##### Table of Contents

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

---

FORM 10-QSB

---

(Mark One)

| | x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30,
2002

OR

| | o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------

For the transition period fromto

Commission file number 0-29615

---

COMPASS KNOWLEDGE HOLDINGS, INC.(EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS CHARTER)

---

| | NEVADA(STATE OR OTHER JURISDICTION OFINCORPORATION OR ORGANIZATION) |  | 87-0471549(IRS EMPLOYERIDENTIFICATION NUMBER) | 
| | ------------------------------------------------------------------- |  | --------------------------------------------- | 

2710 REW CIRCLE, SUITE 100OCOEE, FLORIDA 34761(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP
CODE)

(407) 573-2000(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)

(407) 656-7585(REGISTRANTS FACSIMILE NUMBER, INCLUDING AREA CODE)

WWW.COMPASSKNOWLEDGE.COM(REGISTRANTS WEBSITE ADDRESS)

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.

x Yes o No

There were 15,861,250 shares outstanding of the Registrants
common stock, $0.001 par value, as of November 6, 2002.

---







---

##### Table of Contents



COMPASS KNOWLEDGE HOLDINGS, INC.FORM 10-QSBFor the Quarter ended September 30, 2002

|        |  |                       |    |                                                                                                       |   
|------- |  | --------------------- | -- | ----------------------------------------------------------------------------------------------------- | --
|        |  |                       |    |                                                                                                       |   
|PART I  |  | Financial Information |   
|        |  |                       |    |                                                                                                       |   
|        |  | Item 1                |    | Financial Statements                                                                                  |   
|        |  |                       |    |                                                                                                       |   
|        |  |                       |    | Consolidated Balance Sheet as of September 30, 2002 and December 31, 2001                             | 3 
|        |  |                       |    |                                                                                                       |   
|        |  |                       |    | Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2002 and 2001 | 4 
|        |  |                       |    |                                                                                                       |   
|        |  |                       |    | Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2002 and 2001           | 5 
|        |  |                       |    |                                                                                                       |   
|        |  |                       |    | Notes to Financial Statements                                                                         | 6 
|        |  |                       |    |                                                                                                       |   
|        |  | Item 2                |    | Managements Discussion and Analysis of Results of Operations and Financial Condition                 | 7 
|        |  |                       |    |                                                                                                       |   
|        |  | Item 3                |    | Controls and Procedures                                                                               | 20
|        |  |                       |    |                                                                                                       |   
|        |  |                       |   
|        |  |                       |    |                                                                                                       |   
|PART II |  | Other Information     | 20
|        |  |                       |    |                                                                                                       |   
|        |  | Item 6                |    | Exhibits and Reports on Form 8-K                                                                      | 20

|           | 
|---------- | 
|           | 
|Signatures | 
|           | 
|           | 





---

##### Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COMPASS KNOWLEDGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS(in Thousands except share and per share amounts)AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001

|                                                                                                                                                                                             |  | September 30,2002 |        | December 31,2001 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | ---------------- | -
|                                                                                                                                                                                             |  |                   |        |                  |  
|                                                                                                                                                                                             |  | (Unaudited)       |        | (Audited)        |  
|                                                                                                                                                                                             |  |                   |        |                  |  
|ASSETS                                                                                                                                                                                       |  |                   |        |                  |  
|CURRENT ASSETS:                                                                                                                                                                              |  |                   |        |                  |  
|Cash                                                                                                                                                                                         |  | $                 | 823    |                  | $
|Accounts receivable, net of allowance for doubtful accounts of $45 & $0        at September 30, 2002 and December 31, 2001,
respectively                                                     |  |                   | 843    |                  |  
|Note receivable                                                                                                                                                                              |  |                   |       |                  |  
|Prepaid expenses                                                                                                                                                                             |  |                   | 115    |                  |  
|Other assets, net                                                                                                                                                                            |  |                   | 795    |                  |  
|                                                                                                                                                                                             |  |                   |        |                  |  
|                                                                                                                                                                                             |  |                   |        |                  |  
|Total current assets                                                                                                                                                                         |  |                   | 2,576  |                  |  
|                                                                                                                                                                                             |  |                   |        |                  |  
|PROPERTY AND EQUIPMENT, net                                                                                                                                                                  |  |                   | 225    |                  |  
|                                                                                                                                                                                             |  |                   |        |                  |  
|GOODWILL, net                                                                                                                                                                                |  |                   | 2,162  |                  |  
|                                                                                                                                                                                             |  |                   |        |                  |  
|OTHER ASSETS, net                                                                                                                                                                            |  |                   | 684    |                  |  
|                                                                                                                                                                                             |  |                   |        |                  |  
|                                                                                                                                                                                             |  |                   |        |                  |  
|Total assets                                                                                                                                                                                 |  | $                 | 5,647  |                  | $
|                                                                                                                                                                                             |  |                   |        |                  |  
|                                                                                                                                                                                             |  |                   |        |                  |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                         |  |                   |        |                  |  
|CURRENT LIABILITIES:                                                                                                                                                                         |  |                   |        |                  |  
|Accounts payable and accrued expenses                                                                                                                                                        |  | $                 | 441    |                  | $
|Deferred student fees                                                                                                                                                                        |  |                   | 1,799  |                  |  
|Note payable-current portion                                                                                                                                                                 |  |                   | 75     |                  |  
|                                                                                                                                                                                             |  |                   |        |                  |  
|                                                                                                                                                                                             |  |                   |        |                  |  
|Total current liabilities                                                                                                                                                                    |  |                   | 2,315  |                  |  
|                                                                                                                                                                                             |  |                   |        |                  |  
|Total liabilities                                                                                                                                                                            |  |                   | 2,315  |                  |  
|                                                                                                                                                                                             |  |                   |        |                  |  
|STOCKHOLDERS EQUITY:                                                                                                                                                                        |  |                   |        |                  |  
|Preferred stock, 5,000,000 shares authorized, 2,000 shares issued and        outstanding                                                                                                     |  |                   | 1,667  |                  |  
|Common stock, $0.001 par value; 50,000,000 shares authorized, 15,861,250        and 15,861,250 shares issued and outstanding at September 30, 2002 and
       December 31, 2001 respectively |  |                   | 16     |                  |  
|Additional paid-in-capital                                                                                                                                                                   |  |                   | 6,020  |                  |  
|Unearned compensation                                                                                                                                                                        |  |                   |       |                  |  
|Accumulated deficit                                                                                                                                                                          |  |                   | (4,371 | )                |  
|                                                                                                                                                                                             |  |                   |        |                  |  
|                                                                                                                                                                                             |  |                   |        |                  |  
|Total stockholders equity                                                                                                                                                                   |  |                   | 3,332  |                  |  
|                                                                                                                                                                                             |  |                   |        |                  |  
|Total liabilities and stockholders equity                                                                                                                                                   |  | $                 | 5,647  |                  | $
|                                                                                                                                                                                             |  |                   |        |                  |  

The accompanying notes are an integral part of the consolidated financial statements





---

##### Table of Contents

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)(in thousands, except share and per share amounts)FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002

|                                                                                                             |  | For the Three MonthsEnded September 30, |            | For the Three MonthsEnded September 30, |  
|------------------------------------------------------------------------------------------------------------ |  | --------------------------------------- | ---------- | --------------------------------------- | -
|                                                                                                             |  |                                         |            |                                         |  
|                                                                                                             |  | 2002                                    |            | 2001                                    |  
|                                                                                                             |  |                                         |            |                                         |  
|TOTAL STUDENT FEE REVENUE                                                                                    |  |                                         |            |                                         |  
|Net student fee revenue from degree          programs                                                        |  | $                                       | 971        |                                         | $
|Gross student fee revenue from          non-degree programs                                                  |  |                                         | 132        |                                         |  
|Gross revenue from subscriptions and          consulting services                                            |  |                                         | 387        |                                         |  
|Other revenue                                                                                                |  |                                         | 2          |                                         |  
|                                                                                                             |  |                                         |            |                                         |  
|Total revenue                                                                                                |  |                                         | 1,492      |                                         |  
|INSTRUCTION COSTS AND SERVICES                                                                               |  |                                         | 332        |                                         |  
|                                                                                                             |  |                                         |            |                                         |  
|Gross profit                                                                                                 |  |                                         | 1,160      |                                         |  
|                                                                                                             |  |                                         |            |                                         |  
|OPERATING EXPENSES                                                                                           |  |                                         |            |                                         |  
|Selling and promotional                                                                                      |  |                                         | 138        |                                         |  
|General and administrative                                                                                   |  |                                         | 867        |                                         |  
|                                                                                                             |  |                                         |            |                                         |  
|Total operating expenses                                                                                     |  |                                         | 1,005      |                                         |  
|                                                                                                             |  |                                         |            |                                         |  
|INCOME (LOSS) FROM OPERATIONS                                                                                |  |                                         | 155        |                                         |  
|                                                                                                             |  |                                         |            |                                         |  
|OTHER INCOME (EXPENSE)                                                                                       |  |                                         |            |                                         |  
|Interest income                                                                                              |  |                                         | 3          |                                         |  
|Interest expense                                                                                             |  |                                         |           |                                         |  
|Other Income                                                                                                 |  |                                         | 0          |                                         |  
|                                                                                                             |  |                                         |            |                                         |  
|Total other income                                                                                           |  |                                         | 3          |                                         |  
|                                                                                                             |  |                                         |            |                                         |  
|INCOME (LOSS) BEFORE PREFERRED     DIVIDENDS AND CUMULATIVE     EFFECT OF CHANGE IN ACCOUNTING     PRINCIPLE |  |                                         | 158        |                                         |  
|                                                                                                             |  |                                         |            |                                         |  
|CUMULATIVE EFFECT OF CHANGE IN     ACCOUNTING PRINCIPLE                                                      |  |                                         |           |                                         |  
|                                                                                                             |  |                                         |            |                                         |  
|                                                                                                             |  |                                         |            |                                         |  
|INCOME (LOSS) BEFORE PREFERRED     DIVIDENDS                                                                 |  |                                         | 158        |                                         |  
|LESS: PREFERRED STOCK DIVIDENDS                                                                              |  |                                         | (35        | )                                       |  
|                                                                                                             |  |                                         |            |                                         |  
|NET INCOME (LOSS) AVAILABLE TO     COMMON STOCKHOLDERS                                                       |  | $                                       | 123        |                                         | $
|                                                                                                             |  |                                         |            |                                         |  
|EARNINGS PER SHARE                                                                                           |  |                                         |            |                                         |  
|Basic                                                                                                        |  | $                                       | 0.008      |                                         | $
|                                                                                                             |  |                                         |            |                                         |  
|Diluted                                                                                                      |  | $                                       | 0.008      |                                         | $
|                                                                                                             |  |                                         |            |                                         |  
|WEIGHTED AVERAGE SHARES     OUTSTANDING                                                                      |  |                                         |            |                                         |  
|Basic                                                                                                        |  |                                         | 15,861,250 |                                         |  
|                                                                                                             |  |                                         |            |                                         |  
|Diluted                                                                                                      |  |                                         | 15,861,250 |                                         |  
|                                                                                                             |  |                                         |            |                                         |  

The accompanying notes are an integral part of the consolidated financial statements





---

##### Table of Contents

COMPASS KNOWLEDGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(in Thousands)FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002

|                                                                                                           |  | 2002 |        | 2001 |  
|---------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | -
|                                                                                                           |  |      |        |      |  
|                                                                                                           |  |      |        |      |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                      |  |      |        |      |  
|Net income (loss) before preferred stock dividends                                                         |  | $    | (1,673 | )    | $
|Adjustments to reconcile net (loss) income to net cash provided by (used for) operating        activities- |  |      |        |      |  
|Depreciation and amortization                                                                              |  |      | 763    |      |  
|Transitional goodwill impairment loss                                                                      |  |      | 2,000  |      |  
|Write-off Content Development                                                                              |  |      | 114    |      |  
|Write-off Direct Marketing                                                                                 |  |      | 34     |      |  
|Amortization of unearned compensation                                                                      |  |      | 0      |      |  
|Stock-based compensation                                                                                   |  |      | 33     |      |  
|                                                                                                           |  |      |        |      |  
|Decrease (increase) in operating assets and liabilities-                                                   |  |      |        |      |  
|Accounts receivable                                                                                        |  |      | (796   | )    |  
|Provision for losses on accounts receivable                                                                |  |      | 45     |      |  
|Prepaid expenses                                                                                           |  |      |       |      |  
|Other current assets                                                                                       |  |      | 17     |      |  
|Other long-term assets                                                                                     |  |      |       |      |  
|Accounts payable and accrued expenses                                                                      |  |      | (290   | )    |  
|Deferred revenue                                                                                           |  |      | 1,111  |      |  
|                                                                                                           |  |      |        |      |  
|                                                                                                           |  |      |        |      |  
|Net cash provided by operating activities                                                                  |  |      | 1,358  |      |  
|                                                                                                           |  |      |        |      |  
|                                                                                                           |  |      |        |      |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                      |  |      |        |      |  
|Purchases of property and equipment                                                                        |  |      | (72    | )    |  
|Cash payments for content development costs                                                                |  |      | (398   | )    |  
|Cash payments for direct marketing costs                                                                   |  |      | (513   | )    |  
|Acquisitions, net of cash/divestiture                                                                      |  |      | (28    | )    |  
|                                                                                                           |  |      |        |      |  
|                                                                                                           |  |      |        |      |  
|Net cash provided by investing activities                                                                  |  |      | (1,011 | )    |  
|                                                                                                           |  |      |        |      |  
|                                                                                                           |  |      |        |      |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                      |  |      |        |      |  
|Proceeds from issuance of common stock and warrants                                                        |  |      |       |      |  
|Proceeds from issuance of note payable                                                                     |  |      | 75     |      |  
|Proceeds from notes receivable                                                                             |  |      | 75     |      |  
|Payment on notes payable                                                                                   |  |      | (50    | )    |  
|Payment of preferred dividend                                                                              |  |      | (105   | )    |  
|                                                                                                           |  |      |        |      |  
|                                                                                                           |  |      |        |      |  
|Net cash provided by financing activities                                                                  |  |      | (5     | )    |  
|                                                                                                           |  |      |        |      |  
|                                                                                                           |  |      |        |      |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                       |  |      | 342    |      |  
|                                                                                                           |  |      |        |      |  
|CASH AND CASH EQUIVALENTS, beginning of period                                                             |  |      | 481    |      |  
|                                                                                                           |  |      |        |      |  
|                                                                                                           |  |      |        |      |  
|CASH AND CASH EQUIVALENTS, end of period                                                                   |  | $    | 823    |      | $
|                                                                                                           |  |      |        |      |  
|                                                                                                           |  |      |        |      |  
|Supplemental disclosure of cash flow information:                                                          |  |      |        |      |  
|Cash paid during the year for:                                                                             |  |      |        |      |  
|Interest                                                                                                   |  | $    | 3      |      | $
|                                                                                                           |  |      |        |      |  

The accompanying notes are an integral part of the consolidated financial statements





---

##### Table of Contents

Compass Knowledge Holdings, Inc. and SubsidiariesNotes to Consolidated Financial Statements

| | 1. |  | Principles of Interim Statements. The following unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures
which are normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to those rules and regulations. The information presented in the unaudited consolidated
financial statements reflects all adjustments, which are, in the opinion of the management, necessary to present fairly the Companys financial position and the results of operations for the interim periods. The consolidated format is designed
to be read in conjunction with the Companys Form 10-KSB. For further information, refer to the consolidated financial statements and the notes thereto included in the Companys Form 10-KSB for the year ended December 31, 2001 filed with
the Securities and Exchange Commission on March 11, 2002.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The results of operations for the nine months ended September 30, 2002 are not necessarily indicative of results to be expected for the entire year.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. |  | As of September 30, 2002 there were 2,000 shares of Preferred Stock outstanding, convertible into 875,000 common shares. Also, there were options to purchase 2,470,400 shares of common stock and warrants to purchase
765,000 shares of common stock outstanding at September 30, 2002. The impact of the assumed conversion of the preferred stock and warrants were not included in the computation of diluted earnings per share because the effect of the assumed
conversion had an antidilutive effect.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 
| | 3. |  | During the quarter ended September 2002, the Company granted no options. Accordingly, no compensation expense will be recognized in the statement of operations.                                                                                                                                                                                                                                                                                                                                              
| |    | 
| | 4. |  | There was no stock and option-based compensation expense for the three months ended September 30, 2002 compared to $1,812 for the three months ended September 30, 2001.                                                                                                                                                                                                                                                                                                                                      
| |    | 
| | 5. |  | No provision for income taxes has been recorded for the period ending September 30, 2002, as the periods net income has been offset by tax loss carryforwards. No benefit for income taxes has been recorded for the
nine months ending September 30, 2002 or 2001 as the benefit resulting from the operating loss has been entirely offset by a valuation allowance due to the uncertainty surrounding the Companys ability to realize the deferred tax assets in the
future.                             

| |  | As reflected in the Companys Form 10-QSB/A filed with the SEC on August 14, 2002, effective January 1, 2002, the Company adopted the provisions of SFAS 142. In accordance with the provisions of SFAS 142, the Company
completed its initial assignment of previously recognized goodwill to its subsidiaries during the second quarter of 2002. Based on this assignment, management has recorded a transitional goodwill impairment loss of $2,000,000 as the effect of a
change in accounting principle. This loss was reflected in the three month period ended March 31, 2002 as presented in the Companys Form 10-QSB/A filed with the SEC on August 14, 2002. The recognized transitional goodwill impairment loss is an
estimate that has not yet been finalized due to managements inability, at this time to predict, with any reasonable degree of accuracy, the long-term effect of the foregoing described factors. Management expects to finalize this estimate no
later than the end of the year ending December 31, 2002.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





---

##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
|------- | --------------------------------------------------------------------------------------

The following
discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.

This
Report includes forward-looking statements made based on current management expectations pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and
actual outcomes may differ materially from what is expressed or forecasted. Factors that could cause future results to differ from the Companys expectations include the factors described on page 12 of this Report under Special Note
Regarding Forward-Looking Statements as well as under Factors Affecting Operating Results And Market Price Of Securities beginning on page 12 of this Report.

OVERVIEW

During 2001, Compass experienced a significant period of transition. In early 2001, management undertook a strategic review of its business and established the following
objectives for the year: simplify the business, reduce the cost structure, including reductions in staffing, and return to a path which management believed would lead to sustainable profitability. In connection with these objectives, the Company
wrote-off investments in unprofitable programs in the second quarter of 2001, exited its initiatives to develop multiple new market niches and undertook significant restructuring and other actions, which served to reduce costs and align its
operation with its goals of being profitable in 2002. During the first, second and third quarters of 2002, we continued to reduce costs and combined with higher revenues and margins, were able to report a profit.

OUTLOOK

The Company intends to increase sales growth by investing in its core products and services through the adoption of a more aggressive
execution, pricing and marketing strategy. At the same time, the Company intends to continue to develop and refine its technology solutions and consulting business as a complement to its core offerings. Recently, management has decided that it is
not in the best interests of the Company at this time to pursue any acquisitions or raise any additional capital, unless circumstances change. Based on this strategy, the Company expects to be profitable in 2002, saving goodwill write-offs as
discussed in footnote 8 to the Companys financial statements. This prospect is based, in part, on managements expectation of increased revenues in our degree and non-degree programs, combined with lower levels of general and
administrative spending compared to 2001. Actual results may vary depending on the Companys results of operations.

SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

Managements Discussion and Analysis of Financial Condition and Results of Operations discusses the Companys consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments,
including those related to marketing expenses, customer incentives, student attrition rates, bad debts, intangible assets, income taxes, financing operations, contractual obligations, restructuring costs, retirement benefits, and contingencies and
litigation . Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.





---

##### Table of Contents

Our significant accounting policies are more fully described in Note 2 to our annual audited consolidated financial statements included
in Form 10-KSB filed with the SEC on March 11, 2002. However, certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by
our management; as a result they are subject to an inherent degree of uncertainty. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those
estimates are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Management believes
the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Our significant accounting
policies include:

| |  | Revenue Recognition. The Company offers consulting services and three types of educational programs: degree programs, non-degree programs, and subscription-based
programs.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For degree programs, in which certain colleges and universities (the University Partners) are responsible
for course curricula and for conferring a degree, the Company receives a stated percentage of student fees. For these degree programs, the Company currently records as revenues only the stated percentage of the student fees paid to the
Company by the University Partners. For all but one of our non-degree programs, in which the Company is responsible for course curricula, the Company records all student fees as gross revenue. With respect to the one non-degree program for
which the University Partner is responsible for course cirricula, the Company recorded the revenues only as a stated percentage of the student fees paid. For both degree and non-degree programs, student fees are usually paid prior to the
students attendance of the program. The Company defers this revenue and recognizes it as income over the period of instruction. If a student withdraws from a course or program prior to the start date or expiration of the drop date, the student
fees may be refunded or applied to a later seminar. The Company has based its revenue recognition policy on recent guidance by the Securities and Exchange Commission (SEC) and the Emerging Issues Task Force (EITF), in EITF Issue No. 99-19,
Reporting Revenue Gross versus Net, regarding the recognition of gross versus net revenues for Internet-based entities.

The revenue generated by
subscription services is in the form of subscription contracts with the Company. These contracts are generally for a period of two to three years. Revenue is billed for a six- or twelve-month period in advance and is recognized ratably
over the billing and service period. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

The revenues generated by consulting
projects is recognized when the service procedures have been completed or applicable milestones have been achieved.

| |  | Other Assets. The Company enters into long-term contracts with its University Partners for the development and delivery of degree programs. Costs incurred by the
Company in entering into these contracts are deferred and amortized over the life of the contract, generally three to seven years.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under some of the long-term contracts with its University Partners, the Company is responsible for developing and delivering a degree program for the duration of the contract period. Direct external and internal costs incurred in the
design and development of course content and the master copy of course materials are capitalized as content development costs. These costs are recognized as expense over a period which is the lesser of (i) five years or (ii) the term of the
contract.

The Company expenses the production costs of advertising the first time the advertising takes place, except for direct-response advertising and
other direct marketing costs, which are deferred and amortized over their expected period of future benefits. Direct-response advertising consists primarily of marketing materials mailed to potential students, which include direct response cards.
Other direct





---

##### Table of Contents

marketing costs consist primarily of brochures and mailing lists, which will be utilized over future periods. The deferred costs of the marketing and advertising are amortized over 12
months.

| |  | Financial Accounting Standards. In June 2001, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations. This statement
requires all business combinations to be accounted for using the purchase method of accounting and continues the recognition of goodwill as an asset.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. This statement does not permit amortization of goodwill as was previously required by
Accounting Principles Board (APB) Opinion No. 17, Intangible Assets. Under SFAS 142, goodwill will be separately tested for impairment using a fair-value-based approach when an event occurs indicating the potential for impairment. Any required
goodwill impairment charges will be presented as a separate line item within the operating section of the income statement. The change from an amortization approach to an impairment approach applies to previously recorded goodwill, as well as
goodwill arising from acquisitions completed after the application of the new standard.

As reflected in the Companys Form 10-QSB/A filed with the SEC
on August 14, 2002, effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). In accordance with the provisions of SFAS 142, the Company
completed its initial assignment of previously recognized goodwill to its subsidiaries during the second quarter of 2002. Based on this assignment, management believed that the carrying amount of the net assets (including goodwill) of its
subsidiaries, Educators Learning Network, Inc. (ELNet) and Rutherford Learning Group, Inc. (RLG), exceeded their fair value. Accordingly, the Company wrote-off $2,000,000 of goodwill related to ELNet and RLG. For a
complete discussion of this matter, please see footnote 8 to the Companys financial statements.

RESULTS OF OPERATIONS

Set forth below is certain of our selected consolidated financial and operating information for the Three and nine months ended September 30, 2002 and the comparable
period in 2001, respectively. The selected consolidated financial information is derived from our consolidated financial statements for such periods. The information set forth below should be read in conjunction with Managements Discussion and
Analysis of Results of Operations and Financial Condition and our Consolidated Financial Statements and Notes thereto.

|                                                                                                         |  | Three Months Ended                                            |            | Nine Months Ended                                             |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------- | ---------- | ------------------------------------------------------------- | -
|                                                                                                         |  |                                                               |            |                                                               |  
|                                                                                                         |  | September 30(in thousands, except share andper share amounts) |            | September 30(in thousands, except share andper share amounts) |  
|                                                                                                         |  |                                                               |            |                                                               |  
|                                                                                                         |  | 2002                                                          |            | 2001                                                          |  
|                                                                                                         |  |                                                               |            |                                                               |  
|Total revenue                                                                                            |  | $                                                             | 1,492      |                                                               | $
|Gross profit                                                                                             |  | $                                                             | 1,160      |                                                               | $
|Income (Loss) before Preferred Dividends and     Cumulative effect of change in accounting     principle |  | $                                                             | 158        |                                                               | $
|Earnings (Loss) per share, basic                                                                         |  | $                                                             | 0.008      |                                                               | $
|Earnings (Loss) per share, diluted                                                                       |  | $                                                             | 0.008      |                                                               | $
|                                                                                                         |  |                                                               |            |                                                               |  
|Weighted average shares outstanding                                                                      |  |                                                               |            |                                                               |  
|Basic                                                                                                    |  |                                                               | 15,861,250 |                                                               |  
|Diluted                                                                                                  |  |                                                               | 15,861,250 |                                                               |  







---

##### Table of Contents

|                     |  | At September 30,2002 |      
|-------------------- |  | -------------------- | -----
|                     |  |                      |      
|Working Capital      |  | $                    | 261  
|Total Current Assets |  | $                    | 2,576
|Goodwill, net        |  | $                    | 2,162
|Total Assets         |  | $                    | 5,647
|Stockholders Equity |  | $                    | 3,332

THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2001

Total revenues increased by $114 to $1,492 for the three months ended September 30, 2002, from $1,378 in the comparable 2001 period, representing an increase of 8.3%.
Revenues increased in both of our degree and non-degree programs compared to the year ago period. Degree program revenue increased by $231 or 31.2%, to $971 for the three months ended September 30, 2002 from $740 in the comparable 2001 period. This
increase is due to the timing and increased enrollment in our degree programs as well as the impact of new degree programs in the current year. Non-degree revenue increased by $28 or 28.6%, to $132 for the three months ended September 30, 2002 from
$104 in the year ago period. This increase is due primarily to the fact that our Life Care Planning Program was postponed to the fourth quarter of 2001 due to the events surrounding September 11. Revenue from subscription and consulting services
declined $146 or 27.4%, to $387 in the three months ended September 30, 2002 from $533 in the year ago period. This decrease is due to a decline of $49 in subscription revenues from our subsidiary, Educators Learning Network, Inc.
(eLNet) and $97 in our consulting revenues.

Gross Profit increased $125, or 12.1%, to $1,160 for the three months ended September 30, 2002 from
$1,035 in the comparable 2001 period, primarily due to increased overall revenues and improved gross margins. For the three months ended September 30, 2002, our gross profit margin increased to 77.7%, compared to 75.1% in the comparable 2001 period,
reflecting the impact of more efficient delivery of our degree and non-degree programs as well as higher margins associated with our subscription and consulting services, partially offset by a write-off of certain content development costs.

Operating expenses decreased by $152, or 13.2%, to $1,005 for the three months ended September 30, 2002 from $1,157 in the comparable 2001 period. The
decrease was primarily due to the elimination of goodwill amortization as a result of the adoption of FASB 142, a reduction in headcount, a decrease in marketing expenditures and a reduction in travel and contract labor.

Net interest income decreased $1, or 25%, to $3 for the three months ended September 30, 2002 from $4, in the year ago period.

As a result of the increase in sales, improvement of margins and reduction in operating expenses, net income before preferred dividends and the cumulative effect of change
in accounting principle increased by $279, resulting in net income before preferred dividends and the cumulative effect of change in accounting principle of $158 for the three months ended September 30, 2002 compared with a net loss before preferred
dividends and cumulative effect of change in accounting principle of $121 in the comparable 2001 period.

NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001

Total revenues increased by $363 to $4,220 for the nine months ended September 30, 2002 from $3,857 for the comparable 2001 period, representing an increase of 9.4%.
Degree program revenue increased by $722 or 37.2%, to $2,666 for the nine months ended September 30, 2002 from $1,944 for the comparable 2001 period. This increase was partially offset by a decline in revenue from non-degree programs as well as
revenue from subscription and consulting services. Revenue from non-degree programs declined $359 or 18.8%, to $1,554 for the nine months ended September 30, 2002 from $1,913





---

##### Table of Contents

in the year ago period. This decline is largely the result of not offering one of our non-degree program this year and a substantial decline in eLNet subscription revenue of $304 which was
partially offset by increased consulting services and other revenue as compared to the year ago period.

Gross profit increased 22.3% to $3,158 for the nine
months ended September 30, 2002 from $2,583 for the comparable 2001 period due to increased overall revenues and improved gross margins. For the nine months ended September 30, 2002, our gross profit margin increased to 74.8%, compared to 67.0% in
the comparable 2001 period, reflecting the impact of more efficient delivery of our degree and non-degree programs as well as the maturation of some of our new programs partially offset by the discontinuance of certain non-degree programs and the
write-off of content associated with these programs.

Operating expenses decreased by $833 to $2,838 for the nine months ended September 30, 2002 from $3,672
in the comparable 2001 period, representing a decrease of 22.7%. This decrease is the result of the waiver of salaries by certain officers, a decreased use of contract laborers, reduced marketing expenditures and the elimination of the amortization
of goodwill in accordance with SFAS 142.

Net interest income decreased compared with the comparable year ago period reflecting our allocation of cash
reserves to the investments we made in people, programs and marketing.

In connection with the implementation of SFAS 142 the Company recorded a transitional
goodwill impairment loss of $2,000.

As a result of the above changes, net income before preferred dividends and the cumulative effect of change in accounting
principle increased by $1,403, resulting in a net income before preferred dividends and the cumulative effect of change in accounting principle $327 for the nine months ended September, 2002 compared with a net loss before preferred dividends and
the cumulative effect of change in accounting principle of $1,076 in the comparable 2001 period.

LIQUIDITY AND CAPITAL RESOURCES

Our cash amounted to $823 at September 30, 2002, compared to $481 at December 31, 2001. The net cash provided by our operations was $1,358 during the nine months ended
September 30, 2002 compared with $763 in the comparable 2001 period. In the second quarter of 2001, we began accounting for capitalized direct marketing and content development costs as investing activities. These costs totaled $911 for the nine
months ended September 30, 2002 and $930 in the year ago period. Therefore, these costs are not included as a use of cash from operating activities for the nine months ending September 30, 2002 and September 30, 2001.

We used $1,011 of cash for investing activities in the nine months ended September 30, 2002 compared with $1,150 in the year ago period.

SEASONALITY

We experience seasonality in our results of operations primarily as a result of changes in the level of student enrollments and course
completion. We typically offer courses during all three semesters (fall - August through December; spring - December through April; and summer - May through August) of the school year. The summer semester typically experiences lower enrollment of
new students as well as an increase in the number of students taking a break from their programs thereby resulting in lower revenues. Accordingly, costs and expenses historically increase as a percentage of revenues as a result of
certain fixed costs not significantly affected by the seasonal summer semester declines in net revenues. Changes in the start and finish dates of courses also impact the quarter in which revenue is recognized and impact comparability on a
year-to-year basis. We anticipate that these seasonal trends will continue in the future.





---

##### Table of Contents

RISK FACTORS

Special Note Regarding Forward-Looking Statements and Risk Factors

Certain statements in this Form 10-QSB contain forward-looking statements. Forward-looking statements are any statements other than statements of historical fact. Examples
of forward-looking statements include projections of earnings, revenues or other financial items, statements of the plans and objectives of management for future operations, and statements concerning proposed new products and services, and any
statements of assumptions underlying any of the foregoing. In some cases, you can identify forward-looking statements by the use of words such as may, will, expects, should, believes, plans, anticipates, estimates, predicts, potential, or continue,
and any other words of similar meaning.

Statements regarding the Companys future financial performance or results of operations, including expected
revenue growth, EBITDA growth, future expenses, future operating margins and other future or expected performance are subject to the following risks: that projected operating efficiencies and cost-reduction initiatives will not be achieved due to
implementation difficulties or contractual spending commitments that cant be reduced; the acquisition of businesses or the launch of new lines of business, which could increase operating expenses and dilute operating margins; the inability to
raise additional capital or to attract new customers; increased competition, which could lead to negative pressure on the Companys pricing and the need for increased marketing; the inability to maintain, establish or renew relationships with
customers, whether due to competition or other factors; costs associated with the Companys initiatives to upgrade its technology platforms or the failure of the Company to successfully complete that initiative; and to the general risks
associated with the Companys businesses.

FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF SECURITIES

You should consider the risks described below before making an investment decision. We believe that the risks and uncertainties described below are the principal material risks facing our company as of the date of this Form 10-QSB. In the
future, we may become subject to additional risks that are not currently known to us. Our business, financial condition or results of operations could be materially adversely affected by any of the following risks. The trading price of our common
stock could decline due to any of the following risks.

ADOPTION OF NEW ACCOUNTING STANDARDS WILL HAVE AN ADVERSE AFFECT ON THE COMPANYS FINANCIAL STATEMENTS AND MAY HAVE A MATERIAL ADVERSE EFFECT ON ITS
BUSINESS AND FINANCIAL CONDITION

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141,
Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.

As reflected in the Companys Form 10-QSB/A filed with the SEC on August 14, 2002, effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS 142). In accordance with the provisions of SFAS 142, the Company completed its initial assignment of previously recognized goodwill to its subsidiaries during the second quarter of 2002. Based on this assignment, the Company has experienced a
loss of $2m attributed to a reduction of value with respect to the net assets (including goodwill) of its subsidiaries, Educators Learning Network, Inc. and Rutherford Learning Group, Inc.

Based on a number of factors as described below and the inability of management to predict with any reasonable degree of accuracy, management of the Company is of the
opinion, based on the criteria set forth in SFAS 142, that the goodwill associated with the acquisition of ELNet and RLG which occurred in August of 2000 should be adjusted downward. The fair value of ELNet and RLG was





---

##### Table of Contents

estimated by management using traditional valuation methods including industry comparables. As a result, management has recorded a transitional goodwill impairment loss of $2m as the effect
of a change in accounting principle. This loss was reflected in the three month period ended March 31, 2002 as presented in the Companys Form 10-QSB/A filed with the SEC on August 14, 2002. The recognized transitional goodwill impairment loss
is an estimate that has not yet been finalized due to managements inability, at this time to predict, with any reasonable degree of accuracy, the long-term effect of the foregoing described factors. Management expects to finalize this estimate
no later than by the end of the year ending December 31, 2002.

The following factors which lead to managements decision to reduce the net asset value
of ELNet and RLG together with other factors will likely result in a material adverse impact on the Companys operating results and financial condition. Accordingly, investors should seriously consider these factors as well as others prior to
making an investment in the Company.

| |  |  | Effective July 1, 2001, the Company and its subsidiaries, ELNet and RLG entered into a Settlement and Asset Purchase Agreement with Michael Rutherford, one of two principals in these
subsidiaries, whereby (i) the Company sold to Mr. Rutherford certain assets of RLG, and (ii) and Mr. Rutherford resigned as an officer and director of both ELNet and RLG.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Effective as of the close of business on July 31, 2002, the Company and Dr. Larry Rowedder, the remaining principal of ELNet and RLG, were unable to reach terms with respect to his
continued employment with the Company and as a result, Dr. Rowedders employment agreement with ELNet expired. Until such time as a suitable replacement for Dr. Rowedder is found, the Registrants CEO, Rogers W. Kirven, Jr., will
also serve as ELNets CEO, the Registrants President, Daniel J. Devine, will also serve as ELNets President and Dr. Gloria Pickar will serve as Chief Education Officer for ELNet. Mr. Joel Hagy will continue to serve as
ELNets Chief Operating Officer.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | For the nine-month period ending September 30, 2002, ELNet has recognized approximately $250,688 less revenue than the year-ago period.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------

| |  |  | For the nine-month period ending September 30, 2002, ELNet realized approximately $156,751 in net losses from operations and approximately $18,332 in negative cash
flow.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Over the past 12 to 18 months, the business sector which ELNet and RLG operate, the K-12 educators marketplace, has experienced significant and rapid change, including without limitation,
significant decreases in operating budgets, changes in customer demands, implementation of State and Federal teaching and learning standards, decreases in private sector funding for education products and services, and delays and transition issues
with respect to education reform and Federal funding as initiated with the No Child Left Behind Act of 2001, all of which have resulted in longer sale cycles, increased customer attrition and longer than expected accounts receivable
collections.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our Limited Operating History and The Emerging E-Learning Market Makes it Difficult To Evaluate Our Business and Future Prospects.

We commenced operations in November 1993 and did not begin to generate significant revenues until fiscal 1999. For the year ended December 31, 2001, we had revenues of
$5.4 million and net losses before preferred dividends of $1.1 million. We are still in the early stages of our development, which, when combined with the emerging e-learning market, and general economic factors affecting the education sector, make
it difficult to evaluate our business or our prospects. Because of these factors, we have a limited and unproven ability to predict the trends in the e-learning market and in our business. The





---

##### Table of Contents

uncertainty of our future performance, in particular, and the uncertainty regarding the acceptance of e-learning, in general, increases the risk that we will be unable to build a sustainable
business and that our stockholder value will decline.

In Recognizing Revenue, We Depend On The Timely Achievement of Various Milestones, and Our Inability to Recognize Revenue In Accordance With Our
Expectations Will Harm Our Operating Results.

In accordance with our revenue recognition policy, our ability to record revenues depends upon several
factors. These factors include acceptance by our customers of new courses and the pace of participant registrations in courses once they are completed and made available for access. Our ability to recognize revenues from our courses depends upon our
content partners providing us with subject matter experts and content to be incorporated into the courses as well as our completion of production and obtaining customer acceptance at each stage of development. Accordingly, if our content partners do
not provide us with the subject matter experts or content in a timely manner, we will not be able to recognize the revenues at the times we anticipate with respect to that program, which would harm our operating results.

In addition, if the expected number of students do not sign up for a course, our ability to recognize revenues will be delayed, which could also harm our operating results
in any quarter. Student registration depends in large part on our marketing and promotional activities. If we fail to take necessary measures to achieve enrollment in our courses, our ability to recognize revenues, and therefore our operating
results, could be harmed. Likewise, our prospects for growth will be delayed and adversely affected if we are unable to raise additional capital to fuel our marketing efforts.

In any Quarter, a Delay In
Receiving Payment from a Content Partner or Customers Could Harm Our Performance.

We expect that we will continue to depend upon a small number of
content partners with respect to our degree programs and several school districts with respect to some of our training and certificate programs for a significant portion of our revenues. As a result, our operating results could suffer if we lose any
of these partners/schools or if these partners/schools delayed payment in any future period. For example, in fiscal 2001, our largest content partner accounted for 51.5% of our total revenues. We anticipate that the University of Florida will
account for a significant portion of our revenues at least through fiscal 2003.

Our Growth Depends On Hiring and Retaining Third-Party Instructors and Other Qualified Personnel In A Highly Competitive
Employment Market.

The growth of our business and revenues will depend in large part upon our ability to attract and retain sufficient numbers of highly
skilled employees. We primarily rely on individual third parties to provide the majority of our program instruction and our ability to support our courses depends on the availability and competency of these third-party instructors. Education and
Internet related industries create high demand for qualified personnel. We require personnel with educational course and design experience. Candidates experienced in both areas are limited. Currently, we contract with individual instructors
throughout the United States. Our failure to attract and retain sufficient skilled personnel and program instructors may limit the rate at which we can grow, which will harm our business and financial performance.

We Rely On Cooperation from Our Content Partners and Third Parties To Develop and Deliver Courses and Our Business Will Suffer If Such Cooperation Occurs in an Untimely or Inefficient Manner.

To be competitive, we must develop and introduce on a timely basis new course offerings, which meet the needs of the working profession seeking to use our e-learning
solutions. The quality of our learning solutions depends in large part on our ability to frequently update our courses and develop new





---

##### Table of Contents

content as the underlying subject matter changes. We create courses by incorporating subject matter expertise provided by our content partners and third party content developers into our
e-learning delivery model. The quality of our courses depends on receiving content and cooperation from our content partners, subject matter experts, and third-party content developers. If we do not receive materials from these sources in a timely
manner, we may not be able to develop or deliver specialized courses to our customers in the expected time frame. Even if we do receive necessary materials from third parties, our employees and consultants must complete their work in a timely manner
or we will not meet customer expectations. In the past, we have experienced delays in obtaining access to experts, which has contributed to a longer development cycle and inefficient allocation of our resources. Any prolonged delays, even when
caused by our customers, can result in failure to satisfy a customers demands and damage our reputation.

The Growth of Our Business Requires Wide Acceptance of E-Learning Solutions.

The market for e-learning solutions is still developing and is rapidly evolving. A number of factors could impact the acceptance of our e-learning solutions,
including:

| |  |  | historic reliance on traditional education methods;
| | - |  | ---------------------------------------------------

| |  |  | limited allocation of our customers and prospective customers education budgets to e-learning; and
| | - |  | ----------------------------------------------------------------------------------------------------

| |  |  | ineffective use of distance learning solutions.
| | - |  | -----------------------------------------------

Our e-learning solutions are
relatively new, largely untested and less familiar to prospective customers than more established education methods. If the market for e-learning fails to develop or develops more slowly than we expect, we will not achieve our growth and revenue
targets and our stock price will likely decline.

The Length and Variability of Our Sales Cycle May Make Our Operating Results Unpredictable and Volatile.

The period between our initial contact with a potential customer and the adoption or first purchase of our solution by that customer typically ranges from three to nine
months. In some cases, the cycle has extended for up to two years. Because we rely on adoption of our solution by our knowledge partners and large sales with respect to some of our training and certificate programs for a substantial portion of our
revenues, these long sales cycles can adversely affect our financial performance in any quarter. Factors which may contribute to the variability and length of our sales cycle include the time periods required for:

| |  |  | our education of potential customers about the benefits of our distance learning solutions;
| | - |  | -------------------------------------------------------------------------------------------

| |  |  | our potential customers assessment of the value of distance learning solutions compared to traditional educational solutions;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------

| |  |  | our potential customers evaluation of competitive distance learning solutions; and
| | - |  | -----------------------------------------------------------------------------------

| |  |  | our potential customers internal budget and approval processes.
| | - |  | ----------------------------------------------------------------

Our
lengthy sales cycle limits our ability to forecast the timing and size of specific sales. This, in turn, makes it difficult to predict quarterly financial performance.

We May Not Have Adequate Resources To
Compete Effectively, Acquire and Retain Customers and Attain Future Growth In The Highly Competitive E-Learning Market.

The e-learning market is
evolving quickly and is subject to rapid technological change, shifts in





---

##### Table of Contents

customer demands and evolving learning methodologies. In recent months e-learning has received more attention and numerous new companies have entered the market. As a result, customers and
potential customers have more choices. This challenges us to distinguish our offerings. If we fail to adapt to changes and the increased competition in our industry, we may lose existing customers or fail to gain new customers. No single competitor
accounts for a dominant market share, yet competition is intense. We compete primarily with:

| |  |  | third-party suppliers of instructor-led education and learning;
| | - |  | ---------------------------------------------------------------

| |  |  | universities and internal education departments; and
| | - |  | ----------------------------------------------------

| |  |  | other suppliers of technology-based learning solutions.
| | - |  | -------------------------------------------------------

Due to the high
market fragmentation, we do not often compete head-to-head with any particular company. On occasion, our customers may evaluate our end-to-end solution by comparison with point solutions offered by other e-learning companies. We may not provide
solutions that compare favorably with traditional new instructor-led techniques or other technology-based learning methodologies. Our competitors vary in size and in the scope and breadth of the courses and services they offer. Several of our
competitors have longer operating histories and significantly greater financial, technical and marketing resources. Larger companies may enter the e-learning market through the acquisition of our competitors. We anticipate that the lack of
significant entry barriers to the e-learning market will allow other competitors to enter the market, increasing competition.

To succeed, we must continue
to expand our course offerings, upgrade our technology and distinguish our solutions. We may not be able to do so successfully. Any failure by us to anticipate or respond adequately to changes in technology and customer preferences, or any
significant delays in course development or implementation, could impact our ability to capture market share. As competition continues to intensify, we expect the e-learning market to undergo significant price competition. We also expect to face
increasing price pressures from customers as they demand more value for their learning related expenditures. Increased competition, or our inability to compete successfully against current and future competitors, could reduce operating margins, loss
of market share and thought leadership resulting in a diminution of our brand.

We Could Inhibit Increases In Our Revenues If We Do Not Increase Our Marketing.

To date, substantially all of our sales have been made through direct marketing and sales efforts. We believe that we will need to expand our marketing and diversify our
sales efforts to be successful. We currently have a very limited ability to invest in personnel and marketing activities and to develop indirect sales channels. Accordingly, we do not expect significant growth in our sales throughout the remainder
of this fiscal year or for the first quarter of 2003.

We Have Restructured Our Operations in Order to Reduce Operating Expenses Which Could Adversely Affect Our Ability to Grow.

Because of our limited working capital, we have restructured our operations to primarily concentrate on our core competencies to provide, among other things, specialized
expertise in consulting, content repurposing and development, and marketing in our existing products. Management will continue to monitor these adjustments for the remainder of 2002 and will make additional adjustments within our organization, if
necessary. The transition issues associated with this restructuring may recur, and our revenue growth rates may decline and expenses may increase in future quarters.

While Not Expected in the Short Term, We
May Engage in Acquisitions, and If We Do We May Be Unable to Integrate any New Operations, Technologies, Products or Personnel.

As part of our long-term
business strategy, we expect to engage in joint ventures and alliances as well as to acquire businesses that offer complementary products, services and technologies. Any





---

##### Table of Contents

ventures, alliances, acquisitions or investments will be accompanied by certain risks. These risks include, among other things, the:

| |  |  | expenditures of cash which may reduce our cash reserves to critical levels,
| | - |  | ---------------------------------------------------------------------------

| |  |  | difficulty of assimilating the operations and personnel of the targeted businesses,
| | - |  | -----------------------------------------------------------------------------------

| |  |  | potential disruption of our ongoing business,
| | - |  | ---------------------------------------------

| |  |  | distraction of management from our core business,
| | - |  | -------------------------------------------------

| |  |  | inability of management to maximize our financial and strategic position,
| | - |  | -------------------------------------------------------------------------

| |  |  | increase in general and administrative expenses,
| | - |  | ------------------------------------------------

| |  |  | expansion of management information systems,
| | - |  | --------------------------------------------

| |  |  | need for greater facilities requirements,
| | - |  | -----------------------------------------

| |  |  | increase in overall headcount,
| | - |  | ------------------------------

| |  |  | maintenance of uniform standards, controls, procedures and policies, and
| | - |  | ------------------------------------------------------------------------

| |  |  | impairment of relationships with employees and clients as a result of any integration of new management personnel
| | - |  | -----------------------------------------------------------------------------------------------------------------

Any of these factors could have a material adverse effect on our business, results of operations or financial conditions, particularly in the case of a larger
acquisition.

Consideration paid for future acquisitions could be in the form of:

| |  |  | cash,
| | - |  | -----

| |  |  | stock,
| | - |  | ------

| |  |  | rights to purchase stock
| | - |  | ------------------------

| |  |  | convertible promissory notes, or
| | - |  | --------------------------------

| |  |  | a combination of the above types of consideration.
| | - |  | --------------------------------------------------

While we intend to
participate in only accretive transactions, dilution of existing stockholders and to earnings per share may result in connection with any such future acquisitions. Our integration processes may also not be successful and the anticipated benefits of
any past or future acquisition may not be realized.

Some of Our Products Are Less Profitable Than Others.

Some
of our revenues are derived from products such as our non-degree programs which, as a percentage of revenues, currently require a higher level of development, distribution and support expenditures compared to some of our degree programs. To the
extent that revenues generated from these products become a greater percentage of our total revenues, our operating margins will decrease, unless the expenses associated with these products decline as a percentage of revenues.

Our Stock Price Will Likely Continue To Be Volatile.

The market price of our common stock has experienced significant
decreases in value and fluctuations over the last two years and may continue to fluctuate significantly. The trading price of our common stock could be subject to wide fluctuations in response to various factors, some of which are beyond our
control, including:

| |  |  | unanticipated adverse market conditions,
| | - |  | ----------------------------------------

| |  |  | actual or anticipated variations in quarterly results of operations,
| | - |  | --------------------------------------------------------------------

| |  |  | changes in our intellectual property rights or our competitors,
| | - |  | ---------------------------------------------------------------

| |  |  | announcements of technological innovations,
| | - |  | -------------------------------------------

| |  |  | our introduction or elimination of new programs, products or services or changes in product pricing by our competitors,
| | - |  | -----------------------------------------------------------------------------------------------------------------------

| |  |  | changes in financial estimates,
| | - |  | -------------------------------

| |  |  | announcement of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------





---

##### Table of Contents

| |  |  | additions or departures of key personnel,
| | - |  | -----------------------------------------

| |  |  | increased needs for operating capital, and
| | - |  | ------------------------------------------

| |  |  | regulatory changes or interpretations.
| | - |  | --------------------------------------

The stock prices for many companies in
the education sectors have experienced wide fluctuations and significant decreases, which often have been unrelated to their operating performance. We believe that these fluctuations have adversely affected the market price of the e-learning sector
and our common stock.

Possible Sales of Securities by Current Shareholders May Have Depressive Effect On Market.

There are currently approximately 8,197,876 shares of the Companys common stock outstanding which are either freely tradable or may be traded as restricted securities pursuant to Rule 144 under the Securities Act. Under Rule
144, a person who has held restricted securities for a period of one year may sell a limited number of shares to the public in ordinary brokerage transactions. Sales of a large number of these securities will likely have a depressive effect on the
market price of the Companys common stock.

Our Market Is Characterized By Rapid Technological Change.

The
market for our products and services is characterized by rapid technological change, changes in customer demands and evolving industry standards. The introduction of services embodying new technologies and the emergence of new industry standards can
render existing services obsolete and unmarketable. To succeed, we must address the increasingly sophisticated needs of higher education by improving our software and services to keep pace with technological developments, emerging industry standards
and customer requirements. Presently, we purchase our technology from third party vendors as we have no proprietary technology. While we continue to strive to upgrade our technology and seek to acquire or partner with companies with state of the art
technology, we may not be competitively successful in the future.

Our Operating Results Are Likely To Fluctuate Significantly And May Be Below Expectations.

The following factors may affect our quarterly, as well as our annual, operating results:

| |  |  | our ability to attract and retain colleges, universities, associations and companies;
| | - |  | -------------------------------------------------------------------------------------

| |  |  | our ability to successfully implement our proposed distributed learning programs;
| | - |  | ---------------------------------------------------------------------------------

| |  |  | the amount and timing of operating costs and capital expenditures relating to expansion of our business;
| | - |  | --------------------------------------------------------------------------------------------------------

| |  |  | our introduction of new or enhanced services and products, and similar introductions by our competitors;
| | - |  | --------------------------------------------------------------------------------------------------------

| |  |  | our ability to upgrade and develop our systems and infrastructure;
| | - |  | ------------------------------------------------------------------

| |  |  | our ability to attract, motivate and retain personnel;
| | - |  | ------------------------------------------------------

| |  |  | our lack of operating capital and inability to raise additional capital at reasonable prices; and
| | - |  | -------------------------------------------------------------------------------------------------

| |  |  | technical difficulties in delivering our services.
| | - |  | --------------------------------------------------

As a result, we believe
that our prior sales and operating results may not necessarily be meaningful, and that such comparisons may not be accurate indicators of future performance. Just because our business grew during the last two years, we can give no assurance that
these percentages will reflect the ongoing pattern of our business.

We Have A History of Losses and No Assurance Can Be Given of Return to Profitability.

Prior to expanding our infrastructure and business in fiscal year 2000, the Company was profitable, but during the fiscal years 2000 and 2001, the Company was unable to
generate revenue sufficient to offset these additional expenses and charges. Consequently, the Company sustained substantial losses in 2001. Net losses for the twelve (12) months ended December 31, 2001 were approximately $1.1 million ($1.2 million
after preferred dividends) or $(0.078) per share. The loss was





---

##### Table of Contents

primarily due to personnel increases and development of new programs. While no assurance can be given, we believe our current team is largely adequate to support our planned growth.
Therefore, we expect that general and administrative costs will not materially increase this year. And while we have been profitable in each quarter of this year (saving the write-off of goodwill), there can be no assurance that the Company will be
able to maintain the level of revenues needed to sustain profitability.

Our Future Capital Needs; Potential Need for Additional Financing.

While we presently have a very limited amount of working capital, we believe that our current cash position and recently acquired line of credit, together with the
expected revenues of the Company will be sufficient to provide the Company with capital sufficient to fund our required working capital needs for the fiscal year 2002 and for the first six (6) months of 2003. If the Company needs to raise additional
financing, there can be no assurance that such funds will, in fact, be available or if available will be sufficient in the near term or that conditions and circumstances described herein may not result in subsequent cash requirements by the Company
or that future funds will be sufficient to meet such needs. In the event of such developments, attaining financing under such conditions may not be possible, or even if additional capital may be otherwise available, the terms on which such capital
may be available may not be commercially feasible or advantageous.

Because of our current cash position, we will be unable in the near term to continue to
develop new product offerings, expand our infrastructure and acquire new companies and businesses for which cash would be required to consummate these transactions without obtaining an infusion of additional capital. Further, to the extent that
recently developed program offerings as well as offerings currently under development or planned do not prove financially viable within a reasonable period of time, it is our intention to terminate the offering and/or production of such programs.
Further, to the extent that we experience a material adverse cash position resulting from employee and other infrastructure costs related to such termination or discontinuation of such programs, it is our intention to take all appropriate and
reasonably necessary measures to immediately reduce and/or eliminate certain members of our staff and infrastructure costs and expenses related to such terminated or discontinued programs.

Authorization and
Discretionary Issuance of Preferred Stock Could Adversely Affect the Voting Power or Other Rights of Our Stockholders.

The Companys Articles of
Incorporation authorize the issuance of blank check preferred stock with such designations, rights, and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered,
without stockholder approval, to designate and issue additional series of preferred stock with dividend, liquidation, conversion, voting or other rights, including the right to issue convertible securities with no limitations on conversion, which
could adversely affect the voting power or other rights of the holders of the Companys common stock, substantially dilute the common shareholders interest and depress the price of the Companys common stock. In addition, the
preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Moreover, the substantial amount of outstanding options and number of warrants, and their terms
of conversion may discourage or prevent an acquisition of the Company.

We Are Highly Dependent Upon Management and A Loss Could Be Critical.

The Company and its subsidiaries will be dependent to a significant extent on the continued efforts and abilities of its Chairman and Chief Executive Officer, Rogers W.
Kirven, Jr., its President, Daniel J. Devine and other key employees. Notwithstanding its ownership of key-man life on Mr. Kirven, if the Company were to lose the services of such key employees before a qualified replacement could be obtained,
its business and the financial affairs of the Company could be materially adversely affected.

You Should Not Invest If You Expect Dividends.

The Company has never paid dividends on its common stock and does not presently intend to pay





---

##### Table of Contents

any dividends in the foreseeable future. The Company anticipates that any funds available for payment of dividends will be re-invested into the Company to assist the Company in furthering
its business strategy. Accordingly, interested parties should not make an investment in the Company if you expect dividends.

ITEM 3  CONTROLS AND PROCEDURES

The Companys Chief Executive Officer and Chief Financial Officer, Rogers W. Kirven,
Jr., (the Certifying Officer) is responsible for establishing and maintaining disclosure controls and procedures for the Company. Such officer has concluded (based upon his evaluation of these controls and procedures as of a date within
90 days of the filing of this report) that the Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in this report is accumulated and communicated to the Companys
management, including its principal executive officers as appropriate, to allow timely decisions regarding required disclosure.

The Certifying Officer also
has indicated that there were no significant changes in the Companys internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation, and there were no corrective actions with regard
to significant deficiencies and material weaknesses.

PART II  OTHER INFORMATION

ITEM 6  EXHIBITS AND REPORTS ON FORM 8-K

(a)      List of
Exhibits

| |  | Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| |  | -----------------------------------------------------------------------------------------------------------------------------------

(b)      Reports on Form 8-K

| |  | A Form 8-K filed by the Company on August 1, 2002.
| |  | --------------------------------------------------

SIGNATURES

In
accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

|                         |  |  | COMPASSKNOWLEDGE HOLDINGS, INC.                              
|------------------------ |  |  | -------------------------------------------------------------
|Date:   November 6, 2002 |  |  | By: /s/ ROGERS W. KIRVEN, JR.                                
|                         |  |  |                                                              
|                         |  |  | Chief Executive Officer, ChiefFinancial Officer and Treasurer

| |  |  |                         
| |  |  | ------------------------
| |  |  | By: /s/ DANIEL J. DEVINE
| |  |  |                         
| |  |  | President and Director