
 
0-3 months
  
350
   
-
   
-
   
350
 
Corporate bonds
 
0-3 months
  
536
   
-
   
-
   
536
 
    
$
63,510
  
$
-
  
$
-
  
$
63,510
 
Short-term investments:
                  
Commercial paper
 
4-12 months
 
$
1,416
  
$
-
  
$
-
  
$
1,416
 
Federal agency notes
 
4-12 months
  
699
   
-
   
-
   
699
 
Corporate bonds
 
4-12 months
  
450
   
-
   
-
   
450
 
Treasury bills
 
4-12 months
  
1,299
   
1
   
-
   
1,300
 
Certificates of deposit
 
4-12 months
  
400
   
-
   
-
   
400
 
    
$
4,264
  
$
1
  
$
-
  
$
4,265
 

Realized gains and losses and declines in value determined to be other-than-temporary on available-for-sale securities are included in investment income. Gross realized gains and losses for the six months ended July 31 2009 were nominal. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in other income.

4. REVENUE RECOGNITION

The Company generates revenue primarily from the license of its products, the provision of professional services and from the provision of hosting/application service provider (ASP) services.

~ 6 ~

The Company follows the provisions of the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, as well as Emerging Issues Task Force (EITF) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” and SEC Staff Accounting Bulletin (SAB) No. 104 (SAB 104),Revenue Recognition,to account for revenue derived pursuant to license agreements under which customers license the Company’s products and services. The pricing for the Company’s courses varies based upon the content offering selected by a customer, the number of users within the customer’s organization and the term of the license agreement (generally one, two or three years). License agreements permit customers to exchange course titles, generally on the contract anniversary date. Hosting services are sold separately licensed for an additional fee. A license can provide customers access to a range of learning products including courseware, Referenceware®, simulations, mentoring and prescriptive assessment.

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

7


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

The Company also derives revenue from extranet hosting/ASP services, which is recognized on a straight-line basis over the period the services are provided. Upfront fees are recorded as revenue over the contract period.

The Company generally bills the annual license fee for the first year of a multi-year license agreement in advance and license fees for subsequent years of multi-year license arrangements are billed on the anniversary date of the agreement. Occasionally, the Company bills customers on a quarterly basis. In some circumstances, the Company offers payment terms of up to six months from the initial shipment date or anniversary date for multi-year license agreements to its customers. To the extent that a customer is given extended payment terms (defined by the Company as greater than six months), revenue is recognized as payments become due, assuming all of the other elements of revenue recognition have been satisfied.

The Company typically recognizes revenue from resellers when both the sale to the end user has occurred and the collectibility of cash from the reseller is probable. With respect to reseller agreements with minimum commitments, the Company recognizes revenue related to the portion of the minimum commitment that exceeds the end user sales at the expiration of the commitment period provided the Company has received payment. If a definitive service period can be determined, revenue is recognized ratably over the term of the minimum commitment period, provided that payment has been received or collectibility is probable.

The Company provides professional services, including instructor led training, customized content development, website development/hosting and implementation services. If the Company determines that the professional services are not separable from an existing customer arrangement, revenue from these services is recognized over the existing contractual terms with the customer; otherwise the Company typically recognizes professional service revenue as the services are performed.

The Company records reimbursable out-of-pocket expenses in both revenue and as a direct cost of revenue, as applicable, in accordance with EITF Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred.Incurred.

~ 7 ~


The Company records revenue net of applicable sales tax collected. Taxes collected from customers are recorded as part of accrued expenses on the balance sheet and are remitted to state and local taxing jurisdictions based on the filing requirements of each jurisdiction.

The Company records as deferred revenue amounts that have been billed in advance for products or services to be provided. Deferred revenue includes the unamortized portion of revenue associated with license fees for which the Company has received payment or for which amounts have been billed and are due for payment in 90 days or less for resellers and 180 days or less for direct customers.

The Company’sSkillSoft contracts often include an uptime guarantee for solutions hosted on itsthe Company’s servers whereby customers may be entitled to credits in the event of non-performance. The Company also retains the right to remedy any nonperformance event prior to issuance of any credit. Historically, the Company has not incurred substantial costs relating to this guarantee and the Company currently accrues for such costs as they are incurred. The Company reviews these costs on a regular basis as actual experience and other information becomes available; and should these costs become substantial, the Company would accrue an estimated exposure and consider the potential related effects of the timing of recording revenue on its license arrangements. The Company has not accrued any costs related to these warranties in the accompanying condensed consolidated financial statements.

8


5. SHAREHOLDERS’ EQUITY

5. ACCOUNTING FOR SHARE-BASED COMPENSATION(a)           ADS Repurchase Program
On April 8, 2008, the Company’s shareholders approved a program for the repurchase by the Company of up to an aggregate of 10,000,000 ADSs. On September 24, 2008, the Company’s shareholders approved an increase in the number of shares that may be repurchased under the program to 25,000,000 and an extension of the repurchase program until March 23, 2010. As of July 31, 2009, 11,277,508 shares remain available for repurchase, subject to certain limitations, under the shareholder approved repurchase program.
During the six months ended July 31, 2009, the Company repurchased a total of 2,625,177 shares for a total purchase price, including commissions, of $19.9 million. The Company retired 3,281,779 shares during the six months ended July 31, 2009, including 830,802 shares repurchased in the prior fiscal year. As of July 31, 2009, 174,200 of the repurchased shares had not yet been retired or canceled and were held as treasury shares at cost. The Company intends to retire these shares in the near future.

(b)           Share Based Compensation
The Company has severaltwo share-based compensation plans under which employees, officers, directors and consultants may be granted options to purchase the Company’s ordinary shares, generally at the market price on the date of grant. The options become exercisable over various periods, typically four years (and typically one or three years in the case of directors), and have a maximum term of up to ten years. As of OctoberJuly 31, 2008, 2,363,2632009, 2,039,826 ordinary shares remain available for future grant under the Company’s share option plans. Please see Note 9 of the Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K as filed with the SEC on March 31, 2008April 1, 2009 for a detailed description of the Company’s share option plans.

A summary of share option activity under the Company’s plans during the ninesix months ended OctoberJuly 31, 20082009 is as follows:

Share Options Shares  
Weighted
Average
 Exercise Price
  
Weighted
Average
Remaining
Contractual
Term (Years)
  Aggregate Intrinsic Value (in thousands) 
Outstanding, January 31, 2009
  
13,024,156
  
$
7.54
         
Granted
  
60,000
   
4.17
         
Exercised
  
(109,167
  
3.31
         
Forfeited
  
(32,917
  
3.94
         
Expired
  
(333,390
)
  
14.96
         
Outstanding, July 31, 2009
  
12,608,682
  
$
7.37
   
3.55
  
$
30,470
 
Exercisable, July 31, 2009
  
10,254,605
  
$
7.73
   
3.36
  
$
23,851
 
Vested and Expected to Vest, July 31, 2009 (1)  
12,326,377
  
$
7.42
   
3.54
  
$
29,474
 
Share Options Shares  Weighted Average Exercise Price  Weighted Average Remaining Contractual Term (Years)  Aggregate Intrinsic Value (in thousands) 
Outstanding, January 31, 2008  16,630,763  $7.05   4.76    
Granted  50,000   10.81        
Exercised  (3,636,058)  4.51        
Cancelled  (69,420)  15.01        
Outstanding, October 31, 2008  12,975,285  $7.74   4.13  $20,240 
Exercisable, October 31, 2008  9,757,981  $8.10   3.77  $16,255 
Vested and Expected to Vest, October 31, 2008 (1)  12,564,616  $7.77   4.09  $19,731 
 _______________________

(1)Represents the number of vested options as of OctoberJuly 31, 20082009 plus the number of unvested options as of OctoberJuly 31, 20082009 that are expected to vest, adjusted for an estimated forfeiture rate of 12.9%15.4%. The Company recognizes expense incurred under SFAS No. 123(R) on a straight line basis. Due to the Company’s vesting schedule, expense is incurred on options that have not yet vested but which are expected to vest in a future period. The options for which expense has been incurred but have not yet vested are included above as options expected to vest.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the closing price of the shares on October 31, 2008 of $7.70 and the exercise price of each in-the-money option) that would have been receivedrealized by the option holders had all option holders exercised their options on OctoberJuly 31, 2008.2009.

 
~ 8 ~9


The totalaggregate intrinsic value of options exercised during the three and six months ended OctoberJuly 31, 2008 and 20072009 was approximately $10.8$0.3 million and $0.6$0.5 million, respectively. The total intrinsicweighted average grant date fair value of options exercisedgranted as calculated by Black-Scholes option pricing model during the ninesix months ended OctoberJuly 31, 2009 and 2008 was $3.19 and 2007 was approximately $21.7 million and $6.3 million,$3.84 per share, respectively.

6. ACQUISITION

On May 14, 2007, the Company acquired NETg from The Thomson Corporation for approximately $254.7 million in cash. The combined entity offers a more robust multi-modal solution that includes online courses, simulations, digitized books and an on-line video library as well as complementary learning technologies. The acquisition supports SkillSoft’s mission to deliver comprehensive and high quality learning solutions and positions the Company to serve the demands of this growing marketplace.

The acquisition of NETg was accounted for as a business combination under SFAS No. 141, “Business Combinations” (SFAS No. 141), using the purchase method. Accordingly, the results of NETg have been included in the Company’s consolidated financial statements since the date of acquisition.

SUPPLEMENTAL PRO-FORMA INFORMATION

The Company concluded that the NETg acquisition represented a material business combination. The following are unaudited pro forma results of operations of the Company and NETg assuming the NETg acquisition occurred on February 1, 2007, with pro forma adjustments to give effect to amortization of intangible assets, an increase in interest expense on acquisition financing and certain other adjustments:
  NINE MONTHS ENDED OCTOBER 31, 2007 
    
Revenue $266,233 
Net income (loss)  (18,800)
Net income (loss) per share - basic $(0.18)
Net income (loss) per share - diluted $(0.17)

The unaudited pro forma results above are not necessarily indicative of results of operations that may have actually occurred had the acquisition of NETg occurred on the date noted.

7. SPECIAL CHARGES

MERGER AND EXIT COSTS

(a)       Merger and Exit Costs Recognized as Liabilities in Purchase Accounting

In connection with the closing of the NETg acquisition on May 14, 2007, the Company’s management effected an acquisition integration effort to eliminate redundant facilities and employees and to reduce the overall cost structure of the acquired business to better align the Company’s operating expenses with existing economic conditions, business requirements and the Company’s operating model. Pursuant to this restructuring, the Company recorded $11.6 million of costs related to severance and related benefits, costs to vacate leased facilities and other pre-Acquisition liabilities. These costs were accounted for under EITF Issue No. 95-3, “Recognition of Liabilities in Connection with Purchase Business Combinations.” These costs, which were recognized as a liability assumed in the purchase business combination, were included in the allocation of the purchase price.

The reductions in employee headcount totaled approximately 360 employees from the administrative, sales, marketing and development functions, and amounted to a liability of approximately $8.9 million, which was paid against the exit plan accrual through October 31, 2008.

In connection with the exit plan, the Company abandoned certain leased facilities and has a remaining facilities consolidation liability of $0.1 million as of October 31, 2008, consisting of lease termination costs, broker commissions and other facility costs. As part of the plan, two larger sites and a number of small locations were vacated. The fair value of the lease termination costs was calculated with certain assumptions related to the Company’s estimated cost recovery efforts from subleasing vacated space, including (i) the time period over which the property will remain vacant, (ii) the sublease terms and (iii) the sublease rates.

The Company’s merger and exit liabilities, which include previous merger and acquisition transactions, are recorded in accrued expenses (see Note 13) and long-term liabilities (see Note 16).liabilities. Activity in the ninesix month period ended OctoberJuly 31, 20082009 is as follows (in thousands):

  EMPLOYEE SEVERANCE AND RELATED COSTS  CLOSEDOWN OF FACILITIES  OTHER  TOTAL 
Merger and exit accrual January 31, 2008 $1,646  $3,224  $1,370  $6,240 
Adjustment to provision for merger and exit costs in connection with the acquisition of NETg  212   (139)  (971)  (898)
Adjustment to provision for merger and exit costs in connection with the acquisition of SmartForce  (899)  266   -   (633)
Payments made during the nine months ended October 31, 2008  (959)  (1,723)  (164)  (2,846)
Merger and exit accrual October 31, 2008 $-  $1,628  $235  $1,863 
  
CLOSEDOWN OF
FACILITIES
  OTHER  TOTAL 
Merger and exit accrual January 31, 2009
 
$
1,594
  
$
77
  
$
1,671
 
Payments made
  
(845
  
11
   
(834
)
Adjustment to provision for merger and exit costs in connection with the SmartForce Merger  
(381
)
  
-
   
(381
)
Merger and exit accrual July 31, 2009
 
 $
368
  
88
  
$
456
 

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

Year Ended January 31,   
2009 (remaining 3 months) $409 
2010  452 
2011  1,002 
Total $1,863 
Year Ended January 31, 2010 (remaining 6 months)                                                                                                                
 
$
93
 
Year Ended January 31, 2011
  
363
 
Total
 
$
456
 

In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” the costs of continued employment of certain former employees of NETg employees(which the Company acquired in May 2007), during the transition period wereare being expensed as incurred and are included in merger and integration related expenses in the accompanying statements of income.

(b)           Discontinued Operations

In connection with the NETg acquisition, the Company discontinued four businesses acquired from NETg because the Company believed those product offeringsNETg.

Discontinued operations did not represent areas that could grow in a manner consistent withaffect our results of operations during the Company’s operating modelthree or be consistent with the Company’s profit model or strategic initiatives. The businesses that were identified as discontinued operations were Financial Campus, NETg Press, Interact Now and Wave.

~ 10 ~

six months ended July 31, 2009. Summarized results of operations for discontinued operations which includesfor the three and six months ended July 31, 2008 is as follows (in thousands):

  
THREE MONTHS
ENDED
JULY 31, 2008
  
SIX MONTHS
 ENDED
JULY 31, 2008
 
Revenue from discontinued operations
 
$
107
  
$
288
 
         
Gain from discontinued operations before income taxes
  
3,459
   
3,305
 
Income tax
  
1,392
   
1,331
 
Gain from discontinued operations
 
2,067
  
$
1,974
 



The income from discontinued operations before income tax for the six months ended July 31, 2008 consisted primarily of a gain of $2.0$3.4 million net of income taxgain resulting from proceeds received during the second quarter of fiscal 2009 from the Company’s sale of the assets related to the NETg Press business in October 2007, are as follows (in thousands):

  THREE MONTHS ENDED  NINE MONTHS ENDED 
  OCTOBER 31,  OCTOBER 31, 
  2008  2007  2008  2007 
             
Revenue from discontinued operations $(64) $3,134  $224  $6,760 
(Loss) gain from discontinued operations before income tax  (62)  (662)  3,243   249 
Income tax (benefit) provision  (25)  (311)  1,306   76 
(Loss) gain from discontinued operations $(37) $(351) $1,937  $173 
which was partially offset by a $0.1 million loss from discontinued operations.
 
(c)           Restructuring

On January 19, 2009, the Company committed to a reduction in force with respect to a total of approximately 120 employees in the United States, Canada, Ireland and the United Kingdom. The decision was based on a review of various cost savings initiatives undertaken in connection with the development of the Company’s budget and operating plan for fiscal 2010. The Company also recorded a $56,000 restructuring charge in the six months ended July, 31 2009, which is included in the statement of income as restructuring, and is primarily related to a further reduction in force of 6 employees in its Australia office, which was communicated on March 4, 2009. Substantially all of this charge represents the severance cost for the terminated employees.

Activity in the Company’s restructuring accrual was as follows (in thousands):

Restructuring accrual as of January 31, 2009
 
$
1,112
 
Payments made  
(1,161
)
Restructuring charges incurred
  
56
 
Restructuring accrual as of July 31, 2009
 
$
7
 
Total restructuring accrual as of January 31, 2008 $961 
Payments made during the nine months ended October 31, 2008  (464)
Restructuring charges incurred during the nine months ended October 31, 2008  - 
Total restructuring accrual as of October 31, 2008 $497 

The Company anticipates that the remainder of the restructuring accrual will be paid out in fiscal 2009.2010.

8.7. GOODWILL AND INTANGIBLE ASSETS

Intangible assets are as follows (in thousands):

OCTOBER 31, 2008 JANUARY 31, 2008 
GROSS   NET GROSS   NET 
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING  
JULY 31, 2009
  
JANUARY 31, 2009
 
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT  
GROSS
CARRYING
AMOUNT
  
ACCUMULATED
AMORTIZATION
  
NET
CARRYING
AMOUNT
  
GROSS
CARRYING
AMOUNT
  
ACCUMULATED
AMORTIZATION
  
NET
CARRYING
AMOUNT
 
Internally developed software/ courseware $38,717  $38,430  $287  $38,717  $33,259  $5,458  $38,717  $38,526  $191  $38,717  $38,462  $255 
Customer contracts  36,848   25,231   11,617   36,848   19,846   17,002   36,848   29,793   7,055   36,848   26,938   9,910 
Non-compete  6,900   4,140   2,760   6,900   2,070   4,830 
Non-compete agreement  6,900   6,210   690   6,900   4,830   2,070 
Trademarks and trade names  2,725   2,047   678   2,725   1,028   1,697   2,725   2,725      2,725   2,388   337 
Books trademark  900   -   900   900   -   900 
Books 24X7 trademark  900      900   900      900 
 $86,090  $69,848  $16,242  $86,090  $56,203  $29,887  $86,090  $77,254  $8,836  $86,090  $72,618  $13,472 

$900,000Trademarks of intangible assets within trademarks of our Books24x7 business unit$0.9 million relating to the Company’s Books24X7 subsidiary are considered indefinite-lived and accordingly no amortization expense is recorded.

~ 11 ~

Table of Contents
TheThere was no change in goodwill at OctoberJuly 31, 20082009 from the amount recorded at January 31, 2008 is as follows:2009.

   
Gross carrying amount of goodwill, January 31, 2008 $256,196 
Payment of contingent purchase price of Targeted Learning Corporation  250 
Adjustments to allocation of purchase price for NETg acquisition  953 
Utilization of acquired tax benefit  (793)
Gross carrying amount of goodwill, October 31, 2008 $256,606 
The Company will be conducting its annual impairment test of goodwill for fiscal 20092010 in the fourth quarter. There were no indicators of impairment in the second quarter of fiscal 2010.


11
9.

8. COMPREHENSIVE INCOME

SFAS No. 130, “Reporting Comprehensive Income,,” requires disclosure of all components of comprehensive income on an annual and interim basis. Comprehensive income is defined as the change in equity of a business enterprise during a period resulting from transactions, other events and circumstances related to non-owner sources. Comprehensive income for the three and ninesix months ended OctoberJuly 31, 20082009 and 20072008 was as follows (in thousands):

  THREE MONTHS ENDED  NINE MONTHS ENDED 
  OCTOBER 31,  OCTOBER 31, 
  2008  2007  2008  2007 
Comprehensive income:            
Net income $12,029  $5,825  $31,985  $25,702 
Other comprehensive income (loss) — Foreign currency adjustment  2,013   (701)  2,309   (1,116)
Change in fair value of interest rate hedge, net of tax  260   (842)  1,155   (1,074)
Unrealized losses on available-for-sale  securities  -   22   (24)  (65)
Comprehensive income $14,302  $4,304  $35,425  $23,447 
Accumulated other comprehensive income as of October 31, 2008 and January 31, 2008 was as follows (in thousands):
  NINE MONTHS ENDED OCTOBER 31, 2008  YEAR ENDED JANUARY 31, 2008 
Unrealized (loss) gains on available-for-sale securities $(2) $22 
Change in fair value of interest rate hedge  (925)  (2,080)
Foreign currency adjustment  (58)  (2,367)
   Total accumulated other comprehensive loss $(985) $(4,425)
  
THREE MONTHS ENDED
JULY 31,
  
SIX MONTHS ENDED
JULY 31,
 
  
2009
  
2008
  
2009
  
2008
 
Comprehensive income:                
Net income
 
$
17,171
  
$
12,882
  
$
35,950
  
$
19,956
 
Other comprehensive (loss) income — Foreign currency adjustment, net of tax  
(535
)
  
(95
)
  
(615
)
  
296
 
Change in fair value of interest rate hedge, net of tax  
281
   
524
   
658
   
895
 
Unrealized losses on available-for-sale securities  
-
   
(9
)
  
-
   
(24
)
Comprehensive income
 
$
16,917
  
$
13,302
  
$
35,993
  
$
21,123
 

~ 12 ~

10.9. NET INCOME PER SHARE

Basic net income per share was computed using the weighted average number of shares outstanding during the period. Diluted net income per share was computed by giving effect to all dilutive potential shares outstanding. The weighted average number of shares outstanding used to compute basic net income per share and diluted net income per share was as follows:

  
THREE MONTHS ENDED
JULY 31,
  
SIX MONTHS ENDED
JULY 31,
 
  
2009
  
2008
  
2009
  
2008
 
Basic weighted average shares outstanding  
96,395,118
   
104,877,548
   
97,056,558
   
105,081,727
 
Effect of dilutive shares outstanding  
1,986,786
   
3,834,676
   
1,565,806
   
4,149,667
 
Weighted average shares outstanding, as adjusted  
98,381,904
   
108,712,224
   
98,622,364
   
109,231,394
 
  THREE MONTHS ENDED  NINE MONTHS ENDED 
  OCTOBER 31,  OCTOBER 31, 
  2008  2007  2008  2007 
Basic weighted average shares outstanding  104,182,736   104,789,720   104,779,876   104,165,555 
Effect of dilutive shares outstanding  3,317,536   3,762,736   3,876,512   3,853,118 
Weighted average shares outstanding, as adjusted  107,500,272   108,552,456   108,656,388   108,018,673 

The following share equivalents have been excluded from the computation of diluted weighted average shares outstanding for the three and ninesix months ended OctoberJuly 31, 20082009 and 2007,2008, respectively, as they would be anti-dilutive:

  
THREE MONTHS ENDED
JULY 31,
  
SIX MONTHS ENDED
JULY 31,
 
  
2009
  
2008
  
2009
  
2008
 
Options to purchase shares excluded  
3,077,668
   
2,944,977
   
7,616,543
   
2,951,235
 
  THREE MONTHS ENDED  NINE MONTHS ENDED 
  OCTOBER 31,  OCTOBER 31, 
  2008  2007  2008  2007 
Options to purchase shares  2,907,621   8,540,503   2,936,591   9,009,160 

11.10. INCOME TAXES

The Company operates as a holding company with operating subsidiaries in several countries, and each subsidiary is taxed based on the laws of the jurisdiction in which it operates.

The Company has significant net operating loss (NOL) carryforwards, some of which are subject to potential limitations based upon the change in control provisions of Section 382 of the United States Internal Revenue Code.

12


For the ninesix months ended OctoberJuly 31, 20082009 and 2007,2008, the Company’s effective tax rates were 38.5%24.2% and (44.3%)38.7%, respectively. The decrease in the current year effective tax rate is primarily due to a change in the geographical distribution of worldwide earnings as a result of the business realignment strategy that took place at the beginning of fiscal 2010. For the nine month periodsix months ended OctoberJuly 31, 2008,2009, the provision for income taxes consisted of a cash tax provision of $3.1$4.9 million and a non-cash tax provision of $15.7$6.6 million. Included in the non-cash tax provision of $15.7$6.6 million is a $1.1benefit of approximately $0.4 million due to an adjustment made to the Company’s foreign based tax accruals and a $0.5 million provision related to uncertain tax return positions not likely to be sustained under audit.positions. For the nine month periodsix months ended OctoberJuly 31, 2007,2008, the tax benefitprovision for income taxes of $7.9$11.4 million (44.3%) consisted of a cash tax provision of $1.1$2.0 million and a non-cash tax benefitprovision of $9.0$9.4 million. The non-cash tax benefit of $9.0 million was primarily the result of a $25 million reduction in the Company’s U.S. deferred tax valuation allowance on NOL carryforwards which was partially offset by the Company’s projected non-cash provision for income taxes and the impact of certain tax adjustments required in purchase accounting for the NETg acquisition.

At OctoberIn accordance with FIN No. 48, “Accounting for Uncertainty in Income Taxes,” at July 31, 2008,2009, the Company had $3.1 million ofCompany’s unrecognized tax benefits. Ifbenefits, including interest and penalties totaled $3.5 million, all of which, if recognized, $2.4 million would loweraffect the Company’s effective tax rate. However, upon the adoption of SFAS No. 141 (revised), “Business Combinations” (SFAS No. 141(R)), changes in unrecognized tax benefits following an acquisition generally will affect income tax expense, including any changes associated with acquisitions that occurred prior to the effective date of SFAS No. 141(R). The Company recognizes interest and penalties accrued related to unrecognized tax benefits as income tax expense. As of OctoberJuly 31, 2008,2009, the Company had approximately $0.9$0.7 million of accrued interest and penalties related to uncertain tax positions.

The Company conducts business globally and, as a result, the Company and its subsidiaries file income tax returns in the U.S. and foreign jurisdictions. In the normal course of business, the Company isand its subsidiaries are subject to examination by taxing authorities throughout the world, including, but not limited to,in such major jurisdictions as Canada,Ireland, the United Kingdom, Germany, Australia, Canada and the United States.U.S. With few exceptions, the Company is no longer subject to U.S. federal, state and internationallocal or non-U.S based income tax examinations for years before 2003.fiscal 2004.

~ 13 ~

12.11. COMMITMENTS AND CONTINGENCIES

In January 2007, the Boston District Office of the SEC informed the Company that it wasis the subject of an informal investigation concerning option granting practices at SmartForce for the period beginning April 12, 1996 through July 12, 2002 (the Option Granting Investigation). These grants were made prior to the September 6, 2002 merger with SmartForce PLC. The Company has produced documents in response to requests from the SEC. The SEC staff has informed the Company that the staff has not determined whether to close the Option Granting Investigation.

The Company believes that it accounted for SmartForce stock option grants appropriatelyproperly in the merger.merger, and believes that as a result of the merger accounting the Company’s financial statements are not going to change even if the SEC concludes that SmartForce did not properly account for its pre-merger option grants. When SkillSoft Corporation and SmartForce merged on September 6, 2002, SkillSoft Corporation was for accounting purposes deemed to have acquired SmartForce. Accordingly, the pre-merger financial statements of SmartForce are not included in the historical financial statements of the Company, and the Company’s financial statements include results from what had been the resultsbusiness of SmartForce only from the date of the merger.
Under applicable accounting rules, the Company valued all of the outstanding SmartForce stock options assumed in the merger at fair value upon consummation of the merger.

Accordingly, the Company believes that its accounting for SmartForce stock options will not be affected by any error that SmartForce may have made in its own accounting for stock option grants and that that the Option Granting Investigation should not require any change in the Company’s financial statements.

The Company has cooperated with the SEC in the Option Granting Investigation. At the present time, the Company is unable to predict the outcome of the Option Granting Investigation or its potential impact on its operating results or financial position.

From time to time, the Company is a party to or may be threatened with other litigation in the ordinary course of its business. The Company regularly analyzes current information, including, as applicable, the Company’s defenses and insurance coverage and, as necessary, provides accruals for probable and estimable liabilities for the eventual disposition of these matters. The Company is not a party to any material legal proceedings.


13.
13


12. GEOGRAPHICAL DISTRIBUTION OF REVENUE

The Company attributes revenue to different geographical areas on the basis of the location of the customer. RevenuesRevenue by geographical area for the three and ninesix month periods ended OctoberJuly 31, 20082009 and 20072008 were as follows (in thousands):

  
THREE MONTHS ENDED
JULY 31,
  
SIX MONTHS ENDED
JULY 31,
 
  
2009
  
2008
  
2009
  
2008
 
Revenue:                
United States
 
$
60,040
  
$
60,756
  
$
118,752
  
$
119,809
 
United Kingdom
  
8,986
   
11,790
   
17,574
   
23,622
 
Canada
  
3,047
   
3,292
   
5,740
   
6,784
 
Europe, excluding United Kingdom  
2,182
   
1,842
   
4,286
   
3,680
 
Australia/New Zealand
  
3,114
   
4,080
   
5,865
   
7,963
 
Other
  
1,557
   
1,572
   
3,148
   
3,117
 
Total revenue
 
$
78,926
  
$
83,332
  
$
155,365
  
$
164,975
 
  THREE MONTHS ENDED  NINE MONTHS ENDED 
  OCTOBER 31,  OCTOBER 31, 
  2008  2007  2008  2007 
Revenue:            
United States $61,998  $59,076  $181,807  $160,161 
United Kingdom (UK)  11,358   8,234   34,980   22,493 
Canada  3,047   2,726   9,831   7,855 
Europe, excluding UK  1,758   1,036   5,438   2,055 
Australia/New Zealand  3,343   3,290   11,306   9,128 
Other  1,560   762   4,677   2,041 
   Total revenue $83,064  $75,124  $248,039  $203,733 

Long-lived tangible assets at international locations are not significant.
14.
13. ACCRUED EXPENSES

Accrued expenses in the accompanying condensed combined balance sheets consistconsisted of the following (in thousands):

 OCTOBER 31, 2008  JANUARY 31, 2008  
JULY 31,
2009
 
JANUARY 31,
2009
 
Professional fees  3,555   5,308  
$
2,945
 
$
4,237
 
Sales tax payable/VAT payable  1,324   4,366  
1,159
 
3,806
 
Accrued royalties  2,246   6,892  
1,600
 
1,650
 
Interest rate swap liability
 
485
 
1,581
 
Accrued tax
 
2,010
 
854
 
Other accrued liabilities  12,403   12,941   
7,980
  
11,632
 
Total accrued expenses $19,528  $29,507  
16,179
 
$
23,760
 

15.14. OTHER ASSETS

Other assets in the accompanying condensed consolidated balance sheets consist of the following (in thousands):

 OCTOBER 31, 2008  JANUARY 31, 2008  
JULY 31,
2009
 
JANUARY 31,
2009
 
Note receivable – long term -   3,507 
Debt financing cost – long term (See Note 18)  3,498   4,126 
Debt financing cost – long term (See Note 17)
 
$
2,659
 
$
3,211
 
Deferred charge
 
4,943
 
-
 
Other  204   97   
         207
  
149
 
Total other assets $3,702  $7,730  
7,809
 
$
3,360
 


16.
14


15. OTHER LONG TERM LIABILITIES

Other long term liabilities in the accompanying condensed consolidated balance sheets consist of the following (in thousands):

 OCTOBER 31, 2008  JANUARY 31, 2008  
JULY 31,
2009
 
JANUARY 31,
2009
 
Merger accrual – long term  1,597   2,914  
$
198
 
$
1,189
 
Interest rate swap liability (See Note 19)  1,542   3,467 
Uncertain tax positions including interest and penalties – long term 
2,486
 
1,714
 
Other  2,793   2,828   
         484
  
318
 
Total other long-term liabilities $5,932  $9,209  
3,168
 
$
3,221
 

In Note 17 of “Notes to Consolidated Financial Statements” presented in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2008, the Company had unintentionally included approximately $2.5 million in “Merger accrual – long term” instead of “Other”. Such amount has been reclassified above to reflect the correct presentation.

17.16. FAIR VALUE OF FINANCIAL INSTRUMENTS

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, “Fair Value Measurements,” which definesinstruments consist mainly of cash and cash equivalents, derivative financial instrument contracts, investments, restricted cash, accounts receivable and debt. The Company determines fair value establishes a framework for measuring fair value in accordance with generally accepted accounting principlesshort-term investments based on quoted market values. The carrying amount of accounts receivable is net of an allowance for doubtful accounts, which is based on historical collections and expands disclosures about fair value measurements. As defined in SFAS No. 157, fair value is the amount that would be received if an asset was sold or a liability transferred in an orderly transaction between market participants at the measurement date.

Effective February 1, 2008, the Company adopted the provision of SFAS No. 157 with respect to its financial assets and liabilities that are measured at fair value within the condensed consolidated financial statements. The adoption of SFAS No. 157 did not have a material impact on the Company’s financial position, results of operations or cash flows.

In February 2008, the FASB issued FASB Staff Position (FSP) SFAS No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions” (FSP SFAS No. 157-1), and FSP SFAS No. 157-2, “Effective Date of FASB Statement No. 157” (FSP SFAS No. 157-2). FSP SFAS No. 157-1 removes leasing from the scope of SFAS No. 157, “Fair Value Measurements.” FSP SFAS No. 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of FSP SFAS No. 157-1, effective February 1, 2008, did not impact the Company’s financial position, results of operations or cash flows.known credit risks. The Company has deferred the application of the provisions of this statement to its non-financial assets and liabilities in accordance with FSP SFAS No. 157-2. The Company does not expect that its adoption of the provisions of FSP SFAS 157-2 will have a material impact on its financial position, results of operations or cash flows.

~ 15 ~


SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The three levels of the fair value hierarchy established by SFAS No. 157 in order of priority are as follows:

·  Level 1: Quoted prices in active markets for identical assets as of the reporting date.

·  Level 2: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

·  Level 3: Unobservable inputs that reflect the Company’s assumptions about the assumptions that market participants would use in pricing the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.

The Company’s commercial paper, corporate debt securities, certificates of deposit, federal agency notes and treasury bills are classified as cash equivalents or available for sale securities based on the original maturity period and carried at fair value. These assets, except for federal agency notes and treasury bills, are generally classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The Company classifies federal agency notes and treasury bills within Level 2 of the fair value hierarchy because they are valued using pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.

The Company recognizes all derivative financial instruments in its consolidated financial statements at fair value in accordance with FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The Company determinesbelieves the fair value of these instruments usingits variable rate debt approximates its carrying value based on comparable market terms and conditions.

In connection with the framework prescribed by SFAS No. 157 by considering the estimated amountacquisition of NETg, the Company would receive to terminate these agreementsentered into an interest rate swap contract that is carried at the reporting date and by taking into account current interest rates and the creditworthiness of the counterparty. In certain instances, the Company may utilize financial models to measure fair value. Generally, the Company uses inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability and inputs derived principally from, or corroborated by, observable market data by correlation or other means. The Company has classified its derivative liability within Level 2 of the fair value hierarchy because these observable inputs are available for substantiallyrelated to debt assumed in connection with the full term of the derivative instrument.acquisition.

See Note 18 for further discussion.
~ 16 ~

The following table summarizes the Company’s fair value hierarchy in accordance with SFAS 157, “Fair Value Measurements, for its financial assets and liabilities measured at fair value on a recurring basis as of OctoberJuly 31, 20082009 (in thousands):

  
July 31, 2009
  
Quoted Prices in Active Markets for Identical Assets
Level 1
  
Significant Other Observable
 Inputs
Level 2
  
Significant Unobservable Inputs Level 3
 
Financial Assets:                
   Cash equivalents (1)
 
$
1,836
  
$
1,486
  
$
350
  
$
-
 
   Available for sale securities (2)
 
$
4,265
  
$
2,266
  
$
1,999
  
$
-
 
                 
Financial Liabilities:                
Interest rate swap agreement (Note 18)
 
$
485
  
$
-  
$
485
  
$
-
 
  October 31, 2008  Quoted Prices in Active Markets for Identical Assets Level 1  Significant Other Observable Inputs Level 2  Significant Unobservable Inputs Level 3 
Financial Assets:            
Cash equivalents (1)  30,821  $15,625  $15,196  $- 
Available for sale securities (2)  8,804  $6,505  $2,299  $- 
                 
Financial Liabilities:                
Interest rate swap agreement (Note 19)  1,542  $-  $1,542  $- 
____________
(1) Consists of high-grade commercial paper, and federal agency notes and corporate bonds with original and remaining maturities of less than 90 days.

(2) Consists of high-grade commercial paper, agency discount notes, corporate debt securities andbonds, certificates of deposit and treasury bills with original maturities of 90 days or more and remaining maturities of less than 365 days.

18. LINE OF17. CREDIT FACILITIES

The Company has an agreement (the Credit Agreement), as amended, with certain lenders (the Lenders) providing for a $225 million senior secured credit facility comprised of a $200 million term loan facility and a $25 million revolving credit facility. The term loan was used to finance the NETg acquisition and the revolving credit facility may be used for general corporate purposes.

On July 7, 2008, the Company entered into an amendment (Amendment No. 1) to the Credit Agreement, and the related Guarantee and Collateral Agreement, dated May 14, 2007. The primary purpose of Amendment No. 1 was to expand the ability of the Company and its subsidiaries to make repurchases of the Company’s Ordinary Shares. The Company’s expanded repurchase ability under Amendment No. 1 is conditioned on the absence of an event of default and a requirement that (i) the leverage ratio shall be There are no greater than 2.75:1.0 as of the most recently completed fiscal quarter ending prior to the date of such repurchase and (ii) that the Company make a prepayment of the term loan under the Credit Agreement in an amount equal to the dollar amount of any such repurchase. Such term loan prepayments will not, however, be required in connection with the first $24.0 million of repurchases made from and after July 7, 2008.

Amendment No. 1 also provides for an increase in the interest rate on the term loanamounts outstanding under the Credit Agreement and the paymentrevolving credit facility.

15


The term loan will bearbears interest at a rate per annum equal to, at the Company’s election, (i) a base rate (3.25% at July 31, 2009) plus a margin of 2.50% (increased from 1.75%) or (ii) adjusted LIBOR (0.60% at July 31, 2009) plus a margin of 3.50% (increased from 2.75%).The Company is required to maintain certain financial covenants under the credit facility. The Company is in compliance with these covenants at July 31, 2009 and has been since the inception of the term loan.

In connection with the Credit Agreement and Amendment No. 1,the amendment, the Company incurred debt financing costs of $5.9$6.2 million and $0.3 million, respectively, which were capitalized and are being amortized as additional interest expense over the term of the loans using the effective-interest method. During the three and ninesix months ended OctoberJuly 31, 2008,2009, the Company paid approximately $2.3$1.3 million and $8.6$2.9 million, respectively, in interest. The Company recorded $0.3 million and $0.9$0.4 million of amortized interest expense related to the capitalized debt financing costs for the three and nine months ended OctoberJuly 31, 2009 and 2008, respectively. The Company recorded $0.6 million of amortized interest expense related to the capitalized debt financing costs for both the six months ended July 31, 2009 and 2008. As of OctoberJuly 31, 2008,2009, total unamortized debt financing costs of $1.0 million and $3.5$2.7 million are recorded within prepaid expenses and other current assets and non-current other assets, respectively, based on scheduled future amortization.

During the three and ninesix months ended OctoberJuly 31, 2008,2009, the Company paid $0.4$10.3 million and $55.3$28.6 million, respectively, against the term loan amount. As a result, the balance outstanding under the term loan was $143.7$94.8 million at OctoberJuly 31, 2008,2009, with a weighted average interest rate for the three month period ended OctoberJuly 31, 20082009 of 8.21%.6.57%, which includes a portion of debt that has been fixed by an interest rate swap.

Future scheduled minimum payments under this credit facility are as follows (in thousands):

Fiscal 2010 (remaining 6 months)
 
$
484
 
Fiscal 2011
  
968
 
Fiscal 2012
  
968
 
Fiscal 2013
  
968
 
Fiscal 2014
  
    91,436
 
  Total
 
$
94,824
 
Fiscal 2009 (remaining 3 months) $364 
Fiscal 2010  1,455 
Fiscal 2011  1,455 
Fiscal 2012  1,455 
Fiscal 2013  1,455 
Thereafter  137,513 
Total $143,697 

~ 17 ~

19.18. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company has anis exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages financial risks, including interest rate, swapliquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding as well as the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The Company assesses the effectiveness of each hedging relationship by using a regression analysis of the changes in fair value or cash flows of the derivative hedging instrument and the changes in fair value or cash flows of the designated hedged item or transaction. The effective portion of changes in the fair value of derivatives designated as and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and six months ended July 31, 2009, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. AsThe ineffective portion of October 31, 2008 and 2007, the notional amount on the interest rate swap was $100.4 million and $159.6 million, respectively.

At October 31, 2008 and 2007, the interest rate swap had achange in fair value of $(1.5) million and $(1.1) million, respectively, which was includedthe derivatives is recognized directly in other long-term liabilities.earnings. No hedge ineffectiveness on cash flow hedges was recognized during the ninethree and six months ended OctoberJuly 31, 2008 and 2007. For the three months ended October 31, 2008 and 2007, the change in net unrealized gains (losses) on the interest rate swap designated as a cash flow hedge and reported as a component2009.

16


Amounts reported in accumulated other comprehensive income related to derivatives will be incurred asreclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The change in net unrealized gains (losses)current interest rate swap held by the Company matures on cash flow hedges reflects a reclassification of $0.6 million of net unrealized losses and $0.1 million of net unrealized gainsDecember 31, 2009. For the period from accumulated other comprehensive income to interest expense for the three months ended October 31, 2008 and 2007, respectively. The change in net unrealized gains (losses) on cash flow hedges reflects a reclassification of $1.8 million of net unrealized losses and $0.2 million of net unrealized gains from accumulated other comprehensive income to interest expense for the nine months ended October 31, 2008 and 2007, respectively. During the twelve month period ending OctoberAugust 1, 2009 through December 31, 2009, the Company estimates that it will incur an additional $1.5$0.5 million will be recorded as an increase to interest expense.

As of July 31, 2009, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest expense relating to the interest rate swap.risk:

20. SHARE REPURCHASE PROGRAM
Interest Rate Derivates 
Notional
(in thousands)
 Effective DateMaturity DateIndex Strike Rate 
Interest Rate Swap $38,400 May 14, 2007December 31, 20093 Month LIBOR  5.1015%

On April 8, 2008,The following table summarizes the location of the fair value of the Company’s shareholders approved a program forderivative instruments within the repurchase bycondensed consolidated balance sheets as of July 31, 2009, and January 31, 2009 (in thousands):

 Balance Sheet Location July 31, 2009  January 31, 2009 
Liabilities:         
Derivative instruments designated as a cash flow instruments under SFAS 133:         
Interest rate swap contracts
Accrued expenses
 
485
  
1,581
 
Total assets
  
485
  
$
1,581
 

The tables below present the Companyeffect of up to an aggregate of 10,000,000 ADSs. On September 24, 2008, the Company’s shareholders approved an increase inderivative financial instruments on the numberConsolidated Statement of shares that may be repurchased under the program to 25,000,000 and an extension of the repurchase program until March 23, 2010. DuringIncome for the three and ninesix months ended OctoberJuly 31, 2008,2009 (in thousands):

  
Amount of Gain (Loss) Recognized
 in OCI
  
Amount of Gain (Loss) Reclassified from AOCI
 into Net Income
 
Location of Gain (Loss) Reclassified from AOCI
into Net Income
For the three months ended July 31, 2009:         
Interest rate swap contracts
 
$
(71
)
 $
(539
Interest Expense
Total
 
$
(71
)
 
(539
 

  
Amount of Gain (Loss) Recognized
 in OCI
  
Amount of Gain (Loss) Reclassified from AOCI
 into Net Income
 
Location of Gain (Loss) Reclassified from AOCI
into Net Income
For the six months ended July 31, 2009:         
Interest rate swap contracts
 
$
(117
)
 
(1,213
Interest Expense
Total
 
$
(117
)
 
(1,213
 

As of July 31, 2009, the fair value of derivatives is in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these instruments was $0.6 million. As of July 31, 2009, the Company repurchased a total of 2,985,680 and 5,709,399 shares, respectively, for a total purchase price, including commissions, of $29.3 million and $56.5 million, respectively. The Company retired 11,586,183 shares during the three months ended October 31, 2008, including 6,533,884 shares repurchased in prior fiscal years. As of October 31, 2008, 657,100 of the repurchased shares havehad not been retired or canceled and are held as treasury stock at cost;posted any collateral related to these instruments. If the Company intendshad breached any of these provisions at July 31, 2009, it would have been required to retire these shares in the near future. As of October 31, 2008, 19,290,601 shares remain available for repurchase, subject to certain limitations,settle its obligations under the shareholder approved repurchase program.instruments at their termination value of $0.6 million.


17
21.

19. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB, issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 ” (SFAS No. 159), which permits entities to choose to measure many financial instruments and certain other items at fair value and is effective for fiscal years beginning after November 15, 2007, or February 1, 2008 for SkillSoft. The Company adopted SFAS No. 159 on February 1, 2008 and elected not to measure any additional financial instruments or other items at fair value. Adoption of SFAS No. 159 did not have a material impact on the Company’s financial position or results of operations.
In December 2007, the FASBFinancial Accounting Standards Board (FASB) issued SFAS No. 141 (revised), “Business Combinations”Combinations (SFAS No. 141(R)). SFAS No. 141(R) changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. Adoption of SFAS No. 141(R) is effectiveon February 1, 2009 did not have a material impact on the Company’s financial position or results of operations. The adoption of SFAS 141(R) will have an impact on the Company’s accounting for the Company for any business combinations for which the acquisition date isoccurring on or after February 1, 2009, with earlythe adoption prohibited.date, but the effect will be dependent on the acquisitions at that time.


In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” 51(SFAS No.” (SFAS 160). SFAS No. 160 changes the accounting for noncontrolling (minority) interests in consolidated financial statements including the requirements to classify noncontrolling interests as a component of consolidated stockholders’ equity, and the elimination of “minority interest” accounting in results of operations with earnings attributable to noncontrolling interests reported as part of consolidated earnings. Additionally, SFAS No. 160 revises the accounting for both increases and decreases in a parent’s controlling ownership interest. SFAS No. 160 is effective for the Company in fiscal 2009, with early adoption prohibited. Adoption of SFAS No. 160 on February 1, 2009 did not have a material impact on the Company’s financial position or results of operations.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” 133(SFAS No.” (SFAS 161). SFAS No. 161 applies to all derivative instruments and nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 37 and 42 of Statement 133 and related hedged items accounted for under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” Activities(SFAS No.” (SFAS 133). SFAS No. 161 requires entities to provide greater transparency through additional disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows. Adoption of SFAS 161 on February 1, 2009 did not have a material impact on the Company’s financial position or results of operations.

In April 2008, the FASB issued FASB Staff Position (FSP) No. 161142-3, “Determination of the Useful Life of Intangible Assets” (FSP 142-3). FSP 142-3 requires companies estimating the useful life of a recognized intangible asset to consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, to consider assumptions that market participants would use about renewal or extension as adjusted for SFAS 142’s entity-specific factors. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2009. Adoption of this statement is not expected to have a material impact on the Company on February 1,Company’s consolidated financial statements when it becomes effective.

In May 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 165, “Subsequent Events”(SFAS 165) .  SFAS 165 does not require significant changes regarding recognition or disclosure of subsequent events, but does require disclosure of the date through which subsequent events have been evaluated for disclosure and recognition.  SFAS 165 is effective for financial statements issued after June 15, 2009.  The Company is currently analyzingimplementation of this standard did not have a significant impact on the effect, SFAS No. 161 willfinancial statements of the Company.  Subsequent events through the filing date of this Quarterly Report on Form 10-Q have on its disclosures related to the Company’s interest rate swap agreement.been evaluated for disclosure and recognition.


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

Any statementFrom time to time, including in this Quarterly Report on Form 10-Q, about our future expectations,we may make forward-looking statements relating to such matters as anticipated financial performance, business prospects, strategy, plans, regulatory, market and prospects, including statements containing the words “believes,” “anticipates,” “plans,” “expects,” “will”industry trends, and similar expressions, constitute forward-looking statements within the meaning ofmatters. The Private Securities Litigation Reform Act of 1995. Actual1995 and federal securities laws provides a safe harbor for forward-looking statements. We note that a variety of factors, including known and unknown risks and uncertainties as well as incorrect assumptions, could cause our actual results mayand experience to differ materially from those indicated bythe anticipated results or other expectations expressed in such forward-looking statements as a resultstatements. The factors that may affect the operations, performance, development and results of various important factors, includingour business include those set forthdiscussed under Part II, Item 1A, “Risk Factors.”Factors” of this Quarterly Report on Form 10-Q.

As used in this Form 10-Q, “we”, “us”, “our”, “SkillSoft” and “the Company” refer to SkillSoft Public Limited Company and its subsidiaries; and references to our fiscal year refer to the fiscal year ended on January 31 of that year (e.g., fiscal 2009 is the fiscal year ended January 31, 2009).

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

OVERVIEW

We are a leading Software as a Service (SaaS) provider of on-demand e-learning and performance support solutions for global enterprises, government, education and small to medium-sized businesses. We enable business organizations to maximize business performance through a combination of comprehensive e-learning content, online information resources, flexible learning technologies and support services. Our multi-modal learning solutions support and enhance the speed and effectiveness of both formal and informal learning processes and integrate our in-depth content resources, learning management system, virtual classroom technology and support services.

We generate revenue primarily from the license of our products, the provision of professional services as well as fromand the provision of hosting and application services. The pricing for our courses varies based upon the content offering selected by a customer, the number of users within the customer’s organization and the length of the license agreement (generally one, two or three years). Our agreements permit customers to exchange course titles, generally on the contract anniversary date. Hosting services are sold separately licensed for an additional fee.

Cost of revenuesrevenue includes the cost of materials (such as storage media), packaging, shipping and handling, CD duplication, custom content development, and hosting services, royalties, and certain infrastructure and occupancy expenses and share-based compensation. We generally recognize these costs as incurred. Also included in cost of revenuesrevenue is amortization expense related to capitalized software development costs and intangible assets related to developed software and courseware acquired in business combinations.


We account for software development costs in accordance with Statement of Financial Accounting Standards (SFAS) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (SFAS No. 86), which requires the capitalization of certain computer software development costs incurred after technological feasibility is established. No software development costs incurred during the three and ninesix months of ended OctoberJuly 31, 20082009 met the requirements for capitalization in accordance with SFAS No. 86.

Research and development expenses consist primarily of salaries and benefits, share-based compensation, certain infrastructure and occupancy expenses, fees to consultants and course content development fees. Selling and marketing expenses consist primarily of salaries and benefits, share-based compensation, commissions, advertising and promotion expenses, travel expenses and certain infrastructure and occupancy expenses. General and administrative expenses consist primarily of salaries and benefits, share-based compensation, consulting and service expenses, legal expenses, audit and tax preparation costs, regulatory compliance costs and certain infrastructure and occupancy expenses.


Amortization of intangible assets represents the amortization of customer value, non-compete agreements, trademarks and tradenames from our acquisitions of NETg, Targeted Learning Corporation (TLC), Books24x7 and GoTrain Corp. and our merger with SkillSoft Corporation (the SmartForce Merger).

Merger and integration related expenses primarily consist of salaries paid to NETg employees for transitional work assignments, facilities, systems and process integration activities.

Restructuring expenses primarily consist of charges associated with our recent reduction in force as described in our Form 8-K filed with the SEC on January 20, 2009.

SEC investigation expenses primarily consist of legal and consulting fees incurred related toin connection with the SEC’s review of SmartForce’s option granting practices prior to the SmartForce Merger, and historically, the SEC investigation relating to the restatement of SmartForce’s financial statements for 1999, 2000, 2001 and the first two quarters of 2002.Merger.

BUSINESS OUTLOOK

In the three and ninesix months ended OctoberJuly 31, 2008,2009, we generated revenuesrevenue of $83.1$78.9 million and $248.0$155.4 million, respectively, as compared to $75.1$83.3 million and $203.7$165.0 million in the three and ninesix months ended OctoberJuly 31, 2007,2008, respectively. We reported net income in the three and ninesix months ended OctoberJuly 31, 20082009 of $12.0$17.2 million and $32.0$36.0 million, respectively, as compared to $5.8$12.9 million and $25.7$20.0 million in the three and ninesix months ended OctoberJuly 31, 2007,2008, respectively.

While we have achieved increased revenuesoperating income and profitabilitynet income from last fiscal year’s comparable periods,period, we have experienced during the last year a significantly more cautious customer spending environment due to the current challenging global economic climate. In addition, we continue to find ourselves in a challenging business environment due to (i) budgetary constraints on training and information technology (IT) spending by our current and potential customers, (ii) price competition and value-based competitive offerings from a broad array of competitors in the learning market and (iii) the relatively slow overall market adoption rate for e-learning solutions. In recent months, the challenging U.S. and global economic environment has put additional pressure on potential budgetaryplaced further constraints on IT and spending by our currentcustomers’ and potential customers.  Whilecustomers’ IT budgets and spending. We have not yet seen signs of an improving customer environment, but we are also not experiencing continued deterioration. We have seen some customers put spendingalso encountered longer sales cycles due to additional customer scrutiny on hold, we have seen others increase spending and utilize e-learning as a cost effective alternative to traditional learning.deals. This has given us less visibility into the overall timing of our sales cycles. Despite thethese challenges, our core business so far this fiscal year has performed predominately in accordance with our expectations. Our recentWe expect our revenue growth,to decline approximately 6% to 7% this fiscal year as compared to last fiscal year was primarily due to recent changes in foreign exchange rates and the resultnegative effect they have on our international subsidiaries’ revenue when converted to U.S. dollars. However, given the volatility of foreign exchange rates, our forward-looking estimates, which are based on July 31, 2009 rates, could change materially. Despite the expected decrease in revenue, we anticipate an increase in our operating income and net income this fiscal year as compared to last fiscal year, primarily due to a number of actions we took in the fourth quarter of fiscal 2009 to reduce our cost structure. These cost-saving initiatives allow us flexibility to manage our costs in light of the realization of additional revenue from the increased customer base associated with the NETg acquisition, third party resellers of our product and international sales. Our growth prospectsdifficult economic conditions we are strongest in developing our expanded core business, which leverages our various product lines in a strategy of bundled product offerings, as well as continued distribution partnerships with third party resellers and international distribution growth. As a result,facing. Despite these cost-savings initiatives, we have increased our sales and marketing investment related to these areas to help capitalize on the recent growth and potential continued growth. We have also invested aggressively in research and development in those areas to accelerate the time by which our planned new products will be available to our customers. In order to pursue the small and medium-sized business markets, we continue to invest in our telesales business unit; however, we have not seen results in line with our expectations and as a result we have maderecently added, and will continue to make organizational changes as neededadd, additional sales resources in response to achieve our expected growth. We plan to continue to invest in our new business direct field sales team and lead generator organizations.the cautious customer spending environment.

 
~ 20 ~


In the nine months ended October 31, 2008 and for the remainder of fiscal 2009,2010 we have and will continue to focus on revenue generation and earnings growth excluding normal and anticipated acquisition and integration related expenses, primarily by:

evaluating our current operating cost structure to determine where we can realize cost efficiencies;
cross selling and up selling;
looking at new markets, which may include expanding or investing internationally;markets;
acquiring new customers throughcustomers;
carefully managing our core sales team as well as through the recently formed New Business Field Sales team;spending;
continuing to execute on our new product and telesales distribution initiatives; and
continuing to evaluate merger and acquisition and possible partnership opportunities that could contribute to our long-term objectives.

CRITICAL ACCOUNTING POLICIES

We believe that our critical accounting policies are those related to revenue recognition, amortization of intangible assets and impairment of goodwill, share-based compensation, deferral of commissions, restructuring charges, legal contingencies and income taxes and valuation of business combinations.taxes. We believe these accounting policies are particularly important to the portrayal and understanding of our financial position and results of operations and require application of significant judgment by our management. In applying these policies, management uses its judgment in making certain assumptions and estimates. Our critical accounting policies are more fully described under the heading “Critical“Summary of Significant Accounting Policies” in Note 2 of the Notes to the Consolidated Financial Statements and under “Management’s Discussion and Analysis of Financial Conditions and Results of Operations – Critical Accounting Policies” in our Annual Report on Form 10-K as filed with the SEC on March 31, 2008.April 1, 2009. The policies set forth in our Form 10-K have not changed.

RESULTS OF OPERATIONS

THREE MONTHS ENDED OCTOBERJULY 31, 20082009 VERSUS THREE MONTHS ENDED OCTOBERJULY 31, 20072008

Revenue

 THREE MONTHS ENDED OCTOBER 31, 2008  DOLLAR INCREASE/(DECREASE)  PERCENT CHANGE
 2008 2007      
(In thousands, except percentages)          
Revenues$83,064 $75,124  $7,940   11%
Operating income 21,607  10,361   11,246   109%
 
THREE MONTHS ENDED
JULY 31,
 DOLLAR INCREASE/(DECREASE) PERCENT CHANGE
 2009 2008    
(In thousands, except percentages)        
Revenue:                
United States $60,040  $60,756  $(716)  (1)%
International  18,886   22,576   (3,690)  (16)%
Total $78,926  $83,332  $(4,406)  (5)%

Revenue increased primarily due to the realization of additionalThe decrease in both total revenue resulting from an increased customer base associated with the NETg acquisition in May 2007 as well as from continued additionaland international revenue earned under agreements with third party resellers of our products. We expect revenue growth to continue through the fourth quarter of fiscal 2009 compared to the fourth quarter of fiscal 2008.
  THREE MONTHS ENDED OCTOBER 31,    
(In thousands) 2008  2007  CHANGE 
Revenue:         
United States $61,998  $59,076  $2,922 
International  21,066   16,048   5,018 
Total $83,064  $75,124  $7,940 

Revenue increased by 5% and 31% in the United States and internationally, respectively, infor the three months ended OctoberJuly 31, 2008 as compared to2009 versus the three months ended OctoberJuly 31, 2007 as a2008 was primarily the result of increasedthe negative effect foreign exchange rates had on our international subsidiaries’ revenue generated from the NETg acquisition and from existing customers and new business.when converted to U.S. dollars.

 
~ 21 ~


We exited the fiscal year ended January 31, 2008 with non-cancelable backlog of approximately $255 million compared to $181 million at January 31, 2007. This amount is calculated by combining the amount of deferred revenue at each fiscal year end with the amounts to be added to deferred revenue throughout the next twelve months from billings under committed customer contracts and determining how much of these amounts are scheduled to amortize into revenue during the upcoming fiscal year. The amount scheduled to amortize into revenue during fiscal 2009 is disclosed as “backlog” as of January 31, 2008. Amounts to be added to deferred revenue during fiscal 2009 include subsequent installment billings for ongoing contract periods as well as billings for committed contract renewals. We have included this non-GAAP disclosure as it is directly related to our subscription based revenue recognition policy. This is a key business metric, which factors into our forecasting and planning activities and provides visibility into fiscal 2009 revenue.

Costs and Expenses
THREE MONTHS ENDED OCTOBER 31, 2008  DOLLAR INCREASE/(DECREASE)  PERCENT CHANGE 
THREE MONTHS ENDED
JULY 31,
 DOLLAR INCREASE/(DECREASE) PERCENT CHANGE
2008  2007       2009 2008    
(In thousands, except percentages)                   
Cost of revenues$9,374  $8,282  $1,092   13%
Cost of revenue $7,524 $9,830 $(2,306) (23)%
As a percentage of revenue 11%  11%         10% 12%     
Cost of revenues - amortization of intangible assets 1,690   1,740   (50)  (3)%
Cost of revenue – amortization of intangible assets 32 1,740 (1,708) (98)%
As a percentage of revenue 2%  2%          2%     

The increasedecrease in cost of revenue in the three months ended OctoberJuly 31, 20082009 versus the three months ended OctoberJuly 31, 20072008 was primarily due to increased revenues.a reduction in royalty fees of $1.1 million as a result of both the decrease in revenue and a shift in product mix away from royalty-bearing products. Additionally, $0.7 million of the decrease in cost of revenue was attributed to reductions in personnel and consulting expenses as a result of our cost-savings initiatives.

The decrease in cost of revenue - amortization of intangible assets in the three months ended July 31, 2009 versus the three months ended July 31, 2008 was primarily due to certain intangible assets becoming fully amortized during fiscal 2009.
THREE MONTHS ENDED OCTOBER 31, 2008  DOLLAR INCREASE/(DECREASE)  PERCENT CHANGE
THREE MONTHS ENDED
JULY 31,
 DOLLAR INCREASE/(DECREASE) PERCENT CHANGE
2008 2007      2009 2008    
(In thousands, except percentages)                  
Research and development$12,138 $13,710  $(1,572)  (11)% $9,706 $12,519 $(2,813) (22)%
As a percentage of revenue 15%  18%         12% 15%     

The decrease in research and development expense in the three months ended OctoberJuly 31, 20082009 versus the three months ended OctoberJuly 31, 20072008 was primarily due to a reduction in professional feescost reductions related to outside service contractors and outsource partners of $0.8$2.2 million as a result of last year’s third fiscal quarter incurring costs attributable to the acquisition of NETg and the subsequent integration initiatives, which were materially completed by July 31, 2008. This included maintaining multiple platforms and fulfilling obligations of acquired customer contracts and product commitments assumed in the acquisition of NETg. In addition, there was a decreasewell as decreases in compensation and benefits expense of $0.2 million primarily dueattributed to performance bonuses being paid in the third quarter of last fiscal year which were related to the acquisition of NETg and the integration efforts of our employees.  There was also a decrease in facility charges of $0.4 million for the three months ended October 31, 2008 due to a reduction in redundant leased space assumed in the acquisition of NETg.
 THREE MONTHS ENDED OCTOBER 31, 2008  DOLLAR INCREASE/(DECREASE)  PERCENT CHANGE 
 2008  2007       
(In thousands, except percentages)           
Selling and marketing$26,387  $25,227  $1,160   5%
As a percentage of revenue 32%  34%        
cost-saving initiatives.

~ 22 ~
 
THREE MONTHS ENDED
JULY 31,
 DOLLAR INCREASE/(DECREASE) PERCENT CHANGE
 2009 2008    
(In thousands, except percentages)        
Selling and marketing $24,387  $26,099  $(1,712)  (7)%
As a percentage of revenue  31%  31%        


The increasedecrease in selling and marketing expense in the three months ended OctoberJuly 31, 20082009 versus the three months ended OctoberJuly 31, 20072008 was primarily due to an increasenet reductions of $2.1 million in sales compensation and benefits, which includes a reduction of $1.1 million asnon-field sales personnel partially offset by increased sales incentive expenses. This net reduction was partially offset by a major customer event that took place during the first quarter of fiscal 2009 which occurred in the second quarter of fiscal 2010. As a result ofwe had an $0.8 million increase in sales and marketing headcount, which includes additional direct sales, telesales and field support personnel required to service our increased customer base as a result of the NETg acquisition, as well as incremental commissions resulting from increased order intake and billings from our larger base business and from the acquired NETg customer base. The decrease in selling and marketing expense as a percentage of revenue inexpenses for the three months ended OctoberJuly 31, 20082009 versus the three months ended OctoberJuly 31, 2007 reflects the growth2008.

22



THREE MONTHS ENDED OCTOBER 31, 2008  DOLLAR INCREASE/(DECREASE)  PERCENT CHANGE
THREE MONTHS ENDED
JULY 31,
 DOLLAR INCREASE/(DECREASE) PERCENT CHANGE
2008 2007     2009 2008    
(In thousands, except percentages)                  
General and administrative$9,130 $9,449  $(319)  (3)% $9,400 $9,433 $(33)  0 %
As a percentage of revenue 11%  13%         12% 11%     

The decrease in generalGeneral and administrative expense in the three months ended OctoberJuly 31, 20082009 was approximately the same as in the three months ended July 31, 2008. An increase in executive bonus expense in the second quarter of fiscal 2010 of $1.7 million was offset by reductions of $0.5 million in professional fees related to our business realignment strategy, which was substantially completed in fiscal 2009, and reductions in insurance premiums, banking service fees and outside contractor expenses of $0.8 million.

 
THREE MONTHS ENDED
JULY 31,
 DOLLAR INCREASE/(DECREASE) PERCENT CHANGE
 2009 2008    
(In thousands, except percentages)        
Amortization of intangible assets $2,117  $2,741  $(624)  (23)%
As a percentage of revenue  3%  3%        
Merger and integration related expenses    $240   (240)  (100)%
As a percentage of revenue  0%  0%        
Restructuring  4  $   4   * 
As a percentage of revenue  0%  0%        
SEC investigation    $(13  (13)  (100)%
As a percentage of revenue  0%  0%        
____________

*           Not meaningful

The decrease in amortization of intangible assets for the three months ended July 31, 2009 versus the three months ended OctoberJuly 31, 2007 was primarily due to a reduction in bad debt expense of $0.5 million resulting from an improvement in collection efforts on accounts receivable as compared to the third quarter of fiscal 2008 as well as a reduction in depreciation of fixed assets of $0.3 million and lower facility charges of $0.2 million. This was partially offset by an increase of $0.6 million in professional fees, primarily related to an on-going feasibility analysis related to our business realignment strategy.

Amortization of intangible assets decreased $0.9 million, or 25%, to $2.7 million in the three months ended October 31, 2008 from $3.6 million in the three months ended October 31, 2007. This decrease was primarily due to certain assets becoming fully amortized during fiscal 2009.

InDuring the three months ended OctoberJuly 31, 2008, we did not incur materialincurred merger and integration related expenses as compared to the $2.6 million in the three months ended October 31, 2007. The significant charges in last year’s third quarter were primarily duerelated to the NETg acquisition. We do not expectcompleted our efforts to incur any significant additional merger-related expenses related to the NETg acquisition in future periods.integrate NETg’s operations during fiscal 2009.

 
THREE MONTHS ENDED
JULY 31,
 DOLLAR INCREASE/(DECREASE) PERCENT CHANGE
 2009 2008    
(In thousands, except percentages)        
Other (expense) income, net $(605 $6  $(611)  * 
As a percentage of revenue  (1)%  0%        
Interest income  68  $575   (507)  (88)%
As a percentage of revenue  0%  1%        
Interest expense  (2,032) $(3,664  1,632   (45)%
As a percentage of revenue  (3)%  (4)%        
 THREE MONTHS ENDED OCTOBER 31, 2008  DOLLAR INCREASE/(DECREASE)  PERCENT CHANGE 
 2008  2007       
(In thousands, except percentages)           
Other income (expense), net$752  $(642) $1,394   * 
As a percentage of revenue 1%  (1)%        
Interest income 248   654   (406)  (62)%
As a percentage of revenue 0%  1%        
Interest expense (3,103)  (3,927)  (824  (21)%
As a percentage of revenue (4)%  (5)%        
____________
 ____________
*           Not meaningful

Other Income (Expense), Net

The increase in other income (expense), net in the three months ended October 31, 2008 versus the three months ended October 31, 2007 was primarily due to foreign currency fluctuations. Due to our multi-national operations, our business is subject to fluctuations based upon changes in the exchange rates between the currencies used in our business. During the three months ended October 31, 2008 the strengthening of the U.S. dollar in relation to certain other foreign currencies resulted in significant gains, whereas in the same period of the prior year, the U.S. dollar declined in relation to foreign currencies.

Interest Income

The reduction in interest income in the three months ended October 31, 2008 versus the three months ended October 31, 2007 was primarily due to a reduction in our short-term investments and lower interest rates.

Interest Expense

The decrease in interest expense in the three months ended October 31, 2008 versus the three months ended October 31, 2007 was primarily due to a reduction of our debt as a result of $55.3 million in principal debt repayments made in the first half of fiscal 2009.

Provision for Income Taxes
 THREE MONTHS ENDED OCTOBER 31, 2008  DOLLAR INCREASE/(DECREASE)  PERCENT CHANGE
 2008  2007     
(In thousands, except percentages)           
Provision (benefit) for income taxes
$7,438  $270  $7,168   2,655%
As a percentage of revenue 9%  0%        
For the three months ended October 31, 2008, the effective tax rate of 38.5% was higher than the Irish statutory rate of 12.5% primarily due to earnings realized in higher tax jurisdictions outside of Ireland. The tax benefit for the three months ended October 31, 2007 was influenced significantly by certain purchase accounting tax adjustments as a result of the NETg acquisition and the release of $49.1 million of our valuation allowance primarily related to U.S. net operating loss (NOL) carryforwards. Approximately $25 million of this valuation allowance was recorded through reductions to tax expense and $24.1 million was recorded through adjustments to goodwill.

Discontinued Operations

In connection with the NETg acquisition, we decided to discontinue four product lines that were acquired from NETg because we believed these product offerings did not represent businesses that could grow or produce operating results consistent with our profit model. The product lines that have been identified as discontinued operations are Wave, NETg Press, Interact Now and Financial Campus. We recorded a loss from discontinued operations, net of tax, of $37 thousand in the three months ended October 31, 2008 versus a loss, net of tax, of $0.4 million in the three months ended October 31, 2007. This was primarily due to NETg Press and Financial Campus being sold in the three months ended October 31, 2007. In addition, we exited the Wave business in the three months ended October 31, 2007. We do not anticipate operations from discontinued operation to materially affect our liquidity, financial condition or results of operations going forward.

NINE MONTHS ENDED OCTOBER 31, 2008 VERSUS NINE MONTHS ENDED OCTOBER 31, 2007

Revenue

 NINE MONTHS ENDED OCTOBER 31, 2008  DOLLAR INCREASE/(DECREASE)  PERCENT CHANGE
 2008  2007      
(In thousands, except percentages)           
Revenues$248,039  $203,733  $44,306   22%
Operating income 57,796   23,420   34,376   147%



Revenue increased primarily due to the realization of additional revenue resulting from an increased customer base associated with the acquisition of NETg in May 2007 as well as from continued additional revenue earned under agreements with third party resellers of our products.
  NINE MONTHS ENDED OCTOBER 31,    
(In thousands) 2008  2007  CHANGE 
Revenue:         
United States $181,807  $160,161  $21,646 
International  66,232   43,572   22,660 
Total $248,039  $203,733  $44,306 

Revenue increased by 14% and 52% in the United States and internationally, respectively, in the nine months ended October 31, 2008 as compared to the nine months ended October 31, 2007 as a result of increased revenue generated from the NETg acquisition and from existing customers and new business as well as from continued additional revenue earned under agreements with third party resellers of our products.

Costs and Expenses

 NINE MONTHS ENDED OCTOBER 31, 2008  DOLLAR INCREASE/(DECREASE)  PERCENT CHANGE 
 2008  2007       
(In thousands, except percentages)           
Cost of revenues$28,013  $23,827  $4,186   18%
As a percentage of revenue 11%  12%        
Cost of revenues - amortization of intangible assets 5,170   3,683   1,487   40%
As a percentage of revenue 2%  2%        

The increase in cost of revenue in the nine months ended October 31, 2008 versus the nine months ended October 31, 2007 was primarily due to increased revenue. Gross margin remained consistent during these periods.

The increase in cost of revenue — amortization of intangible assets in the nine months ended October 31, 2008 versus the nine months ended October 31, 2007 was primarily due to the amortization of the intangible assets acquired in the acquisition of NETg being included for the entire nine month period of fiscal 2009 versus less than six months in fiscal 2008, partially offset by certain intangible assets becoming fully amortized since October 31, 2007.
 NINE MONTHS ENDED OCTOBER 31, 2008  DOLLAR INCREASE/(DECREASE)  PERCENT CHANGE
 2008  2007      
(In thousands, except percentages)           
Research and development$38,136  $35,315  $2,821   8%
As a percentage of revenue 15%  17%        

The increase in research and development expense in the nine months ended October 31, 2008 versus the nine months ended October 31, 2007 was primarily due to additional contractor and outsource partner costs of $1.4 million to support expanded product and software development initiatives resulting from our larger customer base. A portion of these incremental costs are attributable to NETg integration initiatives, which include maintaining multiple platforms, fulfilling obligations of acquired customer contracts and product commitments assumed in the acquisition of NETg. In addition, we incurred an increase in compensation and benefits expense of $1.8 million as a result of an increase in our research and development headcount. The decrease in research and development expense as a percentage of revenue in the nine months ended October 31, 2008 versus the nine months ended October 31, 2007 reflects the growth of revenue partially offset by the aforementioned factors.

 NINE MONTHS ENDED OCTOBER 31, 2008  DOLLAR INCREASE/(DECREASE)  PERCENT CHANGE
 2008  2007     
(In thousands, except percentages)           
Selling and marketing$82,185  $71,489  $10,696   15%
As a percentage of revenue 33%  35%        

The increase in selling and marketing expense in the nine months ended October 31, 2008 versus the nine months ended October 31, 2007 was primarily due to an increase in compensation and benefits of $8.6 million as a result of an increase in our sales and marketing headcount, which includes additional direct sales, telesales and field support personnel required to service our increased customer base as a result of the NETg acquisition, as well as incremental commissions resulting from increased order intake and billings from our larger base business and from the acquired NETg customer base. In addition, we incurred incremental marketing costs of $1.2 million to support our larger customer base, which includes the expense associated with our efforts to retain customers acquired in the NETg acquisition. The decrease in selling and marketing expense as a percentage of revenue in the nine months ended October 31, 2008 versus the nine months ended October 31, 2007 reflects the growth of revenue partially offset by the aforementioned factors.
 NINE MONTHS ENDED OCTOBER 31, 2008  DOLLAR INCREASE/(DECREASE)  PERCENT CHANGE
 2008  2007     
(In thousands, except percentages)           
General and administrative$27,454  $25,572  $1,882   7%
As a percentage of revenue 11%  13%        

The increase in general and administrative expense in the nine months ended October 31, 2008 versus the nine months ended October 31, 2007 was primarily due to an increase of $3.4 million of professional fees primarily related to our share capital reduction initiative aimed at increasing distributable profits in our Irish parent entity as well as a feasibility analysis related to our business realignment strategy. This was partially offset by a reduction in bad debt expense of $0.5 million resulting from improved collection efforts on accounts receivable balances compared to the fiscal 2008 third quarter, as well as a reduction in depreciation of fixed assets of $0.7 million, which was due primarily to certain fixed assets related to the NETg acquisition becoming fully depreciated by the end of fiscal 2008 and lower facility charges of $0.3 million. The decrease in general and administrative expense as a percentage of revenue in the nine months ended October 31, 2008 versus the nine months ended October 31, 2007 reflects the growth of revenue partially offset by the aforementioned factors.
Amortization of intangible assets increased $0.5 million, or 7%, to $8.5 million in the nine months ended October 31, 2008 from $8.0 million in the nine months ended October 31, 2007. This was primarily due to the amortization of the intangible assets acquired in the acquisition of NETg being included for the entire nine month period of fiscal 2009 versus less than six months in fiscal 2008, partially offset by certain intangible assets becoming fully amortized since October 31, 2007.

Merger and integration related expenses decreased $10.3 million, or 93%, to $0.8 million in the nine months ended October 31, 2008 from $11.1 in the nine months ended October 31, 2007. This was primarily due to the significant charges in last year’s second and third quarter when the NETg acquisition was consummated, and the near completion of efforts undertaken to integrate NETg’s operations into ours during fiscal 2009.


In the nine months ended October 31, 2008, we did not incur material SEC investigation expenses as compared to the $1.3 million in the nine months ended October 31, 2007. This is due to a decrease in legal activities related to the SEC’s informal inquiry into the pre-merger option granting practices at SmartForce.
  NINE MONTHS ENDED OCTOBER 31, 2008  DOLLAR INCREASE/(DECREASE)  PERCENT CHANGE 
  2008  2007       
(In thousands, except percentages)            
Other expense, net $(282) $(1,026) $(744  (73)%
As a percentage of revenue  (0)%  (1)%        
Interest income  1,440   2,990   (1,550)  (52)%
As a percentage of revenue  1%  1%        
Interest expense  (10,116)  (7,741)  2,375   31%
As a percentage of revenue  (4)%  (4)%        

Other Expense, Net

The change in other expense,(expense) income, net in the ninethree months ended OctoberJuly 31, 20082009 versus the ninethree months ended OctoberJuly 31, 20072008 was primarily due to foreign currency fluctuations. Due to our multi-national operations, our business is subject to fluctuations based upon changes in the exchange rates between the currencies used in our business.

Interest Income

The reduction ofin interest income in the ninethree months ended OctoberJuly 31, 20082009 versus the ninethree months ended OctoberJuly 31, 20072008 was primarily due to a reduction in our short-term investments attributed to our share buyback program and our significant long term debt repayments as well as lower interest rates.

Interest Expense

The increasedecrease in interest expense in the ninethree months ended OctoberJuly 31, 20082009 versus the ninethree months ended OctoberJuly 31, 20072008 was primarily due to the interest expense on the debt incurred for the acquisition of NETg being incurred for the full nine months through October 31, 2008 versus only six months through October 31, 2007. This was partially offset by $55.3$49.2 million in prepaymentsprincipal debt repayments made during fiscal 2009 to reduce debt.against our long-term debt since July 31, 2008.

Provision for Income Taxes
 
THREE MONTHS ENDED
JULY 31,
 DOLLAR INCREASE/(DECREASE) PERCENT CHANGE
 2009 2008    
(In thousands, except percentages)        
Provision for income taxes $6,016  $6,845  $(829)   (12) %
As a percentage of revenue  8%  8%        
 NINE MONTHS ENDED OCTOBER 31, 2008  DOLLAR INCREASE/(DECREASE)  PERCENT CHANGE
 2008  2007     
(In thousands, except percentages)           
Provision (benefit) for income taxes$18,790  $(7,886 $26,676   (338)%
As a percentage of revenue 8%  (4)%        

For the ninethree months ended OctoberJuly 31, 2009 and 2008, our effective tax rates were 25.9% and 38.8%, respectively. The decrease in the current year effective tax rate is primarily due to a change in the geographical distribution of worldwide earnings as a result of our business realignment strategy that took effect at the beginning of fiscal 2010. For the three months ended July 31, 2009 and 2008, the effective tax rate of 38.5% was higher than the Irish statutory rate of 12.5% due primarily due to earnings realized in higher tax jurisdictions outside of Ireland. For the nine month period ended October 31, 2007, the $8.2 million tax benefit was comprised of a $25 million deferred tax benefit related to the reduction in our deferred tax asset valuation allowance, which was partially offset by the effects of certain purchase accounting tax adjustments related to the NETg acquisition.

Discontinued OperationsSIX MONTHS ENDED JULY 31, 2009 VERSUS SIX MONTHS ENDED JULY 31, 2008

Income from discontinued operations was $1.9 millionRevenue
 
SIX MONTHS ENDED
JULY 31,
 DOLLAR INCREASE/(DECREASE) PERCENT CHANGE
 2009 2008    
(In thousands, except percentages)        
Revenue:                
United States $118,752  $119,809  $(1,057)  (1)%
International  36,613   45,166   (8,553)  (19)%
Total 155,365  164,975   (9,610)  (6)%

The decrease in both total and international revenue for the ninesix months ended OctoberJuly 31, 2009 versus the six months ended July 31, 2008 versus $0.2 million during the nine months ended October 31, 2007.  This increase was primarily due to the acquirer of our former NETg Press business prepaying the remaining portionresult of the purchase price for the NETg Press business during the nine months ended October 31, 2008, which resulted in a gain from the disposal of $2.0 million, net of income tax.negative effect foreign exchange rates had on our international subsidiaries’ revenue when converted to U.S. dollars.


Costs and Expenses
 
SIX MONTHS ENDED
JULY 31,
 DOLLAR INCREASE/(DECREASE) PERCENT CHANGE
 2009 2008    
(In thousands, except percentages)        
Cost of revenue $14,997  $18,639  $(3,642)  (20)%
As a percentage of revenue  10%  11%        
Cost of revenue – amortization of intangible assets  64   3,480   (3,416)  (98)%
As a percentage of revenue     2%        

The decrease in cost of revenue in the six months ended July 31, 2009 versus the six months ended July 31, 2008 was partially due to a reduction in royalty fees of $0.9 million as a result of both the decrease in revenue and a shift in product mix away from royalty-bearing products. Also contributing to the decrease in cost of revenue was a $0.8 million decrease related to reductions in personnel and $1.7 million in lower expenses for hosting, outside contractor, maintenance and facility charges as a result of both our recent cost-saving initiatives carried out in the fourth quarter of fiscal 2009 and certain NETg integration initiatives being substantially completed in fiscal 2009.

The decrease in cost of revenue - amortization of intangible assets in the six months ended July 31, 2009 versus the six months ended July 31, 2008 was primarily due to certain intangible assets becoming fully amortized during fiscal 2009.

 
SIX MONTHS ENDED
JULY 31,
 DOLLAR INCREASE/(DECREASE) PERCENT CHANGE
 2009 2008    
(In thousands, except percentages)        
Research and development $18,704  $25,998  $(7,294)  (28)%
As a percentage of revenue  12%  16%        

The decrease in research and development expense in the six months ended July 31, 2009 versus the six months ended July 31, 2008 was primarily due to a reduction in outsourced development fees of $5.1 million as well as a decrease in compensation and benefits expense of $1.3 million primarily due to the cost-saving initiatives we instituted in the fourth quarter of fiscal 2009. The reduction in outsource development fees was also due to the inclusion of costs attributable to the NETg acquisition in the six months ended July 31, 2008, which included maintaining multiple platforms and product commitments assumed prior to the completion of the integration.
 
SIX MONTHS ENDED
JULY 31,
 DOLLAR INCREASE/(DECREASE) PERCENT CHANGE
 2009 2008    
(In thousands, except percentages)        
Selling and marketing $46,798  $55,798  $(9,000)  (16)%
As a percentage of revenue  30%  34%        

The decrease in selling and marketing expense in the six months ended July 31, 2009 versus the six months ended July 31, 2008 was primarily due to a decrease in compensation and benefits expense of $6.8 million. This decrease was primarily the result of a reduction in our field support personnel as part of our cost-saving initiatives as well as a reduction in commission expense attributed to when certain commissions were earned in fiscal 2008 as a result of a one-time change to the structure of our compensation plan that year. We also had a reduction in marketing expenses of $1.0 million and a reduction in travel expenses of $0.9 million as a result of our cost-saving initiatives.

 
SIX MONTHS ENDED
JULY 31,
 DOLLAR INCREASE/(DECREASE) PERCENT CHANGE
 2009 2008    
(In thousands, except percentages)        
General and administrative $17,157  $18,324  $(1,167)  (6)%
As a percentage of revenue  11%  11%        

The decrease in general and administrative expense in the six months ended July 31, 2009 versus the six months ended July 31, 2008 was primarily due to a reduction of $1.8 million in legal and professional fees associated with our business realignment strategy, which was substantially completed during fiscal 2009. In addition, we had a decreases in facility and rent expense of $0.4 million as well as decreases in banking fees and insurance expense of $0.4 million. These reductions in cost were partially offset by an increase in compensation and benefits of $1.5 million primarily due to executive bonuses recognized in the three months ended July 31, 2009.
 
SIX MONTHS ENDED
JULY 31,
 DOLLAR INCREASE/(DECREASE) PERCENT CHANGE
 2009 2008    
(In thousands, except percentages)        
Amortization of intangible assets $4,572  $5,737  $(1,165)  (20)%
As a percentage of revenue  3%  3%        
Merger and integration related expenses    $761   (761)  (100)%
As a percentage of revenue  0%  0%        
Restructuring  56  $   56   * 
As a percentage of revenue  0%  0%        
SEC investigation    $49   (49)  (100)%
As a percentage of revenue  0%  0%        
____________

*           Not meaningful

The decrease in amortization of intangible assets for the six months ended July 31, 2009 versus the six months ended July 31, 2008 was primarily due to certain assets becoming fully amortized during fiscal 2009.

 
During the six months ended July 31, 2008, we incurred merger and integration expenses related to the NETg acquisition. We completed our efforts to integrate NETg’s operations during fiscal 2009.

 
SIX MONTHS ENDED
JULY 31,
 DOLLAR INCREASE/(DECREASE) PERCENT CHANGE
 2009 2008    
(In thousands, except percentages)        
Other (expense) income, net $(1,223 $(397 $(826)  208 %
As a percentage of revenue  (1)%  0%        
Interest income  138  $1,192   (1,054)  (88)%
As a percentage of revenue  0%  1%        
Interest expense  (4,477) $(7,650  3,173   (41)%
As a percentage of revenue  (3)%  (5)%        

The increase in other (expense) income, net in the six months ended July 31, 2009 versus the six months ended July 31, 2008 was primarily due to foreign currency fluctuations. Due to our multi-national operations, our business is subject to fluctuations based upon changes in the exchange rates between the currencies used in our business.

The reduction in interest income in the six months ended July 31, 2009 versus the six months ended July 31, 2008 was primarily due to a reduction in our cash, cash equivalents and short-term investments attributed to our share buyback program and our significant long term debt repayments as well as lower interest rates.

The decrease in interest expense in the six months ended July 31, 2009 versus the six months ended July 31, 2008 was primarily due to $49.2 million in principal debt repayments made against our long-term debt since July 31, 2008.

Provision for Income Taxes
 
SIX MONTHS ENDED
JULY 31,
 DOLLAR INCREASE/(DECREASE) PERCENT CHANGE
 2009 2008    
(In thousands, except percentages)        
Provision for income taxes $11,505  $11,352  $153   1 %
As a percentage of revenue  7%  7%        

For the six months ended July 31, 2009 and 2008, our effective tax rates were 24.2% and 38.7% respectively. The decrease in the current year effective tax rate is primarily due to a change in the geographical distribution of worldwide earnings as a result of the business realignment strategy that took place at the beginning of fiscal 2010. For the six months ended July 31, 2009 and 2008, the effective tax rate was higher than the Irish statutory rate of 12.5% due primarily to earnings in higher tax jurisdictions outside of Ireland.
LIQUIDITY AND CAPITAL RESOURCES

As of OctoberJuly 31, 2008,2009, our principal source of liquidity was our cash and cash equivalents and short-term investments, which totaled $73.6$67.8 million. This compares to $89.6$39.0 million at January 31, 2008.2009.

Net cash provided by operating activities of $75.4$74.8 million for the ninesix months ended OctoberJuly 31, 20082009 was primarily due to a decrease in accounts receivable of $92.8$85.9 million. Net cash provided by operating activities was also a result of net income from continuing operations of $30.0$36.0 million, which included the impact of non-cash expenses for depreciation and amortization and amortization of intangible assets of $17.6$7.2 million, non-cash provision for income taxes of $15.7$6.6 million and share-based compensation expense of $4.5$3.2 million. These amounts were partially offset by a decrease in accrued expenses of $23.4$12.0 million as well as a decrease in deferred revenue of $68.6$52.0 million. These decreases in accounts receivable, accrued expenses and deferred revenue are primarily a result of the seasonality of our operations, with the fourth quarter of our fiscal year historically generating the most activity, including order intake and billing. During the six months ended July 31, 2009 the decrease in accounts receivable was $85.9 million as compared to a decrease of $88.8 million during the six months July 31, 2008. This change is primarily due to the timing of collections.

Net cash provided byused in investing activities was $0.7$4.7 million for the ninesix months ended OctoberJuly 31, 2008,2009, which includes the maturities of investments, net of purchases, generating a cash inflow of approximately $4.8 million. This was partially offset by the purchases of capital assets of approximately $4.1$1.4 million. In addition, the purchase of investments, net of maturities, contributed a cash outflow of approximately $3.2 million.

Net cash used in financing activities was $91.1$46.9 million for the ninesix months ended OctoberJuly 31, 2008.2009. During this period, we made principal payments on our debt of $55.3$28.6 million and purchased our own shares having a value of $56.5$19.9 million under our shareholder-approved share repurchase program. These uses of cash were partially offset by proceeds of $19.5$1.5 million received from the exercise of share options under our various share option programs, including the related tax benefit, and share purchases made under our 2004 Employee Share Purchase Plan.

Cash provided from discontinued operations for the nine months ended October 31, 2008 included the gross proceeds of $6.9 million from the sale of NETg Press.

We had a working capital deficit of approximately $6.0$1.6 million as of OctoberJuly 31, 20082009 and approximately $30.4$11.9 million as of January 31, 2008.2009. The decreaseincrease in working capital was primarily due to principal debt payments of $55.3 million and the purchase of treasury shares having a value of $56.5 million under our shareholder-approved share repurchase program. This was partially offset by net income from continuing operations of $30.0$36.0 million, which includes non-cash charges for depreciation and amortization of $17.6$7.2 million, share-based compensation expense of $4.5$3.2 million and a non-cash tax charge of $15.7$6.6 million. Additionally, current deferred tax assets increased by $5.5 million which was primarily attributed to a long term deferred tax asset reclassification net of tax asset utilization and we received proceeds of $19.5$1.5 million from the exercise of share options under our various share option programs and from share purchases made under our 2004 Employee Share Purchase Plan. This was partially offset by principal debt payments of $28.6 million and the purchase of treasury shares having a value of $19.9 million under our shareholder-approved share repurchase program.

As of January 31, 2008,2009, we had U.S. federal NOL carryforwards of approximately $258.3$214.2 million. These NOLsNOL carryforwards represent the gross carrying value of the operating loss carryforwards. The NOL carryforwards which are subject to potential limitations based upon change in control provisions of Section 382 of the Internal Revenue Code,and are available to reduce future taxable income, if any, through 2025. We completed several financings since our inception and have incurred ownership changes as defined under Section 382 of the Internal Revenue Code. We completed an analysis of these changes and do not believe that the changes will have a material impact on our ability to use these net operating loss carryforwards. Included in the $258.3$214.2 million of U.S. federal NOL carryforwards is approximately $121.3$114.7 million of U.S. NOL carryforwards that were acquired in the SmartForce Merger and the purchase of Book 24x7. Also included in the $258.3 million at January 31, 2008 is approximately $36.3Books24X7, $55.4 million of NOL carryforwards in the United States resulting from disqualifying dispositions.dispositions and $44.1 million of U.S. NOL carryforwards that relate to our operations. We will realize the benefit of thesethe disqualifying disposition losses through increases to shareholder’sshareholders' equity in the periods in which the losses are utilized to reduce tax payments. Additionally, we had approximately $193.0have $190.2 million of Irish NOL carryforwards. These NOL carryforwards represent the gross carrying value of the operating loss carryforwards. Included in the $190.2 million are $149.8 million of NOL carryforwards in jurisdictions outside of the U.S. Included in the $193.0 million is approximately $142.2 million of NOL carryforwards, which were acquired in the SmartForce Merger the purchaseand $40.4 million of Books24x7 and the purchase of NETg foreign entities. We will realize the benefits of these acquired NOL carryforwards through reductionsthat relate to goodwill and non-goodwill intangible assets during the period that the losses are utilized.our Irish operations. We also had U.S. federal tax credit carryforwards of approximately $2.5$3.9 million at January 31, 2008.2009.


We lease certain of our facilities and certain equipment and furniture under operating lease agreements that expire at various dates through 2023. In addition, we have a term loan which will be paid out over the next 54 years. Future minimum lease payments, net of estimated sub-rentals, under these agreements and the debt repayments schedule are as follows (in thousands):


 Payments Due By Period 
   Less Than   1 - 3   3 - 5 More Than Payments Due by Period 
Contractual Obligations Total 1 Year    Years  Years 5 Years  
Total
  
Less Than
1 Year
  
1-3
Years
  
3-5
Years
  
More Than
5 Years
 
Operating Lease Obligations $13,185 $4,442   $5,504   $3,239 $-  $12,572  $4,129  $5,676  $2,767  $-- 
Debt Obligations  143,697  1,455   2,910    139,332  -   94,824   968   1,936   91,920   -- 
Total Obligations $156,882 $5,897   $8,414   $142,571 $-  $107,396  $5,097  $7,612  $94,687  $-- 

We do not have any off-balance sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating transactions that are not required to be reflected on our balance sheet.

In May 2007, we entered into a credit agreement with Credit Suisse and certain lenders providing for a $225.0 million senior credit facility comprised of a $200 million term loan facility and a $25.0 million revolving credit facility. On July 7, 2008, we entered into an amendment to the credit agreement.agreement (the Amendment). The primary purpose of the amendmentAmendment was to expand our and our subsidiaries’ ability to make additional repurchases of our shares. The expanded repurchase ability under the amendmentAmendment is conditioned on the absence of an event of default and a requirement that (i) the leverage ratio shall be no greater than 2.75:1.01 as of the most recently completed fiscal quarter ending prior to the date of such repurchase (0.79:1 at July 31, 2009) and (ii) that we make a prepayment of the term loan under the credit agreement in an amount equal to the dollar amount of any such repurchase. Such term loan prepayments willwere not, however, be required in connection with the first $24.0 million of repurchases made from and after July 7, 2008. The Amendment also provides for an increase in the annual interest rate on the term loan to, at our election, (i) base rate plus a margin of 2.5% or (ii) adjusted LIBOR plus margin of 3.5%.

Please see Note 10 of The Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K as filed with the SEC on March 31, 2008 and our 8-K filed July 11, 2008,April 1, 2009 for a detailed description of the credit agreement, as amended.

We will continue to invest in research and development and sales and marketing in order to execute our business plan and achieve expected revenue growth. To the extent that our execution of the business plan results in increased sales, we expect to experience corresponding increases in deferred revenue, cash flow and prepaid expenses. Capital expenditures for the fiscal year ended January 31, 2009 are expected to be approximately $5.0 million to $7.0 million.

We expect that the principal sources of funding for our operating expenses, capital expenditures, debt payment obligations, share repurchases and other liquidity needs will be a combination of our available cash and cash equivalents and short-term investments, and funds generated from future cash flows from operating activities. We believe our current funds and expected cash flows from operating activities will be sufficient to fund our operations, including our debt repayment obligations, for at least the next 12 months. However, there are several items that may negatively impact our available sources of funds. In addition, our cash needs may increase due to factors such as unanticipated developments in our business or the marketplace for our products in general or significant acquisitions (in addition to and including NETg).acquisitions. The amount of cash generated from operations will be dependent upon the successful execution of our business plan. Although we do not foresee the need to raise additional capital, any unanticipated economic or business events could require us to raise additional capital to support our operations.

EXPLANATION OF USE OF NON-GAAP FINANCIAL RESULTS

In addition to reporting our audited and unaudited financial results in accordance with United States generally accepted accounting principles (GAAP), to assist investors we may on occasion provide certain non-GAAP financial results as an alternative means to explain our periodic results. The non-GAAP financial results typically exclude non-cash or one-timeunusual charges or benefits.

 
~ 29 ~


Our management uses the non-GAAP financial results internally as an alternative means for assessing our results of operations. By excluding non-cash charges such as share-based compensation, amortization of purchased intangible assets, impairment of goodwill and purchased intangible assets, management can evaluate our operations excluding these non-cash charges and can compare itsour results on a more consistent basis to the results of other companies in our industry. By excluding charges such as restructuring charges (benefits) and merger and integration related expenses and one-time or infrequent charges our management can compare our ongoing operations to prior quarters where such items may be materially different and to ongoing operations of other companies in our industry who may have materially different unusual charges. Our management recognizes that non-GAAP financial results are not a substitute for GAAP results, but believes that non-GAAP measures are helpful in assisting them in understanding and managing our business.

Our management believes that the non-GAAP financial results may also provide useful information to investors. Non-GAAP results may also allow investors and analysts to more readily compare our operations to prior financial results and to the financial results of other companies in the industry who similarly provide non-GAAP results to investors and analysts. Investors may seek to evaluate our business performance and the performance of our competitors as they relate to cash. Excluding one-time and non-cash charges may assist investors in this evaluation and comparisons. When we provide non-GAAP financial results, we will also provide reconciliations of such results to GAAP financial measures.

In addition, certain covenants in our credit agreement are based on non-GAAP financial measures, such as adjusted EBITDA, and evaluating and presenting these measures allows us and our investors to assess our compliance with the covenants in our credit agreement and thus our liquidity situation.

We intend to continue to assess the potential value of reporting non-GAAP results consistent with applicable rules and regulations.

ITEM 3. — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of OctoberJuly 31, 2008,2009, we did not use derivative financial instruments for speculative or trading purposes.

INTEREST RATE RISK

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

In order to limit our exposure to interest rate changes associated with our term loan, we entered into an interest rate swap agreement with an initial notional amount of $160 million which amortizes over a period consistent with our anticipated payment schedule. This strategy uses an interest rate swap to effectively convert $160 million in variable rate borrowings into fixed rate liabilities at a 5.1015% effective interest rate. The interest rate swap is considered to be a hedge against changes in the amount of future cash flows associated with interest payments on a variable rate loan.


FOREIGN CURRENCY RISK

Due to our multi-nationalmultinational operations, our business is subject to fluctuations based upon changes in the exchange rates between the currencies in which we collect revenuesrevenue or pay expenses and the U.S. dollar. Our expenses are not necessarily incurred in the currency in which revenue is generated, and, as a result, we are required from time to time to convert currencies to meet our obligations. These currency conversions are subject to exchange rate fluctuations, in particular with respectchanges to changes in the value of the Euro, Canadian dollar, Australian dollar, New Zealand dollar, Singapore dollar, and pound sterling relative to the U.S. dollar, which could adversely affect our business and our results of operations. During the ninesix months ended OctoberJuly 31, 20082009 and 2007,2008, we incurred a foreign currency exchange gainlosses of $0.3$1.3 million and a foreign currency exchange loss of $0.5$0.7 million, respectively.



Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of OctoberJuly 31, 2008.2009. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of OctoberJuly 31, 2008,2009, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended OctoberJuly 31, 20082009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



See Part I Item 3 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2008 for a discussion of legal proceedings. There were no material developments in these proceedings during the quarter ended October 31, 2008.Not applicable.


Investors should carefully consider the risks described below before making an investment decision with respect to our shares. While the following risk factors have been updated to reflect developments subsequent to the filing of our Annual Report on Form 10-K for the fiscal year ended January 31, 2008,2009, there have been no material changes to the risk factors included in that report.


RISKS RELATED TO THE OPERATION OF OUR BUSINESS

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, LIMITING YOUR ABILITY TO EVALUATE HISTORICAL FINANCIAL RESULTS AND INCREASING THE LIKELIHOOD THAT OUR RESULTS WILL FALL BELOW MARKET ANALYSTS’ EXPECTATIONS, WHICH COULD CAUSE THE PRICE OF OUR ADSs TO DROP RAPIDLY AND SEVERELY.

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

~ 31 ~

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

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

royalty rates;

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

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

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

the loss of significant customers;

delays in availability of new products;

product or service quality problems;

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

the spending patterns of our customers;

litigation costs and expenses;

non-recurring charges related to acquisitions;

growing competition that may result in price reductions; and

currency fluctuations.

Most of our expenses, such as rent and most employee compensation, do not vary directly with revenue and are difficult to adjust in the short-term. As a result, if revenue for a particular quarter is below our expectations, we could not proportionately reduce operating expenses for that quarter. Any such revenue shortfall would, therefore, have a disproportionate effect on our expected operating results for that quarter.

~ 32 ~


PAST AND FUTURE ACQUISITIONS INCLUDING OUR ACQUISITION OF NETG, MAY NOT PRODUCE THE BENEFITS WE ANTICIPATE AND COULD HARM OUR CURRENT OPERATIONS.

One aspect of our business strategy is to pursue acquisitions of businesses or technologies that will contribute to our future growth. On May 14, 2007, we acquired NETg from The Thomson Corporation. However, we may not be successful in identifying or consummating future attractive acquisition opportunities. Moreover, any acquisitions we do consummate may not produce benefits commensurate with the purchase price we pay or our expectations for the acquisition. In addition, acquisitions involve numerous risks, including:

difficulties in integrating the technologies, operations, financial controls and personnel of the acquired company;

difficulties in retaining or transitioning customers and employees of the acquired company;

diversion of management time and focus;

the incurrence of unanticipated expenses associated with the acquisition or the assumption of unknown liabilities or unanticipated financial, accounting or other problems of the acquired company; and

accounting charges related to the acquisition, including restructuring charges, write-offs of in-process research and development costs, and subsequent impairment charges relating to goodwill or other intangible assets acquired in the transaction.

DEMAND FOR OUR PRODUCTS AND SERVICES MAY BEIS ESPECIALLY SUSCEPTIBLE TO ADVERSEGENERAL GLOBAL MARKET AND ECONOMIC CONDITIONS.

Our businessWeakness in the United States and/or worldwide economy has had and financial performance may be damaged by adverse financial conditions affectingcould continue to have a negative effect on demand for our target customers or by a general weakeningproducts and our results of the economy.operations. Companies may not view training products and services as critical to the success of their businesses. If these companies continue experience disappointing operating results, whether as a result of adverse economic conditions, competitive issues or other factors, they may decrease or forego education and training expenditures before limiting their other expenditures or in conjunction with lowering other expenses. In addition, during economic downturns, customers may slow the rate at which they pay vendors or may become unable to pay their debts as they become due, which would have a negative effect on our results.

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

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

33


Our primary sources of direct competition are:

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

technology companies that offer learning courses covering their own technology products;

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

internal education, training departments and HRhuman resources outsourcers of potential customers; and

value-added resellers and network integrators.

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

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

We rely on a limited number of independent third parties to provide us with the educational content for a majority of our courses based on learning objectives and specific instructional design templates that we provide to them. We do not have exclusive arrangements or long-term contracts with any of these content providers. If one or more of our third party content providers were to stop working with us, we would have to rely on other parties to develop our course content. In addition, these providers may fail to develop new courses or existing courses on a timely basis. We cannot predict whether new content or enhancements would be available from reliable alternative sources on reasonable terms. In addition, our subsidiary, Books24x7 relies on third party publishers to provide all of the content incorporated into its Referenceware products. If one or more of these publishers were to terminate their license with us, we may not be able to find substitute publishers for such content. In addition, we may be forced to pay increased royalties to these publishers to continue our licenses with them.

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

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

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

The market for education and training software is characterized by rapidly changing technology, evolving industry standards, changes in customer requirements and preferences and frequent introductions of new products and services embodying new technologies. New methods of providing interactive education in a technology-based format are being developed and offered in the marketplace, including intranet and Internet offerings. In addition, multimedia and other product functionality features are being added to educational software. Our future success will depend upon the extent to which we are able to develop and implement products which address these emerging market requirements on a cost effective and timely basis. Product development is risky because it is difficult to foresee developments in technology coordinate technical personnel and identify and eliminate design flaws. Any significant delay in releasing new products could have a material adverse effect on the ultimate success of our products and could reduce sales of predecessor products. We may not be successful in introducing new products on a timely basis. In addition, new products introduced by us may fail to achieve a significant degree of market acceptance or, once accepted, may fail to sustain viability in the market for any significant period. If we are unsuccessful in addressing the changing needs of the marketplace due to resource, technological or other constraints, or in anticipating and responding adequately to changes in customers’ software technology and preferences, our business and results of operations would be materially adversely affected. We, along with the rest of the industry, face a challenging and competitive market for IT spending that has resulted in reduced contract value for our formal learning product lines. This pricing pressure has a negative impact on revenue for these product lines and may have a continued or increased adverse impact in the future.

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

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

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

NEW PRODUCTS INTRODUCED BY US MAY NOT BE SUCCESSFUL.

An important part of our growth strategy is the development and introduction of new products that open up new revenue streams for us. Despite our efforts, we cannot assure you that we will be successful in developing and introducing new products, or that any new products we do introduce will meet with commercial acceptance. The failure to successfully introduce new products will not only hamper our growth prospects but may also adversely impact our net income due to the development and marketing expenses associated with those new products.

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

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

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

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

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

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

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

Our success is largely dependent on the personal efforts and abilities of our senior management. Failure to retain these executives, or the loss of certain additional senior management personnel or other key employees, could have a material adverse effect on our business and future prospects. We are also dependent on the continued service of our key sales, content development and operational personnel and on our ability to attract, train, motivate and retain highly qualified employees. In addition, we depend on writers, programmers, Web designers and graphic artists. We may be unsuccessful in attracting, training, retaining or motivating key personnel. The inability to hire, train and retain qualified personnel or the loss of the services of key personnel could have a material adverse effect upon our business, new product development efforts and future business prospects.

OUR BUSINESS IS SUBJECT TO CURRENCY FLUCTUATIONS THAT HAVE, AND COULD CONTINUE TO, ADVERSELY AFFECT OUR OPERATING RESULTS.

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

LEGISLATION HAS RECENTLY BEEN INTRODUCED IN THE UNITED STATES CONGRESS THAT COULD, IF ENACTED IN ITS CURRENT FORM, SUBJECT US TO TAXATION AS A U.S. CORPORATION, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are aware of two bills recently proposed in Congress that seek to prevent U.S. companies from taking advantage of tax shelters in foreign jurisdictions. One of these proposed bills would, if enacted in its current form, tax a foreign corporation as domestic if it is publicly traded and managed and controlled in the U.S. At this point, it is impossible to tell whether any of the proposed bills will be enacted into law, or whether the provisions of any enacted bill would apply to SkillSoft. In addition, we believe that if any such bill does become law, it would not take effect for several years. If any tax legislation of this nature is ultimately adopted, we would assess its impact on us and take steps, where appropriate, to mitigate such impact. However, it is possible that we could become subject to additional taxes as a result of the adoption of such legislation.

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

Our success depends to a degree upon the protection of our rights in intellectual property. We rely upon a combination of patent, copyright, and trademark laws to protect our proprietary rights. We have also entered into, and will continue to enter into, confidentiality agreements with our employees, consultants and third parties to seek to limit and protect the distribution of confidential information. However, we have not signed protective agreements in every case.

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

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OUR WORLDWIDE OPERATIONS ARE SUBJECT TO RISKS WHICH COULD NEGATIVELY IMPACT OUR FUTURE OPERATING RESULTS.

We expect that international operations will continue to account for a significant portion of our revenuesrevenue and are subject to inherent risks, including:

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

political and economic conditions in various jurisdictions;

difficulties in staffing and managing foreign subsidiary operations;

longer sales cycles and account receivable payment cycles;

multiple, conflicting and changing governmental laws and regulations;

foreign currency exchange rate fluctuations;

protectionist laws and business practices that may favor local competitors;

difficulties in finding and managing local resellers;

potential adverse tax consequences; and

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

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

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

The period between our initial contact with a potential customer and the purchase of our products by that customer typically ranges from three to twelve months or more. Factors that contribute to our long sales cycle, include:

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

competitive evaluations by customers;

the customers’ internal budgeting and approval processes;

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

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

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

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

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

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RISKS RELATED TO LEGAL PROCEEDINGS

WE ARE THE SUBJECT OF AN INVESTIGATION BY THE SEC.

The Boston District Office of the States Securities and Exchange Commission (“SEC”)SEC informed us in January 2007 that we are the subject of an informal investigation concerning option granting practices at SmartForce for the period beginning April 12, 1996 through July 12, 2002. These grants were made prior to the September 6, 2002 merger of SkillSoft Corporation and SmartForce PLC. We have produced documents in response to requests from the SEC.

We have cooperated with the SEC in this matter. At the present time, we are unable to predict the outcome of this matter or its potential impact on our operating results or financial position. However, we may incur substantial costs in connection with the SEC option granting practices investigation, and this investigation could cause a diversion of management time and attention. In addition, we could be subject to penalties, fines or regulatory sanctions or claims by our former officers, directors or employees for indemnification of costs they may incur in connection with the SEC investigation. Any or all of those issues could adversely affect our business, operating results and financial position.

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

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

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

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

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

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

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

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

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

RISKS RELATED TO OUR ADSs

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

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

SALES OF LARGE BLOCKS OF OUR ADSs COULD CAUSE THE MARKET PRICE OF OUR ADSs TO DROP SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.

Some shareholders own 5% or more of our outstanding shares. We cannot predict the effect, if any, that public sales of these shares will have on the market price of our ADSs. If our significant shareholders, or our directors and officers, sell substantial amounts of our ADSs in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our ADSs, even if there is no relationship between such sales and the performance of our business.

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ITEM 2. — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On April 8, 2008, our shareholders approved the repurchase of up to 10,000,000 of our ADSs. On September 24, 2008, our shareholders approved an increase in the number of shares that may be repurchased to 25,000,000. Under the approved share purchase program, we entered into a share purchase agreement, pursuant to which we and certain of our subsidiaries are entitled to purchase our ADSs. ADSs that are repurchased by us or our subsidiaries under the share purchase program shall, at the option of our Board of Directors, be either cancelled upon their purchase or held as treasury shares.

40


During the three months ended OctoberJuly 31, 2008, certain of our subsidiaries2009, we repurchased our ADSs as follows:

Period 
 
(a)
Total Number of Shares Purchased (1)
  
(b)
Average Price Paid per Share $
  
(c)
Total Number of Shares Purchased as Part of Publicly Announced or Program (2)
  
(d)
Maximum Number of Shares that May Yet Be Purchased Under the Program
 
May 1, 2009 – May 31, 2009
  499,300  $7.84   499,300   12,118,331 
June 1, 2009 – June 30, 2009
  421,473   7.88   421,473   11,696,858 
July 1, 2009 – July 31, 2009
  419,350   7.68   419,350   11,277,508 
Total
  1,340,123  $7.80   1,340,123   11,277,508 
        
(c)
    
        
Total
  (d) 
        
Number of
  Maximum 
        
Shares
  Number of 
  (a)     
Purchased
  Shares that 
  Total  (b)  
as Part of
  May Yet Be 
  Number of  Average  
Publicly
  Purchased 
  Shares  Price Paid  
Announced
  Under the 
Period Purchased (1)  Per Share $   or Program (2)  Program 
August 1, 2008 - August 31, 2008  985,680  $10.18   985,680   6,290,601 
September 1, 2008 - September 30, 2008  1,000,000   10.40   1,000,000   20,290,601 
October 1, 2008 - October 31, 2008  1,000,000   8.60   1,000,000   19,290,601 
Total  2,985,680  $9.73   2,985,680   19,290,601 

(1)           We repurchased ADSs pursuant to a share repurchase program that was approved by our shareholders on April 8, 2008 and amended on September 24, 2008.

(2)           Our shareholders approved the repurchase by us of up to 25,000,000 ADSs at a per share purchase price which complies with the requirements of Rule 10b-18. Unless terminated earlier by resolution of our Board of Directors, the repurchase program will expire on March 23, 2010 or when we have repurchased all shares authorized for repurchase thereunder.

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ITEM 3. — DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our 2008 annual general meeting of shareholders (the “AGM”) on September 24, 2008. Under the terms of our arrangements with The Bank of New York, The Bank of New York is entitled to vote or cause to be voted all of our ordinary shares represented by ADSs on behalf of, and in accordance with the instructions received from, the ADS holders. There were no broker non-votes or votes withheld with respect to any matter submitted to a vote of the ordinary shareholders at the AGM.
The following is a brief description of each matter submitted to a vote of the ordinary shareholders and a summary of the votes tabulated with respect to each such matter at the AGM, as well as a summary of the votes cast by The Bank of New York based on the ADR facility:
(1)Receipt and consolidation of the consolidated financial statements for the fiscal year ended January 31, 2008 and the Report of Directors and Auditors thereon.
  Votes “FOR”  “AGAINST”  “ABSTAIN” 
Ordinary Shareholders  4   0   0 
ADS Holders  115,152,262   646   41,158 
(2A)           Re-election of Mr. Charles E. Moran, who retired by rotation, as a director.
  Votes “FOR”  “AGAINST”  “ABSTAIN” 
Ordinary Shareholders  4   0   0 
ADS Holders  114,701,478   477,706   14,882 
(2B)           Re-election of Dr. Ferdinand von Prondzynski, who retired by rotation, as a director.
  Votes “FOR”  “AGAINST”  “ABSTAIN” 
Ordinary Shareholders  4   0   0 
ADS Holders  114,824,744   355,760   13,562 
The term of office for each of P. Howard Edelstein, Stewart K.P. Gross, James S. Krzwicki and William F. Meagher, Jr. continued after the AGM.
(3)           Authorization of the Audit Committee of the Board of Directors to fix the remuneration of our auditor for the fiscal year ending January 31, 2009.

  Votes “FOR”  “AGAINST”  “ABSTAIN” 
Ordinary Shareholders  4   0   0 
ADS Holders  115,048,481   140,108   5,477 
Not applicable

(4)           Amendment of the share purchase agreement, dated as of April 9, 2008, among SkillSoft Public Limited Company, CBT (Technology) Limited, SkillSoft Finance Limited, SkillSoft Corporation and Credit Suisse Securities (USA) LLC.

  Votes “FOR”  “AGAINST”  “ABSTAIN” 
Ordinary Shareholders  4   0   0 
ADS Holders  114,997,249   22,799   174,018 


ITEM 5. — OTHER INFORMATION

Not applicable.applicable

ITEM 6. — EXHIBITS

See the Exhibit Index attached hereto.

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SIGNATURE

Pursuant to the requirements 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.
 
 SKILLSOFT PUBLIC LIMITED COMPANY 
    
Date: DecemberSeptember 9, 20082009                     By:/s/ Thomas J. McDonald 
  Thomas J. McDonald 
  Chief Financial Officer 
    


 
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EXHIBIT INDEX

10.1
Summary of Fiscal 2009 Executive Cash Incentive Compensation Program (Incorporated by reference to Exhibit 99.1 to SkillSoft PLC’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on June 4, 2009 (File No. 000-25674).
10.2
2001 Outside Director Option Plan, as amended
31.1
Certification of SkillSoft PLC’s Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15(d)-14(a) under the Securities Exchange Act of 1934.
31.2
Certification of SkillSoft PLC’s Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15(d)-14(a) under the Securities Exchange Act of 1934.
32.1
Certification of SkillSoft PLC’s Chief Executive Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of SkillSoft PLC’s Chief Financial Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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