** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**Form 10-K**

** **

| **(Mark One)**                                  |                                                                                      |   |
|-------------------------------------------------|-------------------------------------------------------------------------------------------|--------|
| **ý**                                      | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                            |                                                                                      |   |
| **For the fiscal year ended December 31, 2002** |
|                                            |                                                                                      |   |
| **Commission File Number:  0-31226**       |

** **

**INVESTOOLS INC.**

(Exact name of Registrant as specified in itscharter)

 

| **Delaware**                                                    |   | **76-0685039**                             |
|-----------------------------------------------------------------|--------|--------------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification No.)       |
|                                                            |   |                                       |
| **5959 Corporate Drive, Suite LL250  Houston, Texas**           |   | **77036**                                  |
| (Address of principal executive offices)                        |   | (Zip Code)                                 |
|                                                            |   |                                       |
| Registrant’s telephone number, including  area code:       |
| **(281) 588-9700**                                              |
|                                                            |   |                                       |
| Securities registered pursuant to Section  12(b) of the Act:    |   | **None**                                   |
|                                                            |   |                                       |
| Securities registered pursuant to Section  12(g) of the Act:    |   | **Common Stock, $.01 par value per share** |
|                                                            |   | (Title of Class)                           |

 

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

Yes   ý                                                                          No     o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item405 of Regulation S-K is not contained herein, and will not be contained, tothe best of Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  ý

 

The aggregate market value of voting and non-votingcommon equity held by non-affiliates of the Registrant as of June 28, 2002 (thelast business day of the Registrant’s most recently completed second fiscalquarter) based on the closing price of the common stock on the OTC BulletingBoard of the NASD for such date, was $14.8 million. 

 

The aggregate market value of the voting and non-voting common equityheld by non-affiliates of the Registrant on March 3, 2003, based upon theclosing price of the common stock on the OTC Bulletin Board of the NASD forsuch date, was approximately $11.7 million. The number of shares of the Registrant’s common stock converted andoutstanding on March 3, 2003 was 43,206,466.

 

 

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**INVESTOOLS INC.**

**FORM 10-K REPORT INDEX**

 
| **PART I**   |                                                                                        |   |
|--------------|---------------------------------------------------------------------------------------------|--------|
|         |                                                                                        |   |
| ITEM 1.      | BUSINESS                                                                                    |   |
| ITEM 2.      | PROPERTIES                                                                                  |   |
| ITEM  4.     | SUBMISSION  OF MATTERS TO A VOTE OF STOCKHOLDERS                                            |   |
|         |                                                                                        |   |
| **PART II**  |                                                                                        |   |
|         |                                                                                        |   |
| ITEM  5.     | MARKET  FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                 |   |
| ITEM 6.      | SELECTED FINANCIAL DATA                                                                     |   |
| ITEM  7.     | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |
| ITEM  7A.    | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 |   |
| ITEM  8.     | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                |   |
| ITEM  9.     | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE       |   |
|         |                                                                                        |   |
| **PART III** |                                                                                        |   |
|         |                                                                                        |   |
| ITEM  10.    | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT                                         |   |
| ITEM 11.     | EXECUTIVE COMPENSATION                                                                      |   |
| ITEM 12.     | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS  AND MANAGEMENT                             |   |
| ITEM 13.     | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                              |   |
| ITEM 14.     | CONTROLS AND PROCEDURES                                                                     |   |
|         |                                                                                        |   |
| **PART IV**  |                                                                                        |   |
|         |                                                                                        |   |
| ITEM 15.     | EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON  FORM 10-K                                    |   |

 

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**Part I**

** **

# **Item 1.       Business**

 

## **Overview**

 

INVESTools Inc. (the“Company” or “INVESTools,” http://www.investools.com) is a global leader ininvestor education that teaches individual investors how to achieve theirinvestment goals.  The Company providesa full range of investor education products and services that are delivered ina variety of formats, including instructor-led workshops, “at home” studyprograms, personal training sessions and educational newsletters viaemail.  INVESTools focuses its effortson providing solutions that provide lifelong learning in three ways:  by teaching basic investing concepts in atraditional learning environment, by helping graduates successfully apply whatthey have learned through personalized training and by continuously challenginggraduates to build on their knowledge through new products and services.

 

The Company’s primaryproduct is a combination investing workshop and an accompanying six-month Website subscription.  The workshopimplements training and learning by using the Company’s proprietaryInvestorToolbox Web site to teach investors a step-by-step process for makingintelligent, informed and non-emotional investment decisions.  The six-month InvestorToolbox Web sitesubscription gives workshop graduates access to the same tools used in thetraining sessions to more effectively implement the strategies learned.  The investing workshop and accompanyingsix-month InvestorToolbox Web site subscription are offered to investorsthrough the Company’s own INVESTools’ brand and through distributionpartnerships that the Company has formed with marketing and branded partners,such as Peter Lowe, Wright Thurston Group, NTC, BusinessWeek and CNBC.  The Company offers additional investoreducation products and services that allow workshop graduates to continue tobuild upon the strategies learned in the investing workshop in order to becomemore effective managers of their own assets. A significant percentage of workshop graduates renew theirInvestorToolbox Web site subscription every six months, creating substantialrecurring sales.

 

## **Corporate Background**

 

The Company wasincorporated in Delaware on May 21, 2001 and maintains its principal executiveoffices at 5959 Corporate Drive, Suite LL250, Houston, Texas 77036.  Although incorporated in May of 2001, theCompany did not begin business operations until December 6, 2001, when themerger transaction (the “Merger”) pursuant to the Second Amended and RestatedAgreement and Plan of Merger (the “Merger Agreement”), dated September 25,2001, between the Company, ZiaSun Technologies, Inc., a Nevada corporation(“ZiaSun”), and Telescan, Inc. a Delaware corporation (“Telescan”), wasconsummated.  The stockholders of ZiaSunand Telescan approved the Merger Agreement on December 6, 2001.

 

As a result of theMerger, ZiaSun and Telescan each became wholly owned subsidiaries of theCompany.  The stock-for-stock merger transactionresulted in (i) each share of ZiaSun common stock being converted into theright to receive one share of the Company’s common stock, (ii) each share ofTelescan common stock being converted into the right to receive 0.55531 of ashare of the Company’s common stock and (iii) each share of Telescan preferredstock being converted into one share of the Company’s preferred stock.  No fractional shares of the Company’s commonstock were issued and cash, without interest, was paid in lieu of fractionalshares.  Following the close of theMerger, former ZiaSun stockholders owned approximately 75% of the Company’scommon stock and former Telescan stockholders owned approximately 25%.  The Merger was accounted for under thepurchase method of accounting.

 

ZiaSun owns 100% ofOnline Investors Advantage, Inc. (“OIA”). OIA’s wholly owned subsidiaries include:  INVESTools Asia Pacific Pte., Limited (“INVESTools Asia”),INVESTools Hong Kong Ltd. (“INVESTools Hong Kong”), Seminar Marketing Group,Inc. (“SMG”) and Memory Improvement Systems, Inc. (“MIS”).  INVESTools Hong Kong is a start up companywith minimal operations and SMG and MIS are dormant companies with nooperations.

 

Telescan owns 100% ofINVESTools, Inc. (“INVESTools California”), a California corporation andprovider of investment advisory newsletters on the Internet.

## ** **

## **Offerings**

 

The Company’s corebusiness segment, Investor Education, offers a full range of investor educationproducts and services that provide lifelong learning in a variety of deliveryformats.  The Company also providesinvestment research tools, investment advisory newsletters, customized directmarketing and Web hosting services on a non-core operating basis to individualsand businesses through its Publishing and Business Services segment.

 

### ***Investor Education***

 

INVESTools’investor education products and services have been built on the premise thatself-directed investors can more effectively achieve their investment goalsthrough programs that combine hands-on investment education, in-depthinvestment research tools and quality market data.  The Company has developed one and two-day domestic andinternational investing workshops as one of the basic tools for implementingthe principles of INVESTools’ lifelong investment strategy.  The workshops are accompanied by a six-monthWeb site subscription.  The Company alsooffers a variety of investor education products and services that reinforcefundamental investing strategies, as well as provide more advanced investingknowledge.

 

1

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#### Basic Investing

 

INVESToolsteaches basic investing principles that are delivered in a variety of formats,including instructor-led classes, DVD and video-based “at home” study courses,personal training sessions, as well as through periodic investorconferences.  Curricula are based onCompany-developed investing strategies and are implemented using the Company’sproprietary InvestorToolbox Web site as a “hands on” investing tool.

 

##### *PreviewEvent*

 

INVESToolsoffers a free 90-minute event that introduces attendees to basic investingconcepts and provides a broad overview of the market.  Participants receive free gifts for attending and are offered aninvitation to attend a more intensive workshop.

 

##### *Workshops*

 

The Companyoffers one and two-day domestic and international investing workshops thatcover topics ranging from basic investing principles to advanced strategies,such as options investing and cash flow analysis.  Classes also provide investors with “hands on” experience usingINVESTools proprietary InvestorToolbox Web site.  Prices for the Company’s workshops range from $995 to $3,995 andare offered under the INVESTools, BusinessWeek Investor and CNBC University brands.

 

##### *HomeStudy Program*

 

INVESTools “athome” study programs cover the same material offered in the Company’s investingworkshops and are made available to preview attendees who are unable to attendthe investing workshop.  The Company’shome study programs range in price from $295 to $1,995 and are offered underthe INVESTools, BusinessWeek Investor and CNBC University brands.

 

##### *InvestorToolboxWeb Site*

 

The Company’sproprietary InvestorToolbox Web site (http://www.investortoolbox.com) givesgraduates of the Company’s investor education programs access to the investmentresearch tools needed to execute the strategies taught in the Company’sworkshop and home study programs.  Thesite has proprietary features that are not accessible on other financial Websites, including more than 50 pre-built stock searches, comparative reports,market indicators, market commentary and portfolio tracking features.  Attendees of the Company’s workshop and homestudy programs receive a six-month subscription to the InvestorToolbox Web siteas part of the registration fee. Following the initial six-month subscription, workshop graduates canrenew their subscription to the site for a fee.

 

#### Personal Training

 

The Companyhas developed a platform of personalized training programs that aid graduatesof INVESTools’ investor education programs in successfully applying theinvesting principles they have learned. Through one-on-one telephone “coaching” sessions, graduates interactwith and are accountable to a personal trainer.  Personal training sessions are typically offered over athree-month period and include unlimited support by phone and email.  The Company currently offers four personaltraining courses: Personal Training System I - 5 Step Formula; 5 Step FormulaMasters Program; Personal Training System II - Cash Flow Strategies; and CashFlow Strategies Masters Program.

 

#### ContinuingEducation

 

INVESToolscontinuously engages graduates of the Company’s investor education programs toexecute learned investing strategies through Web site subscriptions, weeklyemail newsletters and daily market commentary. The Company also offers graduates courses on advanced investingstrategies and access to continuous support and guidance online to measurablyincrease investing effectiveness.

 

### ***Publishing andBusiness Services***

 

The Companyprovides individual investors with investment advisory newsletters through itsINVESTools Newsletters Web site (http://www.investools.com/c/IT/home/home) andaccess to investing research tools through itsIndividualInvestor.com@WallStreetCity Web site(http://www.wallstreetcity.com). INVESTools leverages its technology platform and marketing expertise byoffering customized direct marketing and Web site hosting as a service to thirdparties.

 

## **Business Strategy**

 

The Company’s objectiveis to expand its position as a global leader in investor education.  Management intends to grow the Company andstrengthen its financial condition by expanding distribution and diversifyingthe Company’s products in order to increase the lifetime value of each customer.

 

### ***StrategicDistribution Partnerships***

 

INVESToolshas pursued a strategy to create strategic partnerships with recognizedorganizations in an effort to develop effective distribution of the Company’s’products and services.  Brandeddistribution partnerships expand the Company’s demographic reach, reduce theCompany’s overall marketing costs and increase the Company’s database ofcustomer names for sales and marketing purposes.  Cooperative marketing partnerships provide the Company withexclusive access to unique customer segments, expand the Company’s marketingopportunities without increasing marketing risk 

 

2

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andgive the Company the ability to capitalize on the partner’s niche marketingexpertise.  In 2002, INVESTools signedan exclusive, two-year licensing agreement with CNBC to develop and deliverongoing investor education programs under the “CNBC University” name.  Other principal distribution alliances maintainedby INVESTools include BBT, Brian Tracy International, BusinessWeek, NationalTraining Conference, Peter Lowe, Phillips Investment Resources and WrightThurston Group.  In 2003, the Companywill continue to pursue strategic alliances to build on its existing productdistribution channels.

 

### ***DiversifiedProducts***

 

INVESToolsproducts empower self-directed investors to achieve their investmentgoals.  The Company continues to upgradethe quality and scope of its products by introducing new offerings and byenhancing the capabilities of existing products.  In August 2002, the Company introduced its first PersonalTraining System (PTS) product, which serves as a platform for additionalpersonal coaching products.  In December2002, the Company entered into an agreement with Wilson, Hewitt & Associatesto develop a new version of the Company’s proprietary TIP® product - oneof the first personal computer applications to provide investors with advancedtechnical charting, real-time data delivery and stock screening tools.  In 2003, the Company plans to increaseproduct diversification of investor education to non-equity related investmentproducts.

 

### ***Lifetime Value***

 

INVESToolshas developed a broad base of individual customers.  The Company maintains a database of more than 700,000 customersconsisting primarily of preview event attendees through the INVESTools brandand through preview events under the brands of strategic distribution partners,such as BusinessWeek and CNBC. The Company constantly upgrades its products andservices and believes its offerings encourage strong customer loyalty.  During 2002, the Company implementedaggressive follow-up sales and customer retention strategies at each of itspoints of customer contact in order to increase the overall lifetime value ofeach customer.  In 2003, INVESToolsplans to continue to provide value to each of its customers through upgradedproducts and services and by responding to customers needs for ongoing supportand guidance.

 

## **Marketing Strategy**

 

To generate interestamong potential customers, the Company engages in a broad range of activitiesto inform the investing public about the investor education programs offered bythe Company.  These activities include:direct mail; internet marketing; marketing to existing graduates; print andbroadcast advertising; referrals and cooperative marketing partnerships. Directresponse methods (direct mail and email advertising) are primarily used topromote a free “Introduction to Online Investing” preview event.  Attendees of the 90-minute free previewevent are given an invitation to attend a more comprehensive instructor-ledworkshop or purchase a DVD or video-based home study program.  Graduates of the Company’s workshops andhome study programs are offered subscription renewals, product upgrades,refresher courses and new products through a variety of direct marketingefforts.

 

## **Competition**

 

In the United States, theCompany competes with many other providers of investment education.  The Company must continue to obtainknowledge about products of value to its customers, as well as increase theCompany’s branding and other marketing activities in order to remaincompetitive and strengthen the Company’s market position.  Through the Company’s own efforts andthrough strategic distribution partnerships, the Company believes that itcompetes favorably with respect to certain key competitive factors, includingproduct quality and marketing capabilities.

 

Internationally, theCompany competes directly with local financial service providers, which mayhave several advantages, including (i) greater knowledge about the particularcountry or local market and (ii) access to significant financial or strategicresources in such local markets.  During2002, the Company began scaling back the number of events it offered in internationalmarkets, primarily as a result of volatile economic conditions abroad anddecreasing workshop margins.  In 2003,the Company will principally focus its international efforts in Asia andneighboring Canada, where the Company has continued to experience profitablemargins.  The Company has developed amodel for international partnerships in Asia to assure the quality of itsproducts when distributed in global markets. By having local management trained in regional markets and productfulfillment with local language and cultural capabilities, management believesthat the Company can effectively compete in international markets in which ithas a presence.

 

## **Intellectual Property**

 

The Company maintains anumber of patents in the United States to protect its proprietarytechnology.  Although managementbelieves that the Company’s patents provide adequate protection for theproprietary aspects of the Company’s technology, management cannot assure thatsuch patents:

 

•                  willbe of substantial protection or commercial benefit to the Company;

•                  willafford the Company adequate protection from competing products; or

•                  willnot be challenged or declared invalid.

 

The Company attempts toprotect its trade secrets and other proprietary information with product developmentpartners, employees and consultants through nondisclosure agreements, contractprovisions and copyright, patent, trademark and trade 

 

3

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secret laws.  With respect to technologies that theCompany licenses to third parties for use in specific applications orplatforms, the Company relies on licensing agreements to ensure additionalprotection related to the source code of the Company’s products as a tradesecret and as an unpublished copyright work.  Management believes that the Company’s products, trademarks andother proprietary rights do not infringe on the proprietary rights of thirdparties, and management is not aware of any current infringement claims againstthe Company.

 

## **Governmental Regulation**

 

With the exception of thegeneral requirement that the Company and its subsidiaries be registered orqualified to do business in the United States and any foreign countries inwhich the Company operates, the products and services provided through the useof the Company’s technology currently are not subject to the approval of anygovernment regulatory body.  However,certain foreign countries may require that the Company register with theirrespective securities and investments commission or similar regulatory bodyprior to conducting investment-related seminars or workshops.  The Company has registered with theAustralian Securities and Investments Commission and has a compliance officerresiding in Australia.

 

The Company files annual,quarterly and special reports, proxy statements and other information with theSecurities and Exchange Commission (“SEC”). Any document the Company files with the SEC may be viewed or copied atthe SEC’s public reference room at 450 Fifth Street, N.W., Room 1200, Washington,D.C. 20549.  Additional informationregarding the public release room can be obtained by calling the SEC at (202)942-8090.  The Company’s SEC filings arealso available to the public through the SEC’s Web site located at www.sec.gov.

 

## **Human Resources**

 

At December 31, 2002, theCompany had 173 employees.  There were161 full time employees in all functions of the Company and 12 part timeemployees, primarily in administrative and sales functions.  The Company also had 17 persons undercontract primarily in educational services.  Key Company personnel are covered by employment and confidentialityagreements.  No persons employed by theCompany, either full-time or on a contract basis, are covered by a collectivebargaining agreement and the Company has never experienced a work stoppage dueto protesting or related activities. Management considers relations with the Company’s personnel to be good.

 

## **Web Site Access to SEC Reports**

 

The Company makesavailable free of charge on its Internet Web site (http://www.investools.com/home.html),its annual report on Form 10-K, quarterly reports on Form 10-Q and amendmentsto those reports as soon as reasonably practicable after the Companyelectronically files, or furnishes, such material with the SEC.

 

Effective January 1,2003, the Company will make available on its Internet Web site its currentreports on Form 8-K and amendments to those reports.

 

The Company willvoluntarily provide electronic or paper copies of its filings free of chargeupon request.

 

# **Item 2.       Properties**

 

The Company’s corporateheadquarters are located in Houston, Texas. Effective May 1, 2002, the Company amended its Houston facility leaseagreement and moved to 9,500 square feet from 77,000 square feet in the samebuilding.  The lease amendment was fortwo years with the option by either party to terminate the lease after one yearwith 180 days notice in writing.  Themonthly rent under the agreement was $11,000 and payment was not scheduled tobegin until May 1, 2003.  In November2002, the Company gave notice of its intention to cancel the amended leaseeffective April 30, 2003.  In December2002, the Company entered into a temporary lease agreement for the Houstonfacility beginning May 1, 2003 that can be terminated by either party with 90 dayswritten notice for the 9,500 square feet of space at a monthly rent ofapproximately $6,000.  As a result ofthese transactions, the Company is not incurring any rent expense for itsHouston facilities at December 31, 2002 and will not pay any rent until May 1,2003.

 

The Company’s mainoperations are located in leased facilities in two locations in Provo,Utah.  The Company’s administrativefunctions are located in approximately 9,500 square feet and the back officeoperations are located in another facility of approximately 8,000 squarefeet.  The Company is currentlynegotiating to expand that space to 15,000 square feet during 2003 as the backoffice operations of the Company continue to grow.

 

The Company also hasfacilities in leased space in New York, New York, Menlo Park, California, andSingapore.

 

4

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The following table showsthe amount of square footage of the Company’s facilities and monthly rent as ofDecember 2002:

 

| **City**         |   | **Square Feet****Rented** |       | **Monthly Rent  as of  December 2002** |   |
|------------------|--------|---------------------------|------------|----------------------------------------|--------|
|             |   |                      | ** ** |                                   |   |
| Provo (combined) |   | 19,289                    | ** ** | $                                      | 25,232 |   |
| Menlo Park       |   | 10,361                    | ** ** | 27,243                                 |   |
| Houston          |   | 9,495                     | ** ** | —                                 |   |
| Singapore        |   | 1,350                     | ** ** | 2,849                                  |   |
| New York         |   | 170                       | ** ** | 4,511                                  |   |
|             |   |                      |       |                                   |   |
|             |   | 40,665                    |       | $                                      | 59,835 |   |

 

# **Item 3.       Legal Proceedings**

 

From time to time theCompany is involved in certain legal actions arising from the ordinary courseof business.  It is the opinion ofmanagement that such litigation will be resolved without a material adverseeffect on the Company’s financial position or results of operations.

 

*Avner Hacohen v. Telescan, Inc., No. 00CIV.5937 -*InAugust 2000, a lawsuit was filed against Telescan in the United States DistrictCourt for the Southern District of New York by a former employee, AvnerHacohen, alleging that Telescan failed to grant him certain stock options towhich he was entitled.  The plaintiffseeks monetary compensation for damages alleged to exceed $1.0 million, plusinterest and attorney fees.  Telescanresponded to the complaint and the case is proceeding before the court.  Although no assurances can be given, theCompany believes that the ultimate resolution of the litigation will not have amaterial adverse impact on the Company’s financial position or results ofoperations.  The Company believes that(i) Mr. Hacohen’s claim is without merit since he has no signed formal grant ofstock options and (ii) nearly ten years have elapsed since the termination ofhis employment and the statute of limitations has expired on Mr. Hacohen’sclaim.

 

The Company is not awareof pending claims or assessments, other than as described above, which may havea material adverse impact on the Company’s financial position or results ofoperation.

 

# **Item 4.       Submission of Matters to a Vote ofStockholders**

 

During the fourth quarterof 2002, there were no matters submitted to a vote of the stockholders.

** **

**PartII**

** **

# **Item 5.       Market for Registrant’s Common Equity andRelated Stockholder Matters**

 

## **The Company**

 

The Company’s commonstock is traded on the OTC Bulletin Board of the NASD under the symbol“INVS.”  The following table sets forth,for the periods indicated, the high and low sales prices for the common stockas reported by the OTC Bulletin Board beginning on December 7, 2001, the daythe Company’s common stock began trading. The bid prices reflect inter-dealer quotations, do not include retailmarkups, markdowns or commissions and do not necessarily represent actualtransactions.

 
|                       |   | **Company Common Stock** |   |
|----------------------------|--------|--------------------------|--------|
|                       |   | **High**                 |   | **Low** |   |
| 2001                       |   |                     |   |   |   |
| Quarter ended December 31  |   | $                        | 1.95   |   | $ | 0.40 |   |
|                       |   |                     |   |   |   |
| 2002                       |   |                     |   |   |   |
| Quarter ended March 31     |   | $                        | 0.71   |   | $ | 0.25 |   |
| Quarter ended June 30      |   | 0.51                     |   | 0.25 |   |
| Quarter ended September 30 |   | 0.51                     |   | 0.08 |   |
| Quarter ended December 31  |   | 0.40                     |   | 0.06 |   |

 

On March 3, 2003, theclosing price of the Company’s common stock as reported by the OTC BulletinBoard was $0.27.  As of March 3, 2003,the Company had 877 stockholders of record, and believes it has approximately9,000 beneficial holders.

 

5

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## **ZiaSun**

 

Prior to the Merger,ZiaSun common stock was traded on the OTC Bulletin Board of the NASD under thesymbol “ZSUN”.  The following tablerepresents the high and low sales prices for ZiaSun common stock for theperiods indicated.  The bid pricesreflect inter-dealer quotations, do not include retail markups, markdowns orcommissions and do not necessarily represent actual transactions.

 
|                                        |   | **ZiaSun Common Stock** |   |
|---------------------------------------------|--------|-------------------------|--------|
|                                        |   | **High**                |   | **Low** |   |
| 2000                                        |   |                    |   |   |   |
| Quarter ended March 31                      |   | $                       | 15.75  |   | $ | 10.00 |   |
| Quarter ended June 30                       |   | 11.38                   |   | 4.16 |   |
| Quarter ended September 30                  |   | 5.63                    |   | 1.80 |   |
| Quarter ended December 31                   |   | 2.93                    |   | 1.03 |   |
|                                        |   |                    |   |   |   |
| 2001                                        |   |                    |   |   |   |
| Quarter ended March 31                      |   | $                       | 1.63   |   | $ | 0.54 |   |
| Quarter ended June 30                       |   | 1.40                    |   | 0.51 |   |
| Quarter ended September 30                  |   | 0.84                    |   | 0.38 |   |
| Quarter ended December 31 (thru December 6) |   | 1.01                    |   | 0.27 |   |

 

## **Telescan**

 

Prior to the Merger,Telescan common stock was traded on the OTC Bulletin Board of the NASD underthe symbol “TSCN”.  The following tablesets forth, for the periods indicated, the high and low sales prices for Telescancommon stock as reported by the OTC Bulletin Board of the NASD (or othermarkets as indicated below).  The bidprices reflect inter-dealer quotations, do not include retail markups,markdowns or commissions and do not necessarily represent actual transactions.

 
|                                            |   | **Telescan Common Stock** |   |
|-------------------------------------------------|--------|---------------------------|--------|
|                                            |   | **High**                  |   | **Low** |   |
| 2000                                            |   |                      |   |   |   |
| Quarter ended March 31                          |   | $                         | 27.50  |   | $ | 17.72 |   |
| Quarter ended June 30                           |   | 23.88                     |   | 7.06 |   |
| Quarter ended September 30                      |   | 8.25                      |   | 1.81 |   |
| Quarter ended December 31                       |   | 2.81                      |   | 0.97 |   |
|                                            |   |                      |   |   |   |
| 2001                                            |   |                      |   |   |   |
| Quarter ended March 31                          |   | $                         | 2.06   |   | $ | 0.50 |   |
| Quarter ended June 30                           |   | 0.95                      |   | 0.29 |   |
| Quarter ended September 30(1)                   |   | 0.44                      |   | 0.10 |   |
| Quarter ended December 31 (through December  6) |   | 0.48                      |   | 0.10 |   |

 

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(1) September 25, 2001 was the last dayTelescan’s common stock traded on the Nasdaq National Market.On September 26, 2001, Telescan’s common stock began trading on the OTCBulletin Board of the NASD.

 

## **Dividend Policy**

 

The Company has neverdeclared a cash dividend on its common stock. The Board of Directors currently intends to retain all earnings for usein the Company’s business, and therefore, does not anticipate paying any cashdividends on its common stock in the foreseeable future.  The declaration of dividends, if any, in thefuture would be subject to the discretion of the Board of Directors, which mayconsider factors such as the Company’s results of operations, financialcondition, capital needs and acquisition strategy, among other things.  See “Item 7 - Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and the Company’sconsolidated financial statements and the notes thereto.

 

In accordance with theagreement pursuant to which the stock was issued, on May 15, 2002, the 120,000outstanding shares of the Company’s Series A Convertible Preferred Stockconverted into 1,666,667 shares of Company common stock.  Accrued dividends of $75,000 were convertedinto 41,667 shares of common stock.

 

6

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## **Equity Compensation Plan Information**

 

The following table setsforth information as of December 31, 2002 with respect to the Company’s equitycompensation plans previously approved by stockholders and equity compensationplans not previously approved by stockholders.

 
|                                                       |   | **Equity Compensation Plans**                                                                     |   |
|------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------|--------|
| **Plan  Category**                                         |   | **Number of securities to  be issued upon exercise  of outstanding options, warrants and rights** |   | **Weighted average  exercise price of  outstanding options,  warrants and rights** |   | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))** |   |
|                                                       |   | **(a)**                                                                                           |   | **(b)** |   | **(c)** |   |
| Equity compensation plans approved by  stockholders(1)     |   | 600,000 – 1,150,000                                                                          |   | $ | 0.18 |   | 3,350,000 – 2,800,000 |   |
| Equity compensation plans not approved by  stockholders(2) |   | 713,595                                                                                           |   | — |   | — |   |
| Total                                                      |   | 1,363,595 – 1,863,595                                                                        |   | $ | 0.18 |   | 3,300,000 – 2,800,000 |   |
|                                                            |        |                                                                                                   |        |  |  |  |  |  |  |

 

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(1)  Thisamount includes an option granted by the Company to its Chief Executive Officerin 2002.  The vesting of the options iscontingent upon an event occurring in the future.  Based upon the terms of the option, the number of shares issuableupon exercise of the option , if any, will be between 50,000 to 550,000 sharesat an exercise price of $0.18 per share. The option was granted under the INVESTools 2001 Stock Option Plan, whichwas approved by stockholders.

 

The amount also includes a total of 600,000 options granted to Messrs.Elder and Jardine pursuance to the INVESTools 2001 Stock Option Plan, which wasapproved by shareholders.

 

(2)  During2002, the Company issued a total of 693,595 shares of common stock to itsexecutive officers as payment in lieu of cash bonuses and a total of 20,000shares of common stock to directors as payment in lieu of cash bonuses.  The shares were issued outside of theINVESTools 2001 Stock Option Plan and were not approved by stockholders.   The shares of common stock were issuedpursuant to Section 4(2) of the Securities Act of 1933.

 

7

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# **Item 6.       Selected Financial Data**

 

The following table setsforth selected historical consolidated financial data for the periodsindicated.  The selected data should beread in conjunction with “Item 7-Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and with the Company’s consolidatedfinancial statements and notes thereto.

 
| **Statement of Operations**                                                                 |   | **(in  thousands, except per share amounts)Years Ended December 31,** |    |
|---------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|---------|
|                                                                                        |   | **2002**                                                              |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                                                        |   |                                                                  |    |   |   |   |   |   |   |   |   |
| Revenue                                                                                     |   | $                                                                     | 56,142  |   | $ | 52,691 |   | $ | 54,667 |   | $ | 23,620 |   | $ | — |   |
| Write downs of assets and other charges                                                     |   | —                                                                |    | (6,454 | ) | (73,051 | ) | — |   | — |   |
| Other income (expense)                                                                      |   | (61                                                                   | )       | (40 | ) | 367 |   | 17 |   | — |   |
| Net income (loss) from continuing  operations before cumulative effect of accounting change |   | (1,456                                                                | )       | (8,020 | ) | (70,547 | ) | 2,632 |   | (77 | ) |
| Cumulative effect of accountingchange, net  of tax                                          |   | (28,417                                                               | )       | — |   | — |   | — |   | — |   |
| Net income (loss) available to common  stockholders                                         |   | $                                                                     | (29,918 | ) | $ | (7,913 | ) | $ | (77,226 | ) | $ | 5,964 |   | $ | 769 |   |
| Net income (loss) per common share -  diluted                                               |   |                                                                  |    |   |   |   |   |   |   |   |   |
| Net income (loss) from continuing  operations before cumulative effect of accounting change |   | $                                                                     | (0.03   | ) | $ | (0.25 | ) | $ | (2.37 | ) | $ | 0.10 |   | $ | 0.05 |   |
| Net income (loss) from discontinued  operations                                             |   | $                                                                     | —  |   | $ | 0.01 |   | $ | (0.23 | ) | $ | 0.13 |   | $ | — |   |
| Cumulative effect of accounting change, net  of tax                                         |   | $                                                                     | (0.68   | ) | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Net income (loss) available to common  stockholders                                         |   | $                                                                     | (0.71   | ) | $ | (0.24 | ) | $ | (2.60 | ) | $ | 0.23 |   | $ | 0.05 |   |
| Diluted weighted average shares outstanding                                                 |   | 41,983                                                                |    | 32,684 |   | 29,744 |   | 25,796 |   | 17,023 |   |
|                                                                                        |   |                                                                  |    |
|                                                                                        |   |                                                                  |    |
| **Balance Sheet Data**                                                                      |   | **December 31,**                                                      |    |
|                                                                                        |   | **2002**                                                              |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                                                        |   |                                                                  |    |   |   |   |   |   |   |   |   |
| Working capital (deficit)                                                                   |   | $                                                                     | (986    | ) | $ | (2,185 | ) | $ | (542 | ) | $ | 6,373 |   | $ | 1,662 |   |
| Total assets                                                                                |   | 25,201                                                                |    | 55,174 |   | 47,713 |   | 19,457 |   | 4,765 |   |
| Total stockholders’ equity                                                             |   | 15,166                                                                |    | 44,344 |   | 42,099 |   | 15,736 |   | 4,165 |   |
| Book value per share                                                                        |   | $                                                                     | 0.36    |   | $ | 1.36 |   | $ | 1.42 |   | $ | 0.61 |   | $ | 0.24 |   |
|                                                                                             |        |                                                                       |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

# ** **

# **Item 7.       Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

The following discussionshould be read in conjunction with the Company’s financial statements andrelated notes, and the preceding “Item 6 - Selected Financial Data.”

 

## **Forward-Looking Information**

 

Certain matters discussedherein may contain forward-looking statements that are subject to risks anduncertainties.  Such risks anduncertainties include, but are not limited to, the following:

 

•                  the volatilenature of the securities business,

•                  theuncertainties surrounding the rapidly evolving markets in which the Companycompetes,

•                  theuncertainties surrounding technological change and the Company’s dependence oncomputer systems,

•                  the Company’sdependence on its intellectual property rights,

•                  the success ofmarketing efforts by third parties in revenue sharing agreements,

•                  the potential ofincreased governmental regulation of the telecommunications industry and theInternet and

•                  the changingdemands of customers.

 

Should one or more ofthese risks or uncertainties materialize or should any of the underlyingassumptions prove incorrect, 

 

8

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actual results of currentand future operations may vary materially from those anticipated.

 

## **Critical Accounting Policies**

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires estimates and assumptions that affectthe reported amounts of assets and liabilities, revenues and expenses andrelated disclosures of contingent assets and liabilities in the consolidatedfinancial statements and accompanying notes. The SEC has defined a company’scritical accounting policies as the ones that are most important to theportrayal of the company’s financial condition and results of operations, andwhich require the company to make its most difficult and subjective judgments,often as a result of the need to make estimates of matters that are inherentlyuncertain. Based on this definition, we have identified the critical accountingpolicies and judgments addressed below. Although we believe that our estimates,assumptions and judgments are reasonable, they are based upon informationpresently available. Actual results may differ significantly from theseestimates under different assumptions, judgments or conditions.

 

### ***Income Taxes***

 

Theprovision for income taxes is calculated in accordance with SFAS No. 109,Statement of Financial Accounting Standards (“SFAS”), *Accounting for Income Tax*es, whichrequires the recognition of deferred income taxes using the liability method.Deferred income taxes reflect the net tax effect of temporary differencesbetween the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes. We provide valuationallowances against the deferred tax assets if, based on available evidence, itis more likely than not that some portion or all of the deferred tax assetswill not be realized. In determining the adequacy of the valuation allowance,which totaled $4.3 million as of December 31, 2002, management assesses ourprofitability by taking into account the present and anticipated amounts ofdomestic and international earnings, as well as the anticipated taxable incomeas a result of the reversal of future taxable temporary differences.

 

Forfinancial reporting purposes, the Company generally provides taxes at the rateapplicable for the appropriate tax jurisdiction.  Where the Company’s present intention is to reinvest in foreignventures the unremitted earnings of certain of its foreign operations, theCompany does not provide for U.S. income taxes on such unremitted earnings ofthose foreign subsidiaries.  Managementperiodically assesses the need to utilize these unremitted earnings to financethe foreign operations of the Company. This assessment is based on cash flow projections that are the result ofestimates of future production, commodity pricing and expenditures by taxjurisdiction for the Company’s operations. Such estimates are inherentlyimprecise since many assumptions utilized in the cash flow projections aresubject to revision in the future.

 

### ***Goodwill andIntangible Assets***

 

TheCompany accounts for business combinations using the purchase method ofaccounting and records intangible assets apart from goodwill.  This purchased goodwill and certainindefinite-lived intangibles are no longer amortized, but instead are testedfor impairment at least annually.

 

Inconnection with the acquisition of Telescan, the Company reviewed theintangible assets acquired and valued them using an allowable valuationmethodology.  The Company determined thatits software platforms containing ProSearch and its Orbit marketing/publishingengine should be capitalized at a value of $250,000 each and assigned usefullives of 10 and 5 years, respectively. The useful lives were determined based on the proprietary nature of thesoftware, absence of equivalent competitive products and the unlikelihood ofany being developed, and the useful lives already realized.

 

Aspart of the transition provisions of SFAS 142, *Goodwilland Other Intangible Assets,* the Company completed the impairmenttesting of goodwill during the second quarter of 2002. The impairment testingis performed in two steps: (i) the determination of impairment, based upon thefair value of a reporting unit as compared to its carrying value, and (ii) ifthere is an impairment, measure the amount of impairment loss by comparing theimplied fair value of goodwill with the carrying amount of that goodwill. Usingconservative, but realistic assumptions, the Company determined that thecarrying value of the Investor Education segment was greater than the derivedfair value, indicating an impairment in the recorded goodwill. To determinefair value, the Company relied on a discounted cash flow analysis.  Significant estimates used in themethodology included estimates of future earnings, future growth rates and aweighted average cost of capital.   Forgoodwill valuation purposes only, the revised fair value of this segment wasallocated to the assets and liabilities of the business unit to arrive at animplied fair value of goodwill, based upon known facts and circumstances, as ifthe acquisition occurred currently. This allocation resulted in a write-down ofrecorded goodwill in the amount of $28.4 million, which has been reported asthe cumulative effect of a change in accounting principle, as of January 1,2002, in the accompanying consolidated statements of operations.

 

Inconnection with the preparation of the financial statements as of December 31,2002, the Company compared the carrying value of the goodwill to the fair valueof the reporting unit and determined that no additional impairment waswarranted.

 

9

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## **Recent Developments**

## ** **

## **Tax Refund Received**

 

In February 2003, theCompany received a tax refund from the Internal Revenue Service of $462,000related to taxes paid in prior years.

## ** **

## **Generation Marketing LLC**

 

In December 2002, ashareholder not related to INVESTools approached Messrs. Elder, Jardine andHarris to buy out their interests in Generation Marketing LLC (“GenerationMarketing”).  This agreement wasfinalized in February 2003 and Generation Marketing is no longer considered arelated party to INVESTools.  See“Related Party Transactions” for further discussion about Generation Marketing.

 

## **Shares Issued to Officers**

 

In November 2002, theBoard of Directors authorized payment of the third quarter bonuses to certainofficers of the Company.  Each officerelected to receive part of his bonus either in Company common stock, in cash,or in a combination thereof.  As ofMarch 15, 2003, approximately $40,000 had been paid in cash for these bonuses,but the stock portion had not been distributed.

 

## **2002 Compared to 2001**

 

### ***Results ofOperations***

 

Asdiscussed in detail in Item 1 of this Annual Report on Form 10-K, INVESToolswas formed by the merger between ZiaSun and Telescan effective December 6, 2001(the “Merger”).  The Merger wasaccounted for as a purchase and therefore, the results of Telescan’s operationsfor 2001 are included in the financial results for only the 25-day periodsubsequent to the Merger.  Overall, netincome from continuing operations before cumulative effect of accounting changeincreased $6.6 million for the year ended December 31, 2002 compared to theyear ended December 31, 2001.

 

#### Investor Education

 

Revenue fromInvestor Education declined $3.2 million to $48.8 million for 2002 from $52.0million in 2001.  Workshop revenuedeclined $5.5 million to $33 million for 2002 from $38.5 for the same period in2001 as average attendance decreased 14% to 35.4 average participants in 2002from 41.1 average participants in 2001. This attendance decline is primarily due to the continuing soft economyaggravated by an uncertain geopolitical climate.  While workshop revenue and attendance fell 14%, home studyrevenue fell only 8%, or $663,000.  Offsetting the declines in workshop revenue was a 30% increase inwebsite renewal revenue to $6.1 million in 2002 compared to $4.7 million in2001 and the strong performance of the new Personal Training System, introducedin the second quarter of 2002, that contributed approximately $1.7 million torevenue in less than six months.

 

Cost ofrevenue primarily consists of payroll, commissions, investor educationsupplies, including facilities, and the costs of maintaining the Company’s Websites.  Cost of revenue remained flatcompared to 2001, resulting in an increase in the percentage of revenue from42% for 2001 to 46% for 2002.  This increaseis primarily due to the changing product mix as the Company sells more co-brandedand co-marketed products that require higher third party commissions.

 

Selling,general and administrative costs decreased $1.3 million compared to 2001 as thepercentage of revenue declined slightly to 47% for 2002 compared to 48% for2001.  One of the first tasks after theMerger was to reduce marketing costs by improving efficiencies and utilizingthe in house email marketing system Telescan had developed over the five yearsprior to the Merger.  Management beganworking with the outside marketing provider, Generation Marketing, to improveefficiencies and lower the marketing cost per sales dollar and, during thethird quarter of 2002, engaged another company, 360 Group, to continue to driveto reduce costs.  As a result of theseefforts, during the fourth quarter of 2002, marketing costs as a percentage ofrevenue fell to 15%, down from 19% for the third quarter of 2002 and 21% forthe second quarter of 2002 for a total decline in cost of approximately $1.0million for the year ended December 31, 2002 compared to the year endedDecember 31, 2001.

 

Professionalfees also decreased approximately $400,000 from 2001 levels as these increasedcosts in 2001 were primarily related to the Merger activities that were notcapitalizable.  Depreciation and amortizationdeclined due to the adoption of SFAS 142 that no longer permits amortization ofgoodwill.  Goodwill amortization totaled$4.5 million for the twelve-month period of 2001.

 

Managementplans to continue aggressively reducing selling, general and administrativecosts during 2003.

 

As part ofimplementing SFAS 142 as of January 1, 2002, the Company recognized animpairment of $28.4 million on goodwill that is being recognized as acumulative effect of accounting change in the financial statements.  The

 

10

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Companyreviewed the carrying value of goodwill at December 31, 2002 by comparing thecarrying value to the fair value and determined that no additional impairmentwas warranted.

 

#### Publishing and BusinessServices

 

The Publishingand Business Services segment was formed as a result of the Merger withTelescan.  As a result, operations for2001 only include one month of activity.

 

Revenue forPublishing and Business Services totaled $7.9 million for the year endedDecember 31, 2002.  Of this totalrevenue, $4.5 million came from online subscription revenue to the investornewsletters and the WallStreetCity.com website and other Telescan legacyproducts.  Hosting Web sites for thirdparties contributed $2.3 million of revenue. Included in this amount is $1 million of revenue related to therecognition of deferred license fees recorded in prior years.  The license agreement was terminated and theremaining revenue was recognized in one lump sum during 2002.  This license agreement represented the lastof Telescan’s long-term license agreements. All license agreements in effect today are month-to-month.

 

Cost of salesfor the Publishing and Business Services segment totaled $2.5 million.  These costs are primarily data costs for thecontent used and included on the Web sites and royalties to the publishers ofthe investor newsletters.

 

Selling,general and administrative expenses totaled $8.0 million.  Most of the costs incurred for Publishingand Business Services are migrating towards supporting the operations of theInvestor Education segment as the business of the Publishing and BusinessServices Segment continues to wind down. This included $4.3 million in salaries and benefits, and approximately$1 million in accounting and consulting expenses, and approximately $1 millionin rent expense and approximately $1 million in lease expense.  At the end of 2001, the Company hadrenegotiated its lease for the office space in Houston that resulted in theCompany relocating to a smaller space in the same building in May.  However, the new lease did not go intoeffect until May1, 2002 and the Company had to pay two months of rent relatedto terminate the old lease.  By the endof 2002, the Company had yet again renegotiated the lease down to approximately$6,000 per month on a month-to-month basis beginning May 1, 2003.  Until that time, the Company enjoys a freerent period.  The Company also heldseveral operating leases covering equipment dating back to 2000.  These leases all ended by December 31, 2002and the Company will not have that expense going into 2003.  The accounting and consulting fees wereincurred as part of the Merger and are not expected to repeat in 2003 as well.

 

## **2001 Compared to 2000**

 

### ***Results ofOperations***

 

TheCompany’s sales decreased by $2.0 million, or 4%, to $52.7 million for theyear.  Included in 2001 results aresales of $700,000 from the Company’s Publishing and Business Services Segmentrepresenting 25 days of operations for Telescan, which was acquired byINVESTools effective December 6, 2001. The balance of revenues are from the Company’s Investor EducationSegment, represented by ZiaSun’s wholly owned subsidiary OIA.  The decrease in revenues can be attributedto a softening in demand for workshops in conjunction with the market downturnduring 2001 combined with the September 11 tragedy, which closed the marketsfor a week and shut down operations for several weeks.  International operations were down slightlydue to the same influences.  During thefourth quarter, the Company successfully launched its co-branded workshopproduct with BusinessWeek.  Increasedrevenues from this product offset somewhat declines in OIA branded workshops.

 

Costof revenue increased $1.6 million, or 8%, from $21.2 million.  The principal reason for the increase was ashift towards more co-marketed workshops. Co-marketed workshops have the advantage of expanding the market for theCompany’s workshops to more customers than are being reached by the Company’scurrent marketing efforts.  Suchco-marketed workshops realize lower margins than the Company’s other workshops.

 

Generaland administrative expenses, including the expenses paid to related parties,totaled $26.8 million or a 7% increase over the prior year amount of $25.1million.  The increase is primarily dueto increased marketing costs as the company stepped up marketing efforts in2001 to increase sales and offset the effects of the economic downturn.  The expenses to the related party increasedas Generation Marketing began operations during the fourth quarter of2000.  Refer to the section titled“Related Party Transactions” for more discussion.

 

In2001, the Company realized a $6.5 million loss to write off its investment inthe MKZ LLP venture fund.  The Companyhas reached an agreement in principal with the fund to exchange its ownershipposition in the fund in exchange for the fund waiving the Company’s remaining$1.4 million funding commitment.  It isthe position of the Company that its liquid assets are more valuable forfunding current operations than to make further venture capitalinvestments.  See Note 5 to theconsolidated financial statements.

 

During2001 the Company completed the sales of various Asian subsidiary operations asdescribed above.  Losses from suchdiscontinued operations decreased to $132,000 in 2001 from $2.9 million in 2000due to such sales.  A small gain of 

 

11

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$249,000on sale of discontinued operations was realized in 2001 compared with thecorresponding loss of $3.8 million in 2000 due to the write off of goodwillfrom the purchase of such operations.

 

## **Related Party Transactions**

 

### ***GenerationMarketing, LLC***

 

In thesecond half of 2000, D. Scott Elder and Ross W. Jardine, each an executiveofficer and director of the Company, and Scott Harris and David McCoy, each anexecutive officer of the Company, each contributed 20% of the capital towardsthe formation of a new marketing company, Generation Marketing, to ensure continuityin the Company’s marketing efforts.  In2001, this ownership percentage fell to 16.7% for each of them.  Prior to 2002, Generation Marketing handledall of the Company’s marketing expenditures. In May 2002, David McCoy sold his interest to a third party.  InDecember 2002, a shareholder not related to INVESTools approached Messrs.Elder, Jardine and Harris to buy out their interests in GenerationMarketing.  The sale was finalized inFebruary 2003.

 

TheCompany paid $4.9 million, $6.0 million and $400,000 in marketing expenses toGeneration Marketing in each of the periods ended December 31, 2002, 2001 and2000, respectively.

 

## **Liquidity and Capital Resources**

 

Working capital improvedto a deficit of $1.0 million at December 31, 2002 from a deficit of $2.2million at December 31, 2001. Included in working capital is deferred revenue of $4.8 million and $3.6million at December 31, 2002 and 2001, respectively.  Deferred revenue is cash collected fromcustomers before the revenue is earned. This cash is not refundable to the customers at any time and thereforerepresents a non-cash obligation of the Company.  This increase in working capital is primarily due to the $2.3million receivable for taxes paid in prior years recorded during the fourthquarter of 2002.

 

During the year endedDecember 31, 2002, the Company generated approximately $500,000 in cash fromoperations primarily from the receipt of refunds for taxes paid in prioryears.   The Company used approximately$800,000 in cash to make improvements and equipment purchases in connectionwith the Company’s relocation of its Houston facilities.  This relocation and resultant lease willsave the Company more than $3.0 million over the term of the original lease.

 

In September 2000, theCompany acquired all of the issued and outstanding shares of Seminar MarketingGroup, Inc. (“SMG”) for 370,000 shares of unregistered and restricted shares ofthe Company’s common stock.  Theissuance of these shares was intended to be issued in a transaction exempt fromthe registration requirements under the Securities Act of 1933 (Securities Act)pursuant to Rule 506 of Regulation D. Upon subsequent review of the transactionby the Company’s attorneys, it was determined that the issuance of the sharesdid not meet the technical requirements of the Securities Act.  In January 2001, the Company made an offerof rescission to the former SMG Stockholders pursuant to which they would becompensated with a cash amount equal to the consideration paid for the sharesoriginally granted plus the statutory rate of interest of 12%.  The SMG Stockholders had until February 6,2002 to accept or reject the offer.  Allbut six SMG Stockholders accepted the offer to rescind the shares.  The final payments of approximately $400,000on this liability were made in the first quarter of 2002.

 

The Company uses merchantaccount vendors to process credit card transactions.  Under the terms of these agreements, the merchant account vendorhas the right to withhold credit card funds to cover charge backs in the eventthe Company is unable to honor its commitments.  Such funds can be held for up to a year after the Company hasterminated its relationship with the merchant account vendor.  At December 31, 2002, the Company hadapproximately $916,000 due from two merchant account vendors.  Of this amount, approximately $561,000 isincluded with current accounts receivable, as it will be repaid to the Companyduring 2003 because the relationship with the vendor was terminated in2002.  As of March 14, 2003, the Companyhas received approximately $321,000 from this vendor.  The remaining $355,000 is classified as a long-term receivable asthe Company is continuing its relationship with this vendor at this time.

 

The Company believes thatcurrent cash resources and future cash flow from its continuing operations willbe sufficient to meet its current obligations. The Company is successfully pursuing various cost containment measures,of which the relocation of the Company’s Houston facilities is an example.  The Company is continuing to reviewexpenses.  In addition, the Companyexpects to develop and launch additional workshops, home study and otherproducts over the course of 2003.

 

## **Contractual Obligations and Commercial Commitments**

 

The Company has assumedvarious financial obligations and commitments in the ordinary course ofconducting its business.  The Companyhas contractual obligations requiring future cash payments under existingcontractual arrangements, such as management, consulting and non-competitionagreements.  The Company also hascommercial and contingent obligations which result in cash payments only ifcertain contingent events occur requiring the Company’s performance pursuant toa funding commitment.

 

12

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The following tabledetails the company’s known future cash payments (on an undiscounted basis)related to various contractual obligations as of December 31, 2002.

 
|                                            |   | **Payments Due By Period** |   |
|-------------------------------------------------|--------|----------------------------|--------|
| **(in thousands)**                              |   | **Total**                  |   | **2003** |   | **2004 - 2005** |   | **2006 - 2007** |   | **Thereafter** |   |
| Operating leases(1)                             |   | $                          | 2,078  |   | $ | 833 |   | $ | 1,090 |   | $ | 155 |   | $ | — |   |
| Data and communications purchase  agreements(2) |   | 1,411                      |   | 1,076 |   | 335 |   | — |   | — |   |
| Management employment agreements(3)             |   | 1,400                      |   | 850 |   | 550 |   | — |   | — |   |
| Total contractual obligations                   |   | $                          | 4,889  |   | $ | 2,759 |   | $ | 1,975 |   | $ | 155 |   | $ | — |   |
|                                                 |        |                            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)       The Company’s operating leases includeoffice space, and operating facilities, furniture and equipment.  The terms of the agreements vary from 2002until 2006.  As of December 31, 2002 wehad terminated all operating leases covering equipment and furniture.

(2)       The Company has supply contracts withvarious vendors of financial data and communications services providing forminimum monthly commitments.  Thesecontracts have terms from 2002 to 2004.

(3)       The Company has entered into employmentagreements with certain senior executives which require the Company to makecash payments over the contractual period.

 

## **Recently Issued Accounting Standards**

 

In November 2002, theEmerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21 *“Multiple-Deliverable Revenue Arrangements.”*  EITF No. 00-21 addresses how to account forrevenue arrangements with multiple deliverables and provides guidance relatingto when such arrangements should be divided into components for revenuerecognition purposes.  The consensuswill be effective for agreements entered into in fiscal year 2004 with earlyadoption permitted.  The Company iscurrently evaluating its impact on its results of operations, financial positionand cash flows.

 

In December 2002, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 148, *Accounting for Stock-Based Compensation - Transitionand Disclosure - an Amendment of FASB Statement No. 123*. ThisStatement amends SFAS Statement No. 123, *Accountingfor Stock-Based Compensation,* to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, this Statement amends thedisclosure requirements of Statement 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.

 

On January 1, 2003, theCompany voluntarily adopted the fair value expense recognition method availableunder SFAS No. 148.   SFAS No. 148permits recognition on a prospective basis whereby any new options grantedafter January 1, 2003 will be accounted for using the fair value method.  The fair value method requires a calculationof the fair value of the option at the date of the grant using theBlack-Scholes option pricing model and the value of the option is amortizedratably into expense over the appropriate vesting period.  The change to fair value accounting of stockoption grants is not expected to have a material impact on the Company’sfinancial statements in 2003.

# ** **

# **Item 7A.    Quantitative and Qualitative DisclosuresAbout Market Risk**

 

The Company has noexposure to market risk, which is the potential loss arising from adversechanges in market prices and rates is not considered to be material because theCompany does not invest in instruments tied to market prices or rates.  The Company’s exposure to interest ratechanges is not considered to be material to the Company.  The Company does not enter, or intend toenter, into derivative financial instruments for trading or speculativepurposes.

 

# **Item 8.       Financial Statements and SupplementaryData**

 

The financial statementsare filed pursuant to Item 14(a)1.

 

# **Item 9.       Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

 

Previous IndependentAccountants

 

On July 29, 2002,INVESTools dismissed Arthur Andersen LLP as its independent accountants. The Company’sAudit Committee approved the decision to dismiss Arthur Andersen LLP.

 

The report of ArthurAndersen LLP on the financial statements for the year ended December 31, 2001contained no adverse opinion or disclaimer of opinion and was not qualified ormodified as to uncertainty, audit scope or accounting principle. The report ofBDO Seidman, LLP on the financial statements for the year ended December 31,2000 contained no adverse opinion or disclaimer of opinion and was notqualified or modified as to uncertainty, audit scope or accounting principle.

 

In connection with itsaudit for the most recent fiscal year and through July 29, 2002, there were nodisagreements with Arthur

 

13

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Andersen LLP on any matterof accounting principles or practices, financial statement disclosure, orauditing scope or procedure, which disagreements if not resolved to thesatisfaction of Arthur Andersen LLP would have caused them to make referencethereto in their report on the financial statements for such years.

 

During the fiscal yearsended December 31, 2001and through July 29, 2002, there were no reportableevents (as defined in Regulation S-K Item 304(a)(1)(v)).

 

The Company requestedthat Arthur Andersen LLP furnish it with a letter addressed to the SEC statingwhether or not it agreed with the above statements.  Arthur Andersen LLP informed the Company that it did not intendto provide such a letter, because it no longer had a partner remaining with thefirm who had knowledge of relevant information.  Accordingly, pursuant to Item 304T of Regulation S-K, no responsefrom Arthur Andersen LLP was filed as an exhibit to the Company’s currentreport on Form 8-K reporting the change in accountants.

 

New IndependentAccountants

 

The Company engaged KPMGLLP as its new independent accountants as of July 29, 2002. During the two mostrecent fiscal years and through July 29, 2002, the Company did not consult withKPMG LLP regarding either (i) the application of accounting principles to aspecified transaction, either completed or proposed; or the type of auditopinion that might be rendered on the Company’s financial statements, andeither a written report was provided to the Company or oral advice was providedthat KPMG LLP concluded was an important factor considered by the Company inreaching a decision as to the accounting, auditing or financial reportingissue; or (ii) any matter that was either the subject of a disagreement, asthat term is defined in Item 304(a)(1)(iv) of Regulation S-K and the relatedinstructions to Item 304 of Regulation S-K, or a reportable event, as that termis defined in Item 304(a)(1)(v) of Regulation S-K.

 

**PartIII**

** **

# **Item 10.    Directors and Executive Officers of theRegistrant**

 

The Company’s directors aredivided into three classes designated Class I, Class II and Class III.  Each class consists, as nearly as possible,of one-third of the total number of directors constituting the entire Board ofDirectors.  At the 2002 Annual Meetingof Stockholders, Class I directors were elected for a term expiring at the 2005annual meeting of stockholders, Class II directors serve for a term expiring atthe 2003 annual meeting of stockholders, and Class III directors serve for aterm expiring at the 2004 annual meeting of stockholders.  At each annual meeting of stockholders,successors to the class of directors whose term expires at that annual meetingshall be elected for a term expiring at the third succeeding annual meeting.  Each director holds office until the annualmeeting for the year in which his term expires and until his successor has beenelected and qualified.

 

As of December 31, 2002,the Company’s directors and executive officers were as follows:

** **
| **Name**         |   | **Class** |   | **Age** |   | **Position**                                   |
|------------------|--------|-----------|--------|---------|--------|------------------------------------------------|
|             |   |      |   |    |   |                                           |
| Stephen C. Wood  |   | Class I   |   | 50      |   | Director                                       |
| Lee K. Barba     |   | Class II  |   | 52      |   | Chairman, Chief Executive Officer and Director |
| Hans von Meiss   |   | Class II  |   | 55      |   | Director                                       |
| D. Scott Elder   |   | Class III |   | 44      |   | Executive Vice President and Director          |
| Ross W. Jardine  |   | Class III |   | 42      |   | Executive Vice President and Director          |
| Paul A. Helbling |   |      |   | 49      |   | Chief Financial Officer                        |
| Thor A. Clark    |   |      |   | 33      |   | Vice President                                 |
| Scott P. Harris  |   |      |   | 36      |   | Vice President                                 |
| David W. McCoy   |   |      |   | 50      |   | Vice President                                 |
| Daniel S. Olson  |   |      |   | 34      |   | Vice President                                 |

 

The CompensationCommittee and Audit Committee of the Board of Directors are each composed ofMessrs. von Meiss and Wood, each of whom are independent directors.

 

## **Stephen C. Wood**

 

Mr. Wood, a formerDirector of Telescan, was appointed Director of the Company in December2001.  Mr. Wood is currently Presidentand Chief Executive Officer of Wireless Services Corporation based in Bellevue,Washington.  Until May 1996, Mr. Woodwas President and Chief Executive Officer of Notable Technologies, L.L.C., whichfiled for bankruptcy in 1996.  From 1993through 1994, Mr. Wood served as Vice President of Information Broadcasting forMcCaw Development Corporation located in Kirkland, Washington.  Until February 1993, he was President ofStarwave Corporation, a company he formed in 1991 with Microsoft Corporationco-founder Paul G. Allen to develop and market data and informationproducts.  From 1986 through 1991, Mr.Wood served in several executive positions at Asymetrix Corporation, a softwaredevelopment and marketing firm founded by Mr. Allen.  From 1980 until 1985, Mr. Wood was in charge of building amicrocomputer software

 

14

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development organizationfor Datapoint Corporation in Austin, Texas, after serving in research anddevelopment and marketing positions. Mr. Wood began his career in 1976 when he became the sixth employee ofMicrosoft Corporation, where he was general manager from 1977 to 1980.  Mr. Wood holds a B.S. in ComputerEngineering from Case Western University and an M.S. in Electrical Engineeringfrom Stanford University.

 

## **Lee K. Barba**

 

Mr. Barba, was appointedChief Executive Officer and Director of the Company in December 2001, andChairman in June 2003, after having served as Chief Executive Officer ofTelescan.  Prior to joining Telescan inFebruary of 2000, he was the Chief Executive Officer of Open Link Financial, arisk management software company whose largest shareholder, Coral Energy, was awholly owned subsidiary of Shell Oil Company. Mr. Barba joined Open Link after serving as President of CoralEnergy.  Mr. Barba joined Coral Energyafter 22 years on Wall Street, where he was responsible for managing globaltrading businesses for Bankers Trust Company. While based in London, he was responsible for managing Bankers Trust’sEuropean offices, as well as the Global Risk Management Advisory practice,which had offices in Asia and Latin America. Upon returning to New York in 1994, Mr. Barba was the senior executiveof Bankers Trust, responsible for managing the consolidation of the firm’stechnology and operations functions for the global capital markets businesses,which included over 2,100 in staff operating throughout Asia, Europe and NorthAmerica.  Earlier in his career, Mr.Barba served as a co-head of the Fixed Income Division at PaineWebber and as aVice President of Lehman Brothers Kuhn Loeb. He earned his M.B.A. from Columbia University and his B.A. from theUniversity of North Carolina.

 

## **Hans von Meiss**

 

Mr. von Meiss, formerDirector of ZiaSun, was appointed a Director of the Company in December2001.  Since 1997, Mr. von Meiss hasbeen involved in financial management and consulting and has pursuedinvestments in Internet related businesses. He also serves on the Board of Directors of an industrial concern, amerger and acquisition consulting company and his own company, G. von MeissAG.  From 1994 to 1997, Mr. von Meissserved as Chief Executive Officer of Swiss Textile Group.  From 1991 to 1994, Mr. von Meiss was ChiefExecutive Officer of a publicly quoted Dutch company following itsprivatization from the Dutch government. From 1988 to 1991, Mr. von Meiss worked as an independent financialconsultant.  Mr. von Meiss served asChief Executive Officer of Dr. Ing.Koenig AG, a leading Swiss service centerfor flat steel and industrial fasteners from 1984 to 1988.  From 1977 to 1984, Mr. von Meiss served invarious positions in investment banking with Bankers Trust International Ltd.and Chase Manhattan Ltd. in London.  Mr.von Meiss received a Bachelors degree in Economics in 1973 from the Universityof St. Gallen in Switzerland.  Hereceived his M.B.A. from INSEAD, Fontainebleau, France in 1977.

 

## **D. Scott Elder**

 

Mr. Elder, formerChairman of the Board and Chief Executive Officer of ZiaSun, was appointedExecutive Vice President and Director of the Company in December 2001.  Prior to joining ZiaSun in April of 2000 andthrough ZiaSun’s acquisition of OIA, he was President of OIA, a company heco-founded with Ross W. Jardine, Scott P. Harris and David W. McCoy in1997.  From 1994 to 1997, Mr. Elderowned and operated two consulting businesses, D. Scott Elder & Associatesand The Business Alliance Company.  Asthe proprietor of The Business Alliance Company, a developer of joint-venturemarketing and training programs, Mr. Elder developed joint-venture projects forsuch clients as General Mills, Procter & Gamble, Rubbermaid and ZanePublishing.  Mr. Elder has a degree inCommunications from Brigham Young University and an M.B.A. from the Universityof Phoenix

 

## **Ross W. Jardine**

 

Mr. Jardine, former ChiefFinancial Officer, Vice President and Director of ZiaSun, was appointedExecutive Vice President and Director of the Company in December 2001.  Prior to joining ZiaSun in April of 2000 andthrough ZiaSun’s acquisition of OIA, he was Director of OIA, a company heco-founded with D. Scott Elder, Scott P. Harris and David W. McCoy in1997.  In 1994, Mr. Jardine foundediMALL, a company focused on teaching other business owners how to obtain theirown businesses online.  iMALL made itsinitial public offering in 1996 and was sold the same year to Excite@home for$425 million.  From 1990 to 1994, Mr.Jardine served as President of Jacobson & Jardine, Inc., a sports marketingand promotion company he founded in 1990. While serving as President of Jacobson & Jardine, Inc., Mr. Jardinewas responsible for operations and the development and marketing of licensedproducts for major sporting events for such venues as the Indianapolis 500, theKentucky Derby, the 1992 America’s Cup, and such clients as the NationalFootball League, Nabisco, Coca Cola, Fisher Price, American Home Products andRJ Reynolds.  Mr. Jardine graduated cumlaude from Brigham Young University in 1987 with a degree in Communications.

 

## **Paul A. Helbling**

 

Mr. Helbling, formerChief Financial Officer of Telescan, was appointed Chief Financial Officer ofthe Company in December 2001.  Prior tojoining Telescan in August 1999, he was Vice President of Finance at PCC FlowTechnologies, Inc., a subsidiary of Precision Castparts Corporation and a $350million manufacturer of pumps and valves in the U.S. and Europe.  From 1991 to 1997 Mr. Helbling served asVice President and Chief Financial Officer of HydroChem Industrial Services, a$150 million provider of industrial cleaning services to the petrochemical,refining and utility industries.  Mr.Helbling became a Certified Public Accountant in 1978, with experience inpublic accounting and in the contract drilling and oil and gas exploration andproduction industries.  Mr. Helblingholds B.A. and M.A. degrees from Rice University.

 

15

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## **Thor A. Clark**

 

Mr. Clark was appointedVice President of the Company in July 2002. He has served as Chief Technology Officer of the Company since 2001 andalso has served as Vice President of Technology of INVESTools California, awholly owned subsidiary of the Company, since 1999.  Mr. Clark also held the position of Director of Development atINVESTools California.  Prior to joiningINVESTools California in 1995, Mr. Clark was a founding partner in PacificAccess, a consumer data services startup. Mr. Clark studied Physics and Cognitive Science at the CaliforniaInstitute of Technology and the University of California, Berkeley.

 

## **Scott P. Harris**

 

Mr. Harris was appointedVice President of the Company in July 2002. Mr. Harris has served as Executive Vice President of the Company’swholly-owned subsidiary, OIA, since 1998. Prior to joining OIA in 1998, Mr. Harris was president of The OliveTree, an import business he founded. From 1991 through 1997, Mr. Harris managed operations, supervised andtrained seminar personnel and performed other seminar related services forFinancial Freedom Report and iMall.  Mr.Harris is one of the four founders of OIA. Mr. Harris has a degree from Brigham Young University in BusinessManagement.

 

## **David W. McCoy**

 

Mr. McCoy was appointedVice President of the Company in July 2002. Mr. McCoy has served as President of the Company’s wholly-ownedsubsidiary, OIA, since October of 2000. Prior to joining OIA in 1997, Mr. McCoy served as Vice President ofSales and Marketing for Internet Development, Inc. from 1995 to 1997.  From 1992 to 1995, Mr. McCoy worked as anindependent contractor.  From 1986 to1992, Mr. McCoy worked for Mark O. Haroldsen, Inc. where he was promoted toCustomer Service Manager in 1990 and later promoted to Vice President of theComputer Division where he oversaw the management and direction of the Salesand Marketing and the Customer Service Departments.  Mr. McCoy worked with Libra Software from 1978 to 1986 where hewas promoted to National Sales Manager in 1984.  Mr. McCoy is one of the four founders of OIA.  Mr. McCoy attended Brigham Young Universitywhere he studied Business Management with an emphasis in Finance.

 

## **Daniel S. Olson**

 

Mr. Olson was appointedVice President of the Company in July 2002. Mr. Olson has served as Vice President, Business Development ofINVESTools California, since October of 1998. Prior to joining INVESTools California, Mr. Olson was the Executive VicePresident and co-founder of Links Automatic Payment Network, a marketingconsulting firm that developed direct debit enrollment programs for the FederalReserve, regional automated clearinghouse associations, regional utilities andmajor billers, including US West and Bell Atlantic.  From 1995 to 1996, Mr. Olson was the Director of Communicationsfor Great Western Financial Securities. From 1991 to 1992, Mr. Olson specialized in product promotion for boththe institutional and the individual investor at PaineWebber.  From 1988 to 1990, Mr. Olson served as anassistant to the Senior Vice President at Drexel Burnham Lambert.  Mr. Olson received an MFA in CreativeWriting from Louisiana State University and a B.A. in Literature from theUniversity of Southern California.

 

16

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# **Item 11.    Executive Compensation**

# ** **

The following tablereflects all forms of compensation for services to the Company for the yearsended December 31, 2002, 2001, and 2000, of the individuals serving as theCompany’s Chief Executive Officer during 2002 and the Company’s four other mosthighly compensated executive officers who were serving the Company at the endof 2002 and who earned more than $100,000 that year (the “Named Executives”).

 

**SUMMARY COMPENSATIONTABLE**

 
|                       |   |     |       |       |       |      |       |                       |   | **Awards**                    |       |
|----------------------------|--------|----------|------------|------------|------------|-----------|------------|----------------------------|--------|-------------------------------|------------|
| **Name**                   |   | **Year** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Other  Annual  Comp(1)** |   | **Restricted  Stock  Awards** | ** ** | **Securities  Underlying  Options** | ** ** |
|                       |   |     |       |       |       |      |       |                       |   |                          |       |   |   |
| Lee K. Barba               |   | 2002     |       | $          | 353,561    |      | $          | 41,170                     |   | $                             | —     |   | 299,529 |   | — |   |
| *Chief Executive Officer*  |   | 2001     |       | 295,000    |       | 6,656     |       | —                     |   | 102,057                       |       | 1,200,000 |   |
|                       |   | 2000     |       | 248,103    | (2)        | 45,866    |       | —                     |   | —                        |       | 240,627 |   |
|                       |   |     |       |       |       |      |       |                       |   |                          |       |   |   |
| D. Scott Elder             |   | 2002     |       | $          | 321,885    |      | $          | 71,875                     |   | $                             | —     |   | 155,850 |   | — |   |
| *Executive Vice President* |   | 2001     |       | 156,000    |       | 19,300    |       | 304,025                    |   | 10,000                        |       | 340,000 |   |
|                       |   | 2000     |       | 117,500    |       | 204,000   |       | 2,433,065                  |   | 17,500                        |       | 25,000 |   |
|                       |   |     |       |       |       |      |       |                       |   |                          |       |   |   |
| Ross W. Jardine            |   | 2002     |       | $          | 322,285    |      | $          | 71,875                     |   | $                             | —     |   | 115,193 |   | — |   |
| *Executive Vice President* |   | 2001     |       | 156,000    |       | 18,507    |       | 304,025                    |   | 10,000                        |       | 340,000 |   |
|                       |   | 2000     |       | 115,500    |       | 204,000   |       | 2,435,215                  |   | 17,500                        |       | 25,000 |   |
|                       |   |     |       |       |       |      |       |                       |   |                          |       |   |   |
| Scott P. Harris            |   | 2002     |       | $          | 254,658    |      | $          | 30,625                     |   | $                             | —     |   | — |   | — |   |
| *Vice President*           |   | 2001     |       | 128,105    |       | —    |       | 304,025                    |   | —                        |       | 25,000 |   |
|                       |   | 2000     |       | 112,000    |       | 96,000    |       | 1,211,958                  |   | —                        |       | 10,000 |   |
|                       |   |     |       |       |       |      |       |                       |   |                          |       |   |   |
| David W. McCoy             |   | 2002     |       | $          | 253,158    |      | $          | 34,925                     |   | $                             | —     |   | 50,929 |   | — |   |
| *Vice President*           |   | 2001     |       | 129,182    |       | —    |       | 304,025                    |   | —                        |       | 25,000 |   |
|                       |   | 2000     |       | 113,000    |       | 96,000    |       | 1,211,958                  |   | —                        |       | 10,000 |   |

 

----

(1)       Other annual compensation representscommissions based on workshop attendance. Additionally, in 2000, Messrs. Elder and Jardine each received $2.1million and Messrs. Harris and McCoy each received $900,000 in additionalcompensation pursuant to an earn-out agreement provided for in the OIAAcquisition Agreement.

(2)       Mr. Barba joined the Company during2000.  Therefore, the amounts reflectedfor 2000 are for a partial year.

 

## **Stock Options**

 

The following tables setforth information relating to the Named Executives with respect to (i) stockoptions granted in 2002, and (ii) the total number of exercised options through2002 and the value of the unexercised in-the-money options at the end of 2002.

 

**OPTION GRANTS IN LASTFISCAL YEAR**

 
|            |   | **Number of  Securities  Underlying  Options** |   | **Percent of  Total Options  Granted to  Employees in** |   | **Exercise  Price  Per** |   | **Expiration** |     | **Potential  Realizable Value  at Assumed Annual Rate of  Stock Price Appreciation  for Option Term** |   |
|-----------------|--------|------------------------------------------------|--------|---------------------------------------------------------|--------|--------------------------|--------|----------------|----------|-------------------------------------------------------------------------------------------------------|--------|
| **Name**        |   | **Granted**                                    |   | **Fiscal  Year(1)**                                     |   | **Share**                |   | **Date**       |     | **5%**                                                                                                |   | **10%** |   |
| Lee K. Barba    |   | 0  - 550,000                                   |   |                                                    | (2)    | $                        | 0.18   |           | 08/28/04 |                                                                                                  | $      | — |   | $ | — |   |
|            |   |                                           |   |                                                    |   |                     |   |           |     |                                                                                                  |   |   |   |
| D. Scott Elder  |   | 300,000                                        |   | 50                                                      | %      | $                        | 0.18   |           | 09/14/12 |                                                                                                  | $      | 33,960 |   | $ | 86,062 |   |
|            |   |                                           |   |                                                    |   |                     |   |           |     |                                                                                                  |   |   |   |
| Ross W. Jardine |   | 300,000                                        |   | 50                                                      | %      | $                        | 0.18   |           | 09/14/12 |                                                                                                  | $      | 33,960 |   | $ | 86,062 |   |

 

----

(1)       Based upon 600,000 options granted toemployees in  2002.

(2)       The vesting of the option granted to Mr.Barba is contingent upon an event occurring in the future.  Based upon the terms of the option thenumber of shares issuable upon exercise of the options, if any, will be between50,000 and 550,000 shares at an exercise price of $0.18 per share.  Therefore, the percent of total options andthe potential realizable value of the option grant is calculated assuming thatno shares are vested.

** **

17

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**AGGREGATED OPTIONEXERCISES IN LAST FISCAL YEAR AND**

**FISCAL YEAR END OPTIONVALUES**

 
|            |   | **Shares  Acquired  on** |   | **Value**    |   | **Number of  Securities Underlying  Unexercised Options at  Fiscal Year End** |   | **Value of  Unexercised  In-the-Money Options at  Fiscal Year End** |   |
|-----------------|--------|--------------------------|--------|--------------|--------|-------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|
| **Name**        |   | **Exercise**             |   | **Realized** |   | **Exercisable**                                                               |   | **Unexercisable**                                                   |   | **Exercisable** |   | **Unexercisable** |   |
| Lee K. Barba    |   | —                   |   | —       |   | 457,331                                                                       |   | 983,297                                                             |   | — |   | — |   |
| D. Scott Elder  |   | —                   |   | —       |   | 185,000                                                                       |   | 480,000                                                             |   | 13,500 |   | 40,500 |   |
| Ross W. Jardine |   | —                   |   | —       |   | 185,000                                                                       |   | 480,000                                                             |   | 13,500 |   | 40,500 |   |
| David W. McCoy  |   | —                   |   | —       |   | 10,000                                                                        |   | —                                                              |   | — |   | — |   |
| Scott P. Harris |   | —                   |   | —       |   | 10,000                                                                        |   | —                                                              |   | — |   | — |   |

 

## **Director Fees and Compensation**

 

Directors are paid $2,500for each meeting of the Board of Directors or committee meeting they attend inperson, plus out of pocket expenses, and $500 for each telephonic meeting orcommittee meeting in which they participate. These fees are determined by resolution of the Board of Directors.  The Directors have the option to receiveshares of Company common stock or cash for their compensation.

 

# **Item 12**.    Security Ownership of Certain BeneficialOwners and Management

 

The following table setsforth information, as of December 31, 2002, with respect to the number ofshares of common stock beneficially owned by (1) each director and/or NamedExecutive individually, (2) all executive officers and directors of the Companyas a group and (3) each stockholder known by the Company to be the beneficialowner of more than 5% of the Company’s common stock.  The number of shares does not include shares allocated to theperson’s account through the Company’s 401(k) plan.  Except as noted below, each stockholder has sole voting andinvestment power with respect to the shares shown.

 
| **Owners**                                                                          |   | **Number of  Shares  Beneficially Owned(1)** |   | **% of Class** |   |
|-------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|----------------|--------|
| **Common Stock**                                                                    |   |                                         |   |           |   |
| Lee K. Barba                                                                        |   | 858,917                                      |   | 2.0            | %      |
| D. Scott Elder                                                                      |   | 4,152,903                                    |   | 9.6            | %      |
| Ross W. Jardine                                                                     |   | 4,112,746                                    |   | 9.5            | %      |
| David W. McCoy                                                                      |   | 1,512,929                                    |   | 3.5            | %      |
| Scott P. Harris                                                                     |   | 1,617,023                                    |   | 3.7            | %      |
| Hans von Meiss(2)                                                                   |   | 302,445                                      |   |           | *      |
| Stephen C. Wood                                                                     |   | 43,424                                       |   |           | *      |
| All   executive officers and directors as a group                              |   |                                         |   |           |   |
| (10 persons)                                                                        |   | 12,863,800                                   |   | 29.8           | %      |
|                                                                                |   |                                         |   |           |   |
| Momentum Media Limited*304 Dominion Centre**14 Queens Road**East Wanchai Hong Kong* |   | 3,299,980                                    |   | 7.6            | %      |

 

----

*      Lessthan 1%

(1)    Eachof the share amounts for the directors and officers includes options topurchase additional shares, which are exercisable within the next sixty days,as follows:  Lee K. Barba, 45,7331; D.Scott Elder, 185,000; Ross W. Jardine, 185,000; David W. McCoy, 10,000; ScottP. Harris, 10,000; Hans von Meiss, 15,000; Stephen C. Wood 11,242.

(2)    Includesshares, as to which beneficial ownership is disclaimed, of 113,000 shares heldfor the benefit of family members.

 

# **Item 13**.    Certain Relationships and RelatedTransactions

 

## **Generation Marketing, LLC**

 

In the second half of2000, D. Scott Elder and Ross W. Jardine, each an executive officer anddirector of the Company, and Scott Harris and David McCoy, each an executiveofficer of the Company, each contributed 20% of the capital towards the formationof a new marketing company, Generation Marketing, to ensure continuity in theCompany’s marketing efforts.  In 2001,this ownership percentage fell to 16.7% for each of them.  Prior to 2002, Generation Marketing handledall of the Company’s marketing expenditures. In May 2002, David McCoy sold his interest to a third party.  In December 2002, a shareholder not relatedto INVESTools approached Messrs. Elder, Jardine and Harris to buy out theirinterests in Generation Marketing.  Thesale was finalized in February 2003.

 

The Company paid $4.9million, $6.0 million and $400,000 in marketing expenses to GenerationMarketing in each of the

 

18

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periods ended December31, 2002, 2001 and 2000, respectively.

 

## **OIA Earn-Out**

 

On July 26, 2001, ZiaSunentered into a Second Amendment to Acquisition Agreement, effective as of July1, 2001, with D. Scott Elder and Ross Jardine, each an officer and a directorof the Company, and David McCoy and Scott Harris, each an officer of theCompany.  Due to the accrual of apotential liability for sales taxes payable by OIA to various states, ZiaSunand Messrs. Elder, Jardine, McCoy and Harris determined that an adjustment ofthe number of shares received by Messers. Elder, Jardine, McCoy and Harrispursuant to the provisions for the OIA earn-out, as provided for in theoriginal acquisition agreement might be required.  Such sales tax liability is reflected on the Company’s financialstatements for the year ended December 31, 2000 for sales by OIA that hadoccurred in 1998, 1999 and 2000.

 

Paragraph 1.6 of theoriginal acquisition agreement between ZiaSun and Messers. Elder, Jardine,McCoy and Harris provided for an adjustment of the number of shares each wouldreceive based on the actual earnings of OIA during the period of April 1, 1999through March 31, 2000.  In the eventthat the actual OIA earnings were greater than $2.5 million, ZiaSun was toissue additional shares to each recipient on the basis of one additional sharefor each $1.00 of actual OIA earnings greater than $2.5 million.

 

Following the end of theearn-out period, OIA’s audited EBITDA earnings for the period were reported as$10.9 million, which would result in the Company owing 21,820,152 post-splitadjusted shares of common stock at March 31, 2000 to each recipient.  The value of these shares at March 31, 2000,was $248.2 million, which amount would have been added to the goodwill ofZiaSun’s balance sheet.  ZiaSun andMessers. Elder, Jardine, McCoy and Harris jointly recognized that it would notbe in the best interest of ZiaSun to have such a large goodwill burden goingforward.  As a result, the partiesentered into an Amendment to Agreement dated May 31, 2000, amending the earn-outprovisions of the acquisition agreement. Pursuant to the amendment, Messers. Elder, Jardine, McCoy and Harriswould exchange 12,000,000 of the post-split adjusted shares they were toreceive pursuant to the acquisition agreement for $6.0 million in cash andwould receive 9,820,152 post-split adjusted shares of the ZiaSun’s commonstock, of which 5,000,000 shares had been previously of ZiaSun issued and wereheld in escrow pursuant to the terms of the acquisition agreement.  A total of 4,840,152 new restricted shareswere issued on an aggregate basis to Messers. Elder, Jardine, McCoy and Harris.

 

Pursuant to the SecondAmendment to Acquisition Agreement, ZiaSun and Messers. Elder, Jardine, McCoyand Harris reached an agreement such that if, during a three-year periodcommencing on July 1, 2001 through June 30, 2004, any sales tax liability ispaid for sales made during the earn-out period, ZiaSun shall absorb and besolely responsible for the payment of any actual sales tax liability up to anamount of $554,000.  In the event thatthe actual sales tax paid by ZiaSun  onsales made by OIA during such three-year period exceeds $554,000, then Messers.Elder, Jardine, McCoy and Harris shall reduce, return and deliver to ZiaSun oneshare of ZiaSun’s common stock for each $0.50 of actual sales tax paid inexcess of $554,000.

# ** **

# **Item 14**.    Controls and Procedures

 

Within the 90-day periodprior to the filing of this report (the “Evaluation Date”), an evaluation wascarried out under the supervision and with the participation of the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined in Rule 13a – 14(c) and Rule 15d – 14(c)).Based on that evaluation, the Company’s Chief Executive Officer and ChiefFinancial Officer have concluded that the Company’s disclosure controls andprocedures are effective in ensuring that information required to be disclosedin Company reports filed or submitted under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms. However, the design ofany system of controls is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions,regardless of how remote.

 

There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect internal controls subsequent to the Evaluation Date.

 

19

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**Part IV**

** **

# **Item 15**.    Exhibits, Financial Statements and Reportson Form 10-K

 

The following documentsare filed as part of this Form 10-K:

 
| **1.** | **CONSOLIDATED FINANCIAL  STATEMENTS**                                                                     |
|--------|------------------------------------------------------------------------------------------------------------|
|   |                                                                                                       |
|   | Report of Independent Public Accountants                                                                   |
|   | Consolidated Balance Sheets as of December 31, 2002 and 2001                                               |
|   | Consolidated Statements of Operations for  the Years Ended December 31, 2002, 2001 and 2000                |
|   | Consolidated Statements of Stockholders’  Equity for the Years Ended December 31, 2002, 2001 and 2000 |
|   | Consolidated Statements of Cash Flows for  the Years Ended December 31, 2002, 2001 and 2000                |
|   | Notes to Consolidated Financial Statements                                                                 |

 

All other schedules havebeen omitted since the required information is not present or is not present inamounts sufficient to require submission of the schedule, or because theinformation required is included in the financial statements or notes thereto.

 
| **2.** | **EXHIBITS** |   |
|--------|--------------|--------|

 
| **2.1**   |   | **Second  Amended and Restated Agreement and Plan of Merger, dated as of September 25,  2001, between ZiaSun and Telescan   (Included as Annex I to the joint proxy statement/prospectus filed in  Registration No. 333-67454.)**         |
|-----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **2.2**   |   | **Amendment  to Agreement between ZiaSun and the former OIA Stockholders dated May 31,  2000.  (Incorporated by reference from  ZiaSun’s Quarterly Report on Form 10-Q filed on August 17, 2000.)**                                  |
| **2.3**   |   | **Second  Amendment to Acquisition Agreement between ZiaSun and the former OIA  Stockholders, dated as of July 1, 2001.   (Incorporated by reference from ZiaSun’s Current Report on Form 8-K  filed on August 1, 2001.)**           |
| **2.4**   |   | **Share  Purchase Agreement between ZiaSun and Ko Jen Wang, dated October 1,  2001.  (Incorporated by reference from  ZiaSun’s Current Report on Form 8-K filed on October 3, 2001.)**                                               |
| **2.5**   |   | **Acquisition  Agreement and Plan of Reorganization between ZiaSun and Seminar Marketing  Group, Inc., dated September 29, 2000.   (Incorporated by reference from ZiaSun’s Current Report on Form 8-K  filed on October 3, 2000.)** |
| **3.1**   |   | **Amended  and Restated Certificate of Incorporation of INVESTools Inc. (Included as  Annex V to the joint proxy statement/prospectus filed in Registration No.  333-67454.)**                                                                 |
| **3.2**   |   | **By-laws  of INVESTools Inc. (Included as Annex VI to the joint proxy  statement/prospectus filed in Registration No. 333-67454.)**                                                                                                           |
| **10.1**  |   | **Amended  Stock Option Plan of Telescan.   (Incorporated by reference from Telescan’s Post-Effective Amendment  No. 1 to Form S-8 filed February 2, 1994.)**                                                                        |
| **10.2**  |   | **Amended  and Restated 1995 Stock Option Plan of Telescan.  (Incorporated by reference from Telescan’s Registration  Statement on Form S-8 filed November 21, 2000.)**                                                              |
| **10.3**  |   | **2000  Stock Option Plan of Telescan.   (Incorporated by reference from Telescan’s Registration Statement on  Form S-8 filed November 21, 2000.)**                                                                                  |
| **10.4**  |   | **Amended  1999 Stock Option Plan of ZiaSun.   (Incorporated by reference from ZiaSun’s Post-Effective Amendment No.  1 to Form S-8 filed June 14, 2000.)**                                                                          |
| **10.5**  |   | **Non-Qualified  Stock Option Agreement between ZiaSun and Allen D. Hardman.  (Incorporated by reference from ZiaSun’s  Registration Statement on Form 10-SB filed September 16, 1999.)**                                            |
| **10.6**  |   | **Amended  and Restated Employment Agreement and Stock Option of Allen D. Hardman, dated  August 2, 2000.  (Incorporated by  reference from ZiaSun’s Quarterly Report on Form 10-Q filed on August 17,  2000.)**                     |
| **10.7**  |   | **Lease  Agreement between EsNET Properties L.C. and OIA, dated May 25, 1999.  (Incorporated by reference from ZiaSun’s  Registration Statement on Form 10-SB filed September 16, 1999.)**                                           |
| **10.8**  |   | **Lease  Agreement between DC Mason Ltd. and OIA, dated October 7, 1998.  (Incorporated by reference from ZiaSun’s  Registration Statement on Form 10-SB filed September 16, 1999.)**                                                |
| **10.9**  |   | **Lease  Agreement between Gordon Jacobson and OIA, dated June 22, 1999.  (Incorporated by reference from the  ZiaSun’s Registration Statement on Form 10-SB filed September 16, 1999.)**                                            |
| **10.10** |   | **Office  Lease Agreement between Telescan and Chevron U.S.A., Inc., dated November 8,  1995.  (Incorporated by reference from  Telescan’s Form 10-K for the annual period ended December 31, 1995.)**                               |
| **10.11** |   | **Client  Service Agreement, dated January 14, 2000 between ZiaSun and Continental  Capital & Equity Corporation.   (Incorporated by reference from ZiaSun’s Form 10K for the annual  period ended December 31, 1999.)**         |
| **10.12** |   | **Consulting  Agreement, dated January 1, 2000, between ZiaSun and Credico, Inc.  (Incorporated by reference from ZiaSun’s Quarterly Report on Form 10-QSB  filed May 22, 2000.)**                                                        |
| **10.13** |   | **Business  Agreement, dated April 20, 2000, between ZiaSun and The McKenna Group.  (Incorporated by reference from ZiaSun’s Quarterly  Report on Form 10-QSB filed on May 22, 2000.)**                                              |

 

20

----

 
| **10.14**  |   | **Venture  Fund Agreement between ZiaSun and The McKenna Group, dated July 3, 2000.  (Incorporated by reference from ZiaSun’s  Quarterly Report on Form 10-Q filed on August 17, 2000.)**                                                                |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **10.15**  |   | **Agreement,  dated April 13, 2001, between ZiaSun and MKZ Fund, LLC.  (Incorporated by reference from ZiaSun’s  Current Report on Form 8-K filed on August 1, 2001.)**                                                                                  |
| **10.16**  |   | **Non-Competition  Agreement, dated March 8, 2000, between OIA and MIT, LLC.  (Incorporated by reference from ZiaSun’s  Current Report on Form 8-K filed on August 1, 2001.)**                                                                           |
| **10.17**  |   | **Voting  Agreement between ZiaSun and Vulcan Ventures, Inc., dated May 3, 2001.  (Included as Annex II to the joint proxy  statement/prospectus filed in Registration No. 333-67454.)**                                                                      |
| **10.18**  |   | **Voting  Agreement among ZiaSun and NBC-TSCN Holding, Inc., and GE Capital Equity  Investments, Inc., dated May 3, 2001.   (Included as Annex II to the joint proxy statement/ prospectus filed  in Registration No. 333-67454.)**                           |
| **10.19**  |   | **Voting  Agreement between ZiaSun and LJH Corporation, dated May 3, 2001.  (Included as Annex II to the joint proxy  statement/prospectus filed in Registration No. 333-67454.)**                                                                            |
| **10.20**  |   | **Voting  Agreement between Telescan and Ross Jardine, dated May 2, 2001.  (Included as Annex II to the joint proxy  statement/prospectus filed in Registration No. 333-67454.)**                                                                             |
| **10.21**  |   | **Voting  Agreement between Telescan and D. Scott Elder, dated May 2, 2001.  (Included as Annex II to the joint proxy  statement/prospectus filed in Registration No. 333-67454.)**                                                                           |
| **10.22**  |   | **Voting  Agreement between Telescan and Scott Harris, dated May 2, 2001.  (Included as Annex II to the joint proxy  statement/prospectus filed in Registration No. 333-67454.)**                                                                             |
| **10.23**  |   | **Voting  Agreement between Telescan and David W. McCoy, dated May 2, 2001.  (Included as Annex II to the joint proxy  statement/prospectus filed in Registration No. 333-67454.)**                                                                           |
| **10.24**  |   | **Voting  Agreement between Telescan and Momentum Media Ltd., dated May 2, 2001.  (Included as Annex II to the joint proxy  statement/prospectus filed in Registration No. 333-67454.)**                                                                      |
| **10.25**  |   | **Lock-up  Agreement between ZiaSun and Vulcan Ventures, Inc., dated May 2, 2001.  (Included as Annex III to the joint proxy  statement/prospectus filed in Registration No. 333-67454.)**                                                                    |
| **10.26**  |   | **Lock-up  Agreement between Telescan and Ross Jardine, dated May 2, 2001.  (Included as Annex III to the joint proxy  statement/prospectus filed in Registration No. 333-67454.)**                                                                           |
| **10.27**  |   | **Lock-up  Agreement between Telescan and D. Scott Elder, dated May 2, 2001.  (Included as Annex III to the joint proxy  statement/prospectus filed in Registration No. 333-67454.)**                                                                         |
| **10.28**  |   | **Lock-up  Agreement between Telescan and Scott Harris, dated May 2, 2001.  (Included as Annex III to the joint proxy  statement/prospectus filed in Registration No. 333-67454.)**                                                                           |
| **10.29**  |   | **Lock-up  Agreement between Telescan and David W. McCoy, dated May 2, 2001.  (Included as Annex III to the joint proxy  statement/prospectus filed in Registration No. 333-67454.)**                                                                         |
| **10.30*** |   | **Amended  and Restated Employment Agreement by and between the Company and Lee K. Barba  effective as of December 6, 2001.(1)**                                                                                                                                   |
| **10.31*** |   | **Amended  and Restated Employment Agreement by and between the Company and D. Scott  Elder dated August 30, 2002.(1)**                                                                                                                                            |
| **10.32*** |   | **Amended  and Restated Employment Agreement by and between the Company and Ross Jardine  dated August 30, 2002.(1)**                                                                                                                                              |
| **10.33**  |   | **Joint  Venture Agreement among OIA, Hon Leong Chong and Eric Lip Meng Tan, dated  September 27, 2001.  (Incorporated by  reference from ZiaSun’s Current Report on Form 8-K filed on October 3, 2001).**                                               |
| **10.34**  |   | **Fifth  Amendment to Lease Agreement by and between Telescan, Inc. and WiredZone  Property, L.P., dated April 8, 2002.**                                                                                                                                          |
| **10.35*** |   | **Transition  Settlement Agreement among Online Investors Advantage, Hon Leong Chong, Eric  Lip Meng Tan, Investools Asia Pacific Pte. Ltd. and Investools Hong Kong  Limited dated August 1, 2002.**                                                              |
| **10.36*** |   | **License  and Collaboration Agreement among Online Investors Advantage, Hon Leong  Chong, Eric Lip Meng Tan, Rejoice Edumedia Pte. Ltd., Cappi Management Pte.  Ltd., Investools Asia Pacific Pte. Ltd. and Investools Hong Kong Limited  dated August 1, 2002.** |
| **21**     |   | **Subsidiaries  of INVESTools.  (Incorporated by  reference from the joint statement/prospectus filed in Registration No.  333-67454.)**                                                                                                                      |
| 23.1*      |   | Consent of KPMG LLP.                                                                                                                                                                                                                                               |
| **23.2***  |   | **Consent  of BDO Seidman, LLP.**                                                                                                                                                                                                                                  |
| 23.3*      |   | Information Regarding Consent of Arthur Andersen LLP.                                                                                                                                                                                                              |
| 99.1*      |   | Certification of Chief Executive Officer Pursuant to 18 U.S.C.  Section 1350                                                                                                                                                                                       |
| 99.2*      |   | Certification of Chief Financial Officer Pursuant to  18 U.S.C. Section 1350                                                                                                                                                                                       |

 

----

|   | *   | Indicates documents filed herewith.                         |
|--------|-----|-------------------------------------------------------------|
|   | (1) | Management contracts or compensation plans or arrangements. |

 

## **Reports on Form 8-K**

None.

 

21

----

 

## **Signatures**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized in the City of Houston, State of Texas,on March 18, 2003.

 
|   | INVESTools Inc. |
|--------|-----------------|
|   |            |
|   | By:             | /s/ LEE K. BARBA |
|   |            | Lee K. Barba, Chief Executive Officer and Director |

 

Pursuant to therequirements of the Securities Act of 1934, this report has been signed belowby the following persons in the capacities and on the date indicated

 
| **Signature**                                 |   | **Title**                             |   | **Date**       |
|-----------------------------------------------|--------|---------------------------------------|--------|----------------|
|                                          |   |                                  |   |           |
| **PRINCIPAL EXECUTIVE  OFFICER:**             |   |                                  |   |           |
|                                          |   |                                  |   |           |
| /s/ LEE K. BARBA                              |   | Chief Executive Officer and           |   | March 18, 2003 |
| Lee K. Barba                                  |   | Chairman of the Board                 |   |           |
|                                          |   |                                  |   |           |
| **PRINCIPAL FINANCIAL / ACCOUNTING OFFICER:** |   |                                  |   |           |
|                                          |   |                                  |   |           |
| /s/ PAUL A. HELBLING                          |   | Chief Financial Officer               |   | March 18, 2003 |
| Paul A. Helbling                              |   |                                  |   |           |
|                                          |   |                                  |   |           |
| **DIRECTORS:**                                |   |                                  |   |           |
|                                          |   |                                  |   |           |
| /s/ D. SCOTT ELDER                            |   | Executive Vice President and Director |   | March 18, 2003 |
| D. Scott Elder                                |   |                                  |   |           |
|                                          |   |                                  |   |           |
| /s/ ROSS W. JARDINE                           |   | Executive Vice President and Director |   | March 18, 2003 |
| Ross W. Jardine                               |   |                                  |   |           |
|                                          |   |                                  |   |           |
| /s/ HANS VON MEISS                            |   | Director                              |   | March 18, 2003 |
| Hans von Meiss                                |   |                                  |   |           |
|                                          |   |                                  |   |           |
| /s/ STEPHEN C. WOOD                           |   | Director                              |   | March 18, 2003 |
| Stephen C. Wood                               |   |                                  |   |           |

 

22

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INVESTOOLSINC.

aDelaware corporation

CERTIFICATIONOF CHIEF EXECUTIVE OFFICER

Section302 Certification

 

I, Lee K. Barba, certify that:

 

1.                                            I have reviewed this annual report on Form10-K of INVESTools Inc., a Delaware corporation (the “''registrant”");

 

2.                                            Based on my knowledge, this annual report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this annual report;

 

3.                                            Based on my knowledge, the financialstatements, and other information included in this annual report, fairlypresent in all material respects the financial condition, results of operationsand cash flows of the registrant as of, and for, the periods presented in thisannual report;

 

4.                                            The registrant’s other certifying officers andI are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a) designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b) evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this annual report (the“''Evaluation Date”"); and

 

c) presented in this annual report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.                                         The registrant’s other certifying officers andI have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and have  identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                                         The registrant’s other certifying officers andI have indicated in this annual report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:  March 18, 2003 |   |
|-----------------------|--------|
|                  |   |
|                  |   | /s/ LEE K. BARBA |   |
|                  |   |   | Chief Executive Officer |
|                       |        |  |  |  |

 

23

----

 

INVESTOOLSINC.

aDelaware corporation

CERTIFICATIONOF PRINCIPAL FINANCIAL OFFICER

Section302 Certification

 

I, Paul A. Helbling, certify that:

 

1.                                        I have reviewed this annual report on Form10-K of INVESTools Inc., a Delaware corporation (the “''registrant”");

 

2.                                         Based on my knowledge, this annual report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this annual report;

 

3.                                        Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

4.                                        The registrant’s other certifying officers andI are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a) designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b) evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this annual report (the “''Evaluation Date”"); and

 

c) presented in this annual report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.                                         The registrant’s other certifying officers andI have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and have  identified for the  registrant’s auditors any material weaknesses in internalcontrols; and

 

b) any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                                         The registrant’s other certifying officers andI have indicated in this annual report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:  March 18, 2003 |   |
|-----------------------|--------|
|                  |   |
|                  |   | /s/ PAUL A. HELBLING |   |
|                  |   | Chief  Financial Officer |

 

24

----

 

**INDEPENDENT AUDITOR’SREPORT**

 

The Board of DirectorsINVESTools Inc.:

 

We have audited the accompanying consolidated balancesheet of INVESTools Inc. and subsidiaries as of December 31, 2002, and therelated consolidated statement of operations, comprehensive income (loss),stockholders’ equity and cash flows for the year then ended. These consolidatedfinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audit.  The 2001 consolidated financial statementsof INVESTools Inc. and subsidiaries as of and for the year ended December 31,2001 were audited by other auditors who have ceased operations. Those auditorsexpressed an unqualified opinion on those consolidated financial statements intheir report dated April 12, 2002.

 

We conducted our auditin accordance withauditing standards generally accepted in the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, the 2002 consolidated financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of INVESTools Inc. and subsidiaries as ofDecember 31, 2002, and the consolidated results of their operations and theircash flows for the year then ended in conformity with accounting principlesgenerally accepted in the United States of America.

 

As discussed in Note 3 to the consolidated financialstatements, the Company changed, effective January 1, 2002, its method ofaccounting for goodwill and other intangible assets as required by Statement ofFinancial Accounting Standards No. 142, Goodwill and Other IntangibleAssets.

 

As discussed above, the 2001 consolidated financialstatements of INVESTools Inc. and subsidiaries as listed in the accompanyingindex were audited by other auditors who have ceased operations.  As discussed in Note 3, these consolidatedfinancial statements have been revised to include the transitional disclosuresrequired by Statement of Financial Accounting Standards No. 142.  In our opinion, the disclosures for 2001 inNote 3 are appropriate.  However, wewere not engaged to audit, review, or apply any procedures to the 2001consolidated financial statements of INVESTools Inc. other than with respect tosuch reclassification adjustment and the transitional disclosures discussedabove and, accordingly, we do not express an opinion or any other form ofassurance on the 2001 consolidated financial statements taken as a whole.

 

 
| KPMG LLP          |   |
|-------------------|--------|
| Houston, Texas    |   |
| February 24, 2003 |   |   |   |

 

25

----

 

**REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS**

 

To The Board of Directors and Stockholders of INVESTools Inc.:

 

We have audited the accompanying consolidated balance sheet ofINVESTools Inc. (a Delaware corporation) and subsidiaries as of December 31,2002, and the related consolidated statement of operations, comprehensiveincome, stockholders’ equity, and cash flows for the year then ended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audit.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofINVESTools Inc. and subsidiaries as of December 31, 2002, and the results oftheir operations and their cash flows for the year then ended, in conformitywith accounting principles generally accepted in the United States.

 

 
| ARTHUR ANDERSEN LLP |   |
|---------------------|--------|
|                |   |
| Houston, Texas      |   |
| April 12, 2002      |   |   |   |

 

*NOTE: The report of Arthur Andersen LLPpresented above is a copy of a previously issued Arthur Andersen LLP report.This report has not been reissued by Arthur Andersen LLP nor has ArthurAndersen LLP provided a consent to the inclusion of its report in this Form10-K.*

 

*NOTE: The consolidated financial statementsas of December 31, 2001 and for the year then ended have been revised to include the transitional disclosures requiredby Statement of Financial Accounting Standards No. 142, Goodwill and OtherIntangible Assets (see Note 1 under the heading “Goodwill and IntangibleAssets”). The report of Arthur Andersen LLP presented above does not extend tothese changes.*

 

26

----

 

**REPORT OF INDEPENDENTCERTIFIED PUBLIC ACCOUNTANTS**

** **

The Boards of Directors of

ZiaSunTechnologies, Inc.

 

We have audited theaccompanying balance sheet of ZiaSun Technologies, Inc. and subsidiaries (theCompany) as of December 31, 2000 and the related statements of operations andcomprehensive income, changes in stockholders’ deficit and cash flows for theyear then ended.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audit.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion the financial statements referred to above presentfairly, in all material respects, the financial position of ZiaSun Technologies,Inc. and subsidiaries as of December 31, 2000 and the results of its operationsand its cash flows for the year then ended in conformity with accountingprinciples generally accepted in the United States of America.

 

BDO Seidman, LLP

Los Angeles, California

March 9, 2001, except for

Notes 3 and 10, which are as of

April 13, 2001

 

27

----

 

###### **INVESTOOLSINC. AND SUBSIDIARIES**

###### **CONSOLIDATED BALANCE SHEETS**

(in thousands)

 
|                                                                                                                                                       |   | **December 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|------------|
|                                                                                                                                                       |   | **2002**         | ** ** | **2001** | ** ** |
| **ASSETS**                                                                                                                                                 |   |             | ** ** |   | ** ** |
| Current assets:                                                                                                                                            |   |             |       |   |   |
| Cash and cash equivalents                                                                                                                                  |   | $                | 5,160      |   | $ | 5,930 |   |
| Accounts receivable, net (allowance: $150;  $150)                                                                                                          |   | 1,236            |       | 1,560 |   |
| Tax receivable                                                                                                                                             |   | 2,275            |       | 746 |   |
| Other current assets                                                                                                                                       |   | 378              |       | 407 |   |
| **Total current  assets**                                                                                                                                  |   | 9,049            |       | 8,643 |   |
|                                                                                                                                                       |   |             |       |   |   |
| Due from merchant account vendors                                                                                                                          |   | 355              |       | 351 |   |
| Goodwill and intangibles, net                                                                                                                              |   | 12,443           |       | 40,945 |   |
| Deferred tax assets                                                                                                                                        |   | 2,763            |       | 4,799 |   |
| Furniture and equipment, net                                                                                                                               |   | 591              |       | 436 |   |
|                                                                                                                                                       |   |             |       |   |   |
| **Total assets**                                                                                                                                           |   | $                | 25,201     |   | $ | 55,174 |   |
|                                                                                                                                                       |   |             |       |   |   |   |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                             |   |             | ** ** |   | ** ** |
| Accounts payable                                                                                                                                           |   | $                | 3,069      |   | $ | 3,772 |   |
| Deferred revenue                                                                                                                                           |   | 4,820            |       | 3,616 |   |
| Accrued payroll                                                                                                                                            |   | 1,095            |       | 867 |   |
| Accrued tax liabilities                                                                                                                                    |   | 504              |       | 705 |   |
| Shares subject to rescission                                                                                                                               |   | —           |       | 366 |   |
| Other current liabilities                                                                                                                                  |   | 547              |       | 1,502 |   |
|                                                                                                                                                       |   |             |       |   |   |
| **Total liabilities, current**                                                                                                                             |   | 10,035           |       | 10,828 |   |
|                                                                                                                                                       |   |             |       |   |   |
| Minority interest liability                                                                                                                                |   | —           |       | 2 |   |
|                                                                                                                                                       |   |             |       |   |   |
| **Stockholders’  equity:**                                                                                                                            |   |             | ** ** |   | ** ** |
| Convertible preferred stock (liquidation  preference $25 per share) (0 and 120 shares issued and outstanding at  December 31, 2002 and 2001, respectively) |   | —           |       | 1 |   |
| Common stock (43,206 and 40,792 shares  issued and outstanding December 31, 2002 and 2001, respectively)                                                   |   | 432              |       | 408 |   |
| Additional paid-in capital                                                                                                                                 |   | 126,663          |       | 125,855 |   |
| Deferred stock compensation                                                                                                                                |   | (91              | )          | — |   |
| Accumulated deficit                                                                                                                                        |   | (111,838         | )          | (81,920 | ) |
|                                                                                                                                                       |   |             |       |   |   |
| **Total stockholders’  equity**                                                                                                                       |   | 15,166           |       | 44,344 |   |
|                                                                                                                                                       |   |             |       |   |   |
| **Total liabilities  and stockholders’ equity**                                                                                                       |   | $                | 25,201     |   | $ | 55,174 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

28

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###### **INVESTOOLSINC. AND SUBSIDIARIES**

###### **CONSOLIDATED STATEMENTS OF OPERATIONS**

(in thousands, except per share amounts)

 
|                                                                                                    |   | **Years Ended December 31,** |       |
|---------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                                    |   | **2002**                     | ** ** | **2001** | ** ** | **2000** | ** ** |
| **Revenue**                                                                                             |   | $                            | 56,142     |   | $ | 52,691 |   | $ | 54,667 |   |
| **Costs and expenses:**                                                                                 |   |                         | ** ** |   | ** ** |   | ** ** |
| Cost of revenue                                                                                         |   | 25,411                       |       | 22,794 |   | 21,157 |   |
| General and administrative expense                                                                      |   | 26,765                       |       | 20,883 |   | 24,746 |   |
| Related party expense                                                                                   |   | 4,880                        |       | 6,004 |   | 386 |   |
| Depreciation and amortization expense                                                                   |   | 675                          |       | 4,536 |   | 3,140 |   |
| Write down of assets and other charges                                                                  |   | —                       |       | 6,454 |   | 73,051 |   |
| Total costs and expenses                                                                                |   | 57,731                       |       | 60,671 |   | 122,480 |   |
| Net loss from operations                                                                                |   | (1,589                       | )          | (7,980 | ) | (67,813 | ) |
| **Other income  (expense):**                                                                            |   |                         | ** ** |   | ** ** |   | ** ** |
| Loss on sale of assets                                                                                  |   | (1                           | )          | (38 | ) | — |   |
| Interest income (expense), net                                                                          |   | 37                           |       | (13 | ) | 352 |   |
| Minority interest income (expense)                                                                      |   | (36                          | )          | 11 |   | — |   |
| Other income (expense), net                                                                             |   | (61                          | )          | — |   | 15 |   |
| Total other income (expense)                                                                            |   | (61                          | )          | (40 | ) | 367 |   |
| **Net loss before income taxes,  discontinued operations and   cumulative effect of accounting change** |   | (1,650                       | )          | (8,020 | ) | (67,446 | ) |
| Income tax expense (benefit)                                                                            |   | (194                         | )          | — |   | 3,101 |   |
| **Net loss from continuing operations  before cumulative   effect of accounting change**                |   | (1,456                       | )          | (8,020 | ) | (70,547 | ) |
| Loss from discontinued operations, net of  tax                                                          |   | —                       |       | (132 | ) | (2,922 | ) |
| Gain (loss) on disposal of discontinued  operations, net of tax                                         |   | —                       |       | 249 |   | (3,757 | ) |
| **Net loss before cumulative effect  of accounting change**                                             |   | (1,456                       | )          | (7,903 | ) | (77,226 | ) |
| Cumulative effect of accounting change                                                                  |   | (28,417                      | )          | — |   | — |   |
| **Net loss**                                                                                            |   | (29,873                      | )          | (7,903 | ) | (77,226 | ) |
| Preferred stock dividend                                                                                |   | (45                          | )          | (10 | ) | — |   |
| **Net loss available  to common stockholders**                                                          |   | $                            | (29,918    | ) | $ | (7,913 | ) | $ | (77,226 | ) |
| Net loss per common share – basic and diluted:                                                     |   |                         |       |   |   |   |   |
| Net loss from continuing operations                                                                     |   | $                            | (0.03      | ) | $ | (0.25 | ) | $ | (2.37 | ) |
| Net income (loss) from discontinued operations                                                          |   | —                       |       | 0.01 |   | (0.23 | ) |
| Cumulative effect of accounting change net of tax                                                       |   | (0.68                        | )          | — |   | — |   |
| **Net loss available to common  stockholders**                                                          |   | $                            | (0.71      | ) | $ | (0.24 | ) | $ | (2.60 | ) |
| Basic and diluted weighted average shares  outstanding                                                  |   | 41,983                       |       | 32,684 |   | 29,744 |   |

 

###### **CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME (LOSS)**

(in thousands)

 
|                                    |   | **Years Ended December 31,** |       |
|-----------------------------------------|--------|------------------------------|------------|
|                                    |   | **2002**                     | ** ** | **2001** | ** ** | **2000** | ** ** |
| Net loss                                |   | $                            | (29,873    | ) | $ | (7,903 | ) | $ | (77,226 | ) |
| Foreign currency translation adjustment |   | —                       |       | — |   | (54 | ) |
| Comprehensive loss                      |   | $                            | (29,873    | ) | $ | (7,903 | ) | $ | (77,280 | ) |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

29

----

 

###### **INVESTOOLSINC. AND SUBSIDIARIES**

###### **CONSOLIDATED STATEMENTS OFSTOCKHOLDERS**’ EQUITY

(in thousands)

 
|                                                  |   | **Preferred Stock** |       | **Common Stock** |       | **Additional  Paid-In  Capital** |       |
|-------------------------------------------------------|--------|---------------------|------------|------------------|------------|----------------------------------|------------|
|                                                  |   | **Shares**          | ** ** | **Amount**       | ** ** | **Shares**                       | ** ** | **Amount** | ** ** |   |
| **Balance, December  31, 1999**                       |   | **—**          | ** ** | **$**            | **—** | ** **                       | **22,205** | ** ** | **$** | **22** | ** ** | **$** | **12,505** | ** ** |
| Net loss                                              |   | —              |       | —           |       | —                           |       | — |   | — |   |
| Foreign currency translation adjustment               |   | —              |       | —           |       | —                           |       | — |   | — |   |
| Issuance of stock under stock option plans            |   | —              |       | —           |       | 50                               |       | — |   | 100 |   |
| Issuance of common stock for services  rendered       |   | —              |       | —           |       | 202                              |       | — |   | 843 |   |
| Change in deferred stock compensation                 |   | —              |       | —           |       | —                           |       | — |   | 50 |   |
| Additional purchase price for OIA acquisition         |   | —              |       | —           |       | 9,820                            |       | 10 |   | 100,567 |   |
| Acquisition of subsidiaries                           |   | —              |       | —           |       | 1,020                            |       | 1 |   | 2,074 |   |
| Disposition of subsidiaries                           |   | —              |       | —           |       | (725                             | )          | — |   | — |   |
| Warrant grant                                         |   | —              |       | —           |       | —                           |       | — |   | 80 |   |
| Issuance of stock for related party debt              |   | —              |       | —           |       | 104                              |       | — |   | 690 |   |
| Repurchase of common stock                            |   | —              |       | —           |       | —                           |       | — |   | — |   |
| **Balance, December  31, 2000**                       |   | **—**          | ** ** | **$**            | **—** | ** **                       | **32,676** | ** ** | **$** | **33** | ** ** | **$** | **116,909** | ** ** |
| Net loss                                              |   | —              |       | —           |       | —                           |       | — |   | — |   |
| 4% convertible preferred stock dividends              |   | —              |       | —           |       | —                           |       | — |   | — |   |
| Issuance of common stock for services  rendered       |   | —              |       | —           |       | 48                               |       | — |   | 30 |   |
| Amortization of deferred stock compensation           |   | —              |       | —           |       | —                           |       | — |   | — |   |
| Stock received for sale of subsidiaries               |   | —              |       | —           |       | —                           |       | — |   | — |   |
| Retirement of treasury stock                          |   | —              |       | —           |       | (1,087                           | )          | (1 | ) | (1,340 | ) |
| Increase in par value of common stock                 |   | —              |       | —           |       | —                           |       | 284 |   | (284 | ) |
| Issuance of common stock for acquisition of  Telescan |   | 120                 |       | 1                |       | 9,155                            |       | 92 |   | 10,226 |   |
| Reclass to equity of share rescission  liability      |   | —              |       | —           |       | —                           |       | — |   | 314 |   |
| **Balance, December 31, 2001**                        |   | **120**             | ** ** | **$**            | **1**      | ** **                       | **40,792** | ** ** | **$** | **408** | ** ** | **$** | **125,855** | ** ** |
| Net loss                                              |   | —              |       | —           |       | —                           |       | — |   | — |   |
| 4% convertible preferred stock dividends              |   | —              |       | —           |       | —                           |       | — |   | — |   |
| Issuance of common stock for bonuses                  |   | —              |       | —           |       | 714                              |       | 7 |   | 221 |   |
| Options granted to officers for bonuses               |   | —              |       | —           |       | —                           |       | — |   | 350 |   |
| Options granted to contractors                        |   | —              |       | —           |       | —                           |       | — |   | 162 |   |
| Amortization of deferred stock compensation           |   | —              |       | —           |       | —                           |       | — |   | — |   |
| Expiration of share rescission offer                  |   | —              |       | —           |       | (78                              | )          | (1 | ) | 1 |   |
| Conversion of preferred stock                         |   | (120                | )          | (1               | )          | 1,708                            |       | 17 |   | 59 |   |
| Acquisition of minority interest                      |   | —              |       | —           |       | 70                               |       | 1 |   | 15 |   |
| **Balance, December 31, 2002**                        |   | **—**          | ** ** | **$**            | **—** | ** **                       | **43,206** | ** ** | **$** | **432** | ** ** | **$** | **126,663** | ** ** |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

30

----

 
|                                                  |   | **Treasury  Stock** |       | **Deferred  Stock****Compensation** |    | **Accumulated  Comprehensive  Income** |       | **Accumulated  Deficit** |       | **Total**  |        |
|-------------------------------------------------------|--------|---------------------|------------|-------------------------------------|---------|----------------------------------------|------------|--------------------------|------------|------------|-------------|
| **Balance, December  31, 1999**                       |   | **(34**             | **)**      | **$**                               | **(30** | **)**                                  | **$**      | **54**                   | ** ** | **$**      | **3,219**   | ** ** | **$** | **15,736** | ** ** |
| Net loss                                              |   | —              |       | —                              |    | —                                 |       | (77,226                  | )          | (77,226    | )           |
| Foreign currency translation adjustment               |   | —              |       | —                              |    | (54                                    | )          | —                   |       | (54        | )           |
| Issuance of stock under stock option plans            |   | —              |       | —                              |    | —                                 |       | —                   |       | 100        |        |
| Issuance of common stock for services  rendered       |   | —              |       | —                              |    | —                                 |       | —                   |       | 843        |        |
| Change in deferred compensation                       |   | —              |       | (6                                  | )       | —                                 |       | —                   |       | 44         |        |
| Additional purchase price for OIA  acquisition        |   | —              |       | —                              |    | —                                 |       | —                   |       | 100,577    |        |
| Acquisition of subsidiaries                           |   | —              |       | —                              |    | —                                 |       | —                   |       | 2,075      |        |
| Disposition of subsidiaries                           |   | —              |       | —                              |    | —                                 |       | —                   |       | —     |        |
| Warrant grant                                         |   | —              |       | —                              |    | —                                 |       | —                   |       | 80         |        |
| Issuance of stock for related party debt              |   | —              |       | —                              |    | —                                 |       | —                   |       | 690        |        |
| Repurchase of common stock                            |   | (766                | )          | —                              |    | —                                 |       | —                   |       | (766       | )           |
| **Balance, December  31, 2000**                       |   | **(800**            | **)**      | **$**                               | **(36** | **)**                                  | **$**      | **—**               | ** ** | **$**      | **(74,007** | **)** | **$** | **42,099** | ** ** |
| Net loss                                              |   | —              |       | —                              |    | —                                 |       | (7,903                   | )          | (7,903     | )           |
| 4% convertible preferred stock dividends              |   | —              |       | —                              |    | —                                 |       | (10                      | )          | (10        | )           |
| Issuance of common stock for services  rendered       |   | —              |       | —                              |    | —                                 |       | —                   |       | 31         |        |
| Amortization of deferred stock compensation           |   | —              |       | 36                                  |    | —                                 |       | —                   |       | 36         |        |
| Stock received for sale of subsidiaries               |   | (541                | )          | —                              |    | —                                 |       | —                   |       | (541       | )           |
| Retirement of treasury stock                          |   | 1,341               |       | —                              |    | —                                 |       | —                   |       | —     |        |
| Increase in par value of common stock                 |   | —              |       | —                              |    | —                                 |       | —                   |       | —     |        |
| Issuance of common stock for acquisition of  Telescan |   | —              |       | —                              |    | —                                 |       | —                   |       | 10,318     |        |
| Reclass to equity of share rescission  liability      |   | —              |       | —                              |    | —                                 |       | —                   |       | 314        |        |
| **Balance, December  31, 2001**                       |   | **$**               | **—** | ** **                          | **$**   | **—**                             | ** ** | **$**                    | **—** | ** ** | **$**       | **(81,920** | **)** | **$** | **44,344** | ** ** |
| Net loss                                              |   | —              |       | —                              |    | —                                 |       | (29,873                  | )          | (29,873    | )           |
| 4% convertible preferred stock dividends              |   | —              |       | —                              |    | —                                 |       | (45                      | )          | (45        | )           |
| Issuance of common stock for bonuses                  |   | —              |       | —                              |    | —                                 |       | —                   |       | 228        |        |
| Options granted to officers for bonuses               |   | —              |       | —                              |    | —                                 |       | —                   |       | 350        |        |
| Options granted to contractors                        |   | —              |       | (132                                | )       | —                                 |       | —                   |       | 30         |        |
| Amortization of deferred stock compensation           |   | —              |       | 41                                  |    | —                                 |       | —                   |       | 41         |        |
| Expiration of share rescission offer                  |   | —              |       | —                              |    | —                                 |       | —                   |       | —     |        |
| Conversion of preferred stock                         |   | —              |       | —                              |    | —                                 |       | —                   |       | 75         |        |
| Acquisition of minority interest                      |   | —              |       | —                              |    | —                                 |       | —                   |       | 16         |        |
| **Balance, December  31, 2002**                       |   | **$**               | **—** | ** **                          | **$**   | **(91**                                | **)**      | **$**                    | **—** | ** ** | **$**       | **(111,838** | **)** | **$** | **15,166** | ** ** |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

31

----

 

###### **INVESTOOLSINC. AND SUBSIDIARIES**

###### **CONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands)

 
|                                                                             |   | **Years Ended December 31,** |       |
|----------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                             |   | **2002**                     | ** ** | **2001** | ** ** | **2000** | ** ** |
| **Cash flows from  operating activities:**                                       |   |                         | ** ** |   | ** ** |   | ** ** |
| Net income (loss)                                                                |   | $                            | (29,873    | ) | $ | (7,903 | ) | $ | (77,226 | ) |
| Reconciling adjustments:                                                         |   |                         |       |   |   |   |   |
| Cumulative effect of accounting change                                           |   | 28,417                       |       | — |   | — |   |
| Impairment of goodwill                                                           |   | —                       |       | — |   | 71,756 |   |
| Write off of and loss on equity investment                                       |   | —                       |       | 5,805 |   | 200 |   |
| Depreciation and amortization                                                    |   | 675                          |       | 4,536 |   | 3,140 |   |
| Common stock/options/warrants for services                                       |   | 77                           |       | 31 |   | 923 |   |
| Accrued interest on share rescission                                             |   | —                       |       | 156 |   | — |   |
| Discontinued operations                                                          |   | —                       |       | (117 | ) | 6,679 |   |
| Changes in operating assets and  liabilities, net of the effects of acquisitions |   |                         |       |   |   |   |   |
| (Increase) decrease in accounts receivable                                       |   | 885                          |       | 282 |   | (211 | ) |
| (Increase) decrease in amounts due from  related parties                         |   | —                       |       | (20 | ) | 68 |   |
| Increase due from merchant account vendor                                        |   | (565                         | )          | (23 | ) | (231 | ) |
| (Increase) decrease in other assets                                              |   | 29                           |       | 25 |   | (109 | ) |
| Increase in deferred revenue                                                     |   | 1,204                        |       | 282 |   | 2,456 |   |
| Increase (decrease) in accounts payable                                          |   | (593                         | )          | 975 |   | 983 |   |
| Increase in payroll liabilities                                                  |   | 704                          |       | 515 |   | — |   |
| Decrease in other liabilities                                                    |   | (491                         | )          | (1,439 | ) | (1,470 | ) |
| Other                                                                            |   | —                       |       | 63 |   | 939 |   |
| Net cash provided by operating activities                                        |   | 469                          |       | 3,168 |   | 7,897 |   |
| **Cash flows from  investing activities:**                                       |   |                         | ** ** |   | ** ** |   | ** ** |
| Purchases of furniture and equipment                                             |   | (822                         | )          | (88 | ) | (197 | ) |
| Acquisition of Telescan, net of cash  acquired of $696                           |   | —                       |       | (347 | ) | — |   |
| Investment in affiliate                                                          |   | —                       |       | (250 | ) | (6,255 | ) |
| Earn-out payment to former Stockholders of  subsidiary                           |   | —­                 |       | — |   | (6,000 | ) |
| Investment in discontinued subsidiary                                            |   | —                       |       | — |   | (300 | ) |
| Other                                                                            |   | (7                           | )          | 40 |   | (52 | ) |
| Net cash used in investing activities                                            |   | (829                         | )          | (645 | ) | (12,804 | ) |
| **Cash flows from  financing activities:**                                       |   |                         | ** ** |   | ** ** |   | ** ** |
| Payments on share rescission liability                                           |   | (366                         | )          | (90 | ) | — |   |
| Purchase of treasury stock                                                       |   | —                       |       | — |   | (766 | ) |
| Proceeds from exercise of stock options                                          |   | —                       |       | — |   | 100 |   |
| Other                                                                            |   | (44                          | )          | (27 | ) | (89 | ) |
| Net cash used in financing activities                                            |   | (410                         | )          | (117 | ) | (755 | ) |
| **Increase (decrease)  in cash and cash equivalents:**                           |   | (770                         | )          | 2,406 |   | (5,662 | ) |
| **Cash and cash equivalents:**                                                   |   |                         |       |   |   |   |   |
| Beginning of year                                                                |   | 5,930                        |       | 3,524 |   | 9,186 |   |
| End of year                                                                      |   | $                            | 5,160      |   | $ | 5,930 |   | $ | 3,524 |   |
| **Other non-cash  investing and financing activities were as follows:**          |   |                         | ** ** |   | ** ** |   | ** ** |
| Stock issued for bonuses                                                         |   | $                            | 228        |   | $ | — |   | $ | — |   |
| Options issued for bonuses                                                       |   | 350                          |       | — |   | — |   |
| Conversion of preferred stock                                                    |   | 76                           |       | — |   | — |   |
| Stock issued for purchase of subsidiaries                                        |   | —                       |       | — |   | 102,653 |   |
| Conversion of related party note payable to  common stock                        |   | —                       |       | — |   | 690 |   |
| Issuance of stock subject to rescission                                          |   | —                       |       | — |   | 614 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

32

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**INVESTOOLSINC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

# **1.                SignificantAccounting Policies and Related Information**

** **

## **The Company**

 

INVESTools Inc. (the“Company” or “INVESTools,” http://www.investools.com) is a global leader ininvestor education that teaches individual investors how to achieve theirinvestment goals.  The Company providesa full range of investor education products and services that are delivered ina variety of formats, including instructor-led workshops, “at home” studyprograms, personal training sessions and educational newsletters viaemail.  INVESTools focuses its effortson providing solutions that provide lifelong learning in three ways:  by teaching basic investing concepts in atraditional learning environment, by helping graduates successfully apply whatthey have learned through personalized training and by continuously challenginggraduates to build on their knowledge through new products and services.

 

The Company wasincorporated in Delaware on May 21, 2001, but did not begin business operationsuntil December 6, 2001, when the merger transaction (the “Merger”) pursuant tothe Second Amended and Restated Agreement and Plan of Merger (the “MergerAgreement”), dated September 25, 2001, between the Company, ZiaSun Technologies,Inc. , a Nevada corporation (“ZiaSun”), and Telescan, Inc. a Delawarecorporation (“Telescan”), was consummated. The stockholders of ZiaSun and Telescan approved the Merger Agreement onDecember 6, 2001.

 

As a result of theMerger, ZiaSun and Telescan each became wholly owned subsidiaries of theCompany.  The stock-for-stock mergertransaction resulted in (i) each share of ZiaSun common stock being convertedinto the right to receive one share of the Company’s common stock, (ii) eachshare of Telescan common stock being converted into the right to receive0.55531 of a share of the Company’s common stock and (iii) each share ofTelescan preferred stock being converted into one share of the Company’spreferred stock.  No fractional sharesof the Company’s common stock were issued and cash, without interest, was paidin lieu of fractional shares.  Followingthe close of the Merger, former ZiaSun stockholders owned approximately 75% ofthe Company’s common stock and former Telescan stockholders owned approximately25%.  The Merger was accounted for underthe purchase method of accounting.

 

Following the Merger,ZiaSun was deemed the acquirer for accounting purposes.  Therefore, all of the historical financialinformation herein represents the financial results for ZiaSun for the periodsprior to the Merger.  Under the purchasemethod of accounting the results for Telescan are included in the consolidatedfinancial results only for the period subsequent to the Merger.  Refer to Note 2 for more information regardingthe financial statement impact of the Merger.

 

ZiaSun owns 100% ofOnline Investors Advantage, Inc., (“OIA”) and has no operations.  OIA owns 100% of the followingcompanies:  INVESTools Asia Pacific Pte.Ltd. (“Asia”), INVESTools Hong Kong Ltd. (“Hong Kong”), Seminar MarketingGroup, Inc. and Memory Improvement Systems, Inc.  Seminar Marketing Group, Inc. and Memory Improvement Systems,Inc. are dormant companies with no operations and Hong Kong is a developmentstage company with minimal operations. Refer to Note 2 for more information on the ownership of Asia and HongKong.

 

Telescan owns 100% ofINVESTools, Inc., a California corporation, which provides investment advisorynewsletters on the Internet.

 

## **Principles of Consolidation**

 

The consolidatedfinancial statements include the accounts of the Company and its majority-ownedsubsidiaries for which the Company exercises control.  All significant intercompany transactions have been eliminated.

## ** **

## **Use of Estimates**

 

Preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, the disclosed amounts ofcontingent assets and liabilities and the reported amounts of revenues andexpenses.  Management believes the mostsignificant estimates and assumptions are associated with the valuation ofintangibles, goodwill and taxes.  If theunderlying estimates and assumptions upon which the financial statements arebased change in future periods, actual amounts may differ from those includedin the accompanying consolidated financial statements.

## ** **

## **Segment Reporting**

 

The Company’s businessactivities are represented by two identifiable business segments:  Investor Education and Publishing andBusiness Services.  The InvestorEducation segment primarily includes all of the Company’s instructor-lededucational programs.  The Publishingand Business Services segment includes the Company’s newsletter and otherinvestor education publications.  Priorto the Merger, ZiaSun operated in a single segment.

 

Financial informationregarding reportable business segments and international operations appears inManagement’s 

 

33

----

 

Discussion and Analysisof Financial Condition and Results of Operations and in Note 10 to theConsolidated Financial Statements.

## ** **

## **Financial Instruments**

 

The carrying value of theCompany’s financial instruments approximate fair value.  Financial instruments consist primarily ofcash and cash equivalents, accounts receivable, accounts payable and otheraccrued liabilities.

## ** **

## **Cash and Cash Equivalents**

 

The Company considers allcash and cash investments with an original maturity of three months or less tobe cash equivalents.  The Company hasinvested excess cash in money market accounts and amounts included in theconsolidated financial statements approximate fair value at the balance sheetdate.  The Company maintains deposits inbanks, which may exceed the amount of federal deposit insurance available.  Management believes the potential risk ofloss on these accounts to be minimal.

## ** **

## **Accounts Receivable**

 

Approximately 90% of therevenue received for workshops, products and Web site subscriptions are paid bycredit cards.  The Company’s experiencewith chargebacks and refunds is nominal and no allowance for doubtful accountsis provided related to these receivables. Receivables from customers billed for other services are reserved whencollection becomes doubtful.

 

In 2001, in connectionwith the sale of two companies, the Company received notes receivables from thebuyers totaling $150,000 due in two equal installments on June 15, 2003 and2004.  Management has determined collectionof those receivables to be remote and has fully reserved the balance due atDecember 31, 2002 and 2001, respectively.

 

The Company had $150,000in allowance for doubtful accounts at December 31, 2002 and 2001,respectively.  During the years endedDecember 31, 2002, 2001, and 2000, the Company recorded approximately $89,000,$160,000, and $94,000 in bad debt expense, respectively.

## ** **

## **Due From Merchant Account Vendors**

 

The Company uses merchantaccount vendors to process credit card transactions.  Under the terms of these agreements, the merchant account vendorhas the right to withhold credit card funds to cover charge backs in the eventthe Company is unable to honor its commitments.  Such funds can be held for up to a year after the Company hasterminated its relationship with the merchant account vendor.  At December 31, 2002, the Company has$916,000 of funds due from merchant account vendors. Of this balance,approximately $561,000 is included in current accounts receivable because theCompany terminated the relationship with this vendor in October 2002, andexpects to receive the full balance owed by October 2003.  The Company has received approximately$321,000 of the funds subsequent to December 31, 2002.  The remaining balance of approximately$355,000 remains a long term receivable as the Company plans to continue therelationship with the vendor.

## ** **

## **Furniture and Equipment**

 

Furniture and equipmentis stated at cost less accumulated depreciation.  Depreciation is calculated on a straight-line method over theestimated useful lives of the assets, which range from two to five years.

 

Depreciation expense wasapproximately $600,000, $56,000 and $140,000 for the years ended December 31,2002, 2001 and 2000, respectively.  Theunusually high depreciation expense in 2002 is primarily due to leaseholdimprovements related to relocating the Houston facility in the first six monthsof 2002.  The Company incurredapproximately $721,000 of costs related to these improvements and is amortizingthem over the term of the lease of one year.

 

34

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Following is a detail ofthe balance sheet account (in thousands):

 
| **Furniture and equipment:**                     |   | **2002** |   | **2001** |   |
|--------------------------------------------------|--------|----------|--------|----------|--------|
| Computer and office equipment                    |   | $        | 575    |     | $      | 418 |   |
| Leasehold improvements                           |   | 645      |   | 64       |   |
| Furniture                                        |   | 120      |   | 115      |   |
| Total furniture and equipment                    |   | 1,340    |   | 597      |   |
| Less: accumulated depreciation and  amortization |   | (749     | )      | (161     | )      |
| **Furniture and  equipment, net**                |   | $        | 591    |     | $      | 436 |   |

## ** **

## **Investments**

 

At December 31, 2002 and2001, respectively, the minority interest amounts included in the financialstatements represent the share of loss associated with the minority ownershipinterest in Asia and Hong Kong through July 31, 2002.  The Company acquired the minority ownership in August 2002.

 

Periodically, the Companywill invest in private companies or joint ventures.  When the investment is less than 20% of ownership and the Companydoes not have the ability to exercise significant influence over the entity’soperations, the Company accounts for the investment under the cost method.  Under this method, the value of theinvestment is adjusted only for capital contributions and distributionsand  the carrying value is monitored forimpairment by reviewing operating performance and cash flow forecasts.  When the Company has an investment in acompany that is between 20% and 50%, or the Company exercise significantinfluence over the operations, it is accounted for under the equity methodwhere the investment balance is adjusted each period to reflect theproportionate change in earnings which is included in the incomestatement.  When the Company owns morethan a 50% interest in a company, control is assumed and the entity isconsolidated with the proportionate earnings and investment not controlled bythe Company reflected in the consolidated financial results as minorityinterest.

 

Refer to Note 2 fordetailed discussions of the Company’s acquisitions.

 

## **Goodwill and Intangible Assets**

 

On January 1, 2002, theCompany adopted the provisions of Statement of Financial Accounting Standards(“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” The provisions ofSFAS No. 142 prohibit the amortization of goodwill and certain intangibleassets that are deemed to have indefinite lives. Goodwill and indefinite-livedintangibles are required to be tested periodically for impairment and writtendown, if necessary. Amortized intangible assets are required to be tested forrecoverability using undiscounted cash flows as prescribed by SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.” In connectionwith the implementation of SFAS No. 142, the Company recognized a $28.4 millionimpairment charge to operations that has been recorded as a cumulative effectof accounting change in the consolidated statement of operations for fiscal2002.

 

Prior to the adoption ofSFAS No. 142, goodwill, which represents the excess of purchase price over thefair value of net assets acquired, was amortized on a straight-line basis overthe expected periods to be benefited, not to exceed 40 years. Goodwill waspreviously assessed for recoverability by determining whether the amortizationof the goodwill balance over its remaining life could be recovered through theundiscounted future operating cash flows of the acquired entity. The amount ofgoodwill impairment, if any, was measured based on projected discounted futureoperating cash flows using a discount rate reflecting the Company’s averagecost of funds.  The Company recognized a$72 million impairment under this method in 2000.

 

In connection with theacquisition of Telescan, the Company reviewed the intangible assets acquiredand valued them in accordance with SFAS No. 141 and No. 142.  Using a valuation methodology allowableunder SFAS No. 141, the Company determined that its software platformscontaining ProSearch and its Orbit marketing/publishing engine should becapitalized at a value of $250,000 each and assigned useful lives of 10 and 5years, respectively.  The useful liveswere determined based on the proprietary nature of the software, absence ofequivalent competitive products and the unlikelihood of any being developed,and the useful lives already realized.

 

For further informationregarding goodwill and other intangible assets, refer to Note 3.

 

35

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## **Long Lived Assets**

 

In accordance with theprovisions of SFAS 121, the Company reviews long lived assets and goodwill forimpairment.  During fiscal 2002, theCompany adopted SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.” Accordingly, the Company reviews long-lived assets, such asproperty, equipment and definite-lived intangibles subject to amortization, forimpairment whenever events or changes in circumstances may indicate that thecarrying value of an asset may not be recoverable. As required by SFAS No. 144,the Company uses an estimate of the future undiscounted net cash flows of therelated asset or group of assets over their remaining lives in measuringwhether the assets are recoverable. If the carrying amount of an asset exceedsits estimated future cash flows, an impairment charge is recognized for theamount by which the carrying amount exceeds the estimated fair value of theasset. Impairment of long-lived assets is assessed at the lowest levels forwhich there are identifiable cash flows that are independent of other groups ofassets. Assets to be disposed of are reported at the lower of the carryingamount or fair value, less the estimated costs to sell. In addition,depreciation of the asset ceases. Losses on impaired assets are recorded as aseparate component of operating expenses in the consolidated statements ofoperations.

 

The Company did notrecognize any impairment of long-lived assets during the years ended December31, 2002 and 2001.  In 2000, the Companyadjusted the carrying value of goodwill to its estimated fair value, resultingin a non-cash write down of $72 million which is included in “Write down ofassets and other charges” in the consolidated statement of operations.

## ** **

## **Income Taxes**

 

The provision for incometaxes has been determined using the asset and liability approach of accountingfor income taxes. Under this approach, deferred income taxes represent thefuture tax consequences expected to occur when the reported amounts of assetsand liabilities are recovered or paid. The provision for income taxesrepresents income taxes paid or payable for the current year plus the change indeferred taxes during the year. Deferred income taxes result from differencesbetween the financial reporting and tax basis of assets and liabilities and areadjusted for changes in tax rates and tax laws when changes are enacted.  Deferred tax assets represent net operatingloss carryforwards expected to be utilized to offset anticipated futureearnings of the Company.

 

Based upon the weight ofavailable evidence, and the nature and duration of the deferred tax assets, atDecember 31, 2002, the Company determined that it is more likely than not thatthe related benefits from deferred tax deductions will not be realized.Accordingly, the Company increased the valuation allowance on the deferred taxassets to $4.3 million during fiscal 2002 from $2.4 million as of December 31,2001.

 

During 2002, the Companypaid $3,000 in taxes and received cash refunds of  $746,000 of taxes paid in prior years.  The Company paid $3.3 million and $3.2 million in income taxes in2001 and 2000, respectively.

## ** **

## **Revenue Recognition**

 

Revenue is not recognizeduntil it is realized or realizable and earned. The criteria to meet this guideline are: 1) persuasive evidence of anarrangement exists, 2) delivery has occurred or services have been rendered, 3)the price to the buyer is fixed or determinable and 4) collectibility isreasonably assured.

 

The Company sells its productsbundled together in many different ways. Each sale is broken down into its specific element and revenue from eachelement is recognized according to the following policies:

 
| **Revenue stream**                  |   | **Recognition policy**                                                                      |
|-------------------------------------|--------|---------------------------------------------------------------------------------------------|
| Workshop revenue                    |   | Recognized at the end of the workshop                                                       |
| Home study revenue                  |   | Recognized upon shipping to customer                                                        |
| Personal training sessions          |   | Deferred upon receipt and recognized on a straight-line basis over  contract period         |
| Web Site subscriptions and renewals |   | Deferred upon receipt and recognized on a straight-line basis over  the subscription period |
| Web Site hosting                    |   | Recognized when billed                                                                      |

 

The revenue for eachelement is calculated based upon the list price of each product soldseparately.  From time to time, theCompany will offer these products together at a discounted rate.  The discount is allocated pro rata to eachelement of revenue.

 

36

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## **Deferred Revenue**

 

Deferred revenue arisesfrom subscriptions to the Web sites and personal training sessions because thecash is received before the delivery of service has been rendered.  Deferred revenue is recognized into revenueover the period of the contractual obligation.

## ** **

## **Foreign Currencies**

 

The Company’s functionalcurrency is the U.S. dollar. Accordingly, foreign entities translate monetary assets and liabilitiesat year-end exchange rates, while non-monetary items are translated athistorical rates.  Income and expenseaccounts are translated at the average rates in effect during the year, exceptfor depreciation, which is translated at historical rates.  Gains and losses resulting from thetranslation of foreign financial statements and from foreign currency as of andfor the years ended December 31, 2002 and 2001, have been immaterial.

## ** **

## **Stock-Based Compensation**

 

The Company’s long termemployee incentive plans provide for the awarding of stock options to employeesand directors.  With respect to stockoptions that were granted prior to December 31, 2002, the Company accounted forthe stock-based compensation under SFAS No. 123, *Accounting for Stock Based Compensation,*which permits usingeither the intrinsic value method or using the fair value method. The Companychose to use the intrinsic value method whereby compensation cost is measured asthe excess, if any, of the quoted market price of the Company’s stock at thedate of grant over the exercise price of the option granted. Compensation costfor stock options, if any, is recognized ratably over the vesting period. TheCompany’s policy is to grant options with an exercise price equal to the quotedclosing market price of the Company’s stock on the business day preceding thegrant date. Accordingly, no compensation cost has been recognized under theCompany’s stock option plans for the granting of stock options made prior toDecember 31, 2002.

 

In December 2002, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 148, *Accounting for Stock-Based Compensation - Transitionand Disclosure - an Amendment of FASB Statement No. 123*. Thisamendment provides alternative methods of transition for a voluntary change tothe fair value based method of accounting for stock-based employeecompensation.  In accordance with SFAS148, the following table illustrates the effect on net loss and earnings pershare if the fair value method of accounting for stock options had been appliedto all outstanding and unvested stock awards in each reported period as follows(amounts in thousands except per share amounts):

 
|                                                                                                                                                |   | **2002** |       | **2001** |       | **2000** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                                                                                                                                |   |     | ** ** |     | ** ** |     | ** ** |
| Net loss as reported                                                                                                                                |   | $        | (29,918    | )        | $          | (7,913   | )          | $ | (77,226 | ) |
|                                                                                                                                                |   |     |       |     |       |     |       |
| Deduct:   Total stock based employee compensation expense determined under fair  value based method for all awards, net of related tax effects |   | (475     | )          | (741     | )          | (439     | )          |
|                                                                                                                                                |   |     |       |     |       |     |       |
| Pro forma net loss                                                                                                                                  |   | $        | (30,393    | )        | $          | (8,654   | )          | $ | (77,665 | ) |
|                                                                                                                                                |   |     |       |     |       |     |       |
| Basic and diluted loss per share – as reported                                                                                                 |   | $        | (0.71      | )        | $          | (0.24    | )          | $ | (2.60 | ) |
| Basic and diluted loss per share – pro forma                                                                                                   |   | (0.72    | )          | (0.26    | )          | (2.61    | )          |

 

The weighted average fairvalue of options granted in 2002, 2001, and 2000 of $0.16, $0.69, and $2.40,respectively, was estimated using the Black-Scholes option pricing model withthe following assumptions:

 
|                    |   | **2002** |       | **2001**          |       | **2000** |       |
|-------------------------|--------|----------|------------|-------------------|------------|----------|------------|
|                    |   |     | ** ** |              | ** ** |     | ** ** |
| Risk Free  Factors      |   | 3.10     | %          | 4.88% to 5.14     | %          | 6.00     | %          |
| Volatility factors      |   | 145.94   | %          | 135.50% to 139.50 | %          | 45.00    | %          |
| Expected lives          |   | 5 years  |       | 7 to 10 years     |       | 4 years  |       |
| Assumed dividend  yield |   | —   |       | —            |       | —   |       |

 

On January 1, 2003, theCompany  voluntarily adopted the fairvalue expense recognition method available under SFAS No. 148.   SFAS No. 148 permits recognition on aprospective basis whereby any new options granted after January 1, 2003 will beaccounted for using the fair value method. The fair value method requires a calculation of the fair value of theoption at the date of the grant using the Black-Scholes option pricing modeland the value of the option is amortized ratably into expense over theappropriate vesting period.  The changeto fair value accounting of stock option grants is not expected to have amaterial impact on the financial statements in 2003.

 

37

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## **Advertising Costs**

 

Advertising costs areexpensed when incurred and are included in general and administrativeexpenses.  Advertising costs for theyears ended December 31, 2002, 2001 and 2000 were $8.8 million, $9.9 millionand $6.9 million, respectively.

## ** **

## **Costs of Acquisition Opportunities**

 

Internal costs associatedwith a business combination are expensed as incurred.  Direct and incremental costs related to successful negotiationswhere the Company is the acquiring company are capitalized as part of the costof the acquisition.  Costs associatedwith unsuccessful negotiations are expensed when it is probable that the acquisitionwill not occur.

## ** **

## **Earnings (Loss) Per Share**

 

Earnings (loss) per shareare computed by using the weighted average number of shares of common stockconverted and outstanding.  At December31, 2002, 2001 and 2000, there were approximately 236,000, 836,000 and 31,000shares, respectively, of common stock potentially issuable with respect tostock options and convertible preferred stock, which were excluded from the netearnings (loss) per share calculation because they are antidilutive.

## ** **

## **Recently Issued Accounting Standards**

 

In December 2002, theFASB issued SFAS Statement No. 148, *Accountingfor Stock-Based Compensation - Transition and Disclosure - an Amendment of FASBStatement No. 123*. This Statement amends SFAS Statement No. 123, *Accounting for Stock-Based Compensation,*to provide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. Inaddition, this Statement amends the disclosure requirements of Statement 123 torequire prominent disclosures in both annual and interim financial statementsabout the method of accounting for stock-based employee compensation and theeffect of the method used on reported results. The FASB has prescribed atabular format and location for the disclosures in a company’s footnotes.  This Statement requires that companieshaving a year-end after December 15, 2002 follow the prescribed format andprovide the additional disclosures in their annual reports.

## ** **

## **Reclassifications**

 

Certain prior years’balances have been reclassified to conform to the current year’spresentation.  These inconsequentialreclassifications had no impact on operating results.

** **

# **2.                Acquisitions**

** **

## **2002 Acquisition**

 

In August 2002, theCompany terminated the joint venture agreement with Messrs. Hon Leong Chong andEric Tan and purchased their 25 % interest in Asia and their ownership of HongKong, a development stage entity, the companies formed in 2001 (see discussionlater in this Note).  In considerationfor selling their interest in the Asia and Hong Kong companies, the Companyreimbursed Messrs. Chong and Tan for their original capital contribution toAsia equal to a total of approximately $14,000 and issued a total of 70,000shares of the Company’s common stock to them. Messrs. Chong and Tan remain employed by the Company as directors of theAsia and Hong Kong companies.

## ** **

## **2001 Acquisitions**

 

### ***Telescan***

 

Asdiscussed in Note 1, the Company was formed pursuant to a merger betweenTelescan and ZiaSun approved on December 6, 2001, by the stockholders of bothcompanies.  ZiaSun stockholders receivedone share of INVESTools stock for each ZiaSun share they owned as of the recorddate, Telescan common stockholders received 0.55531 shares of INVESTools commonstock for each Telescan common share they owned as of the record date andTelescan preferred stockholders received one share of INVESTools preferredstock for each Telescan preferred share they owned at the record date.  At December 31, 2001, 40,792,219 shares ofINVESTools common stock and 120,000 shares of preferred stock had been issuedto the former stockholders of ZiaSun and Telescan.

 

TheMerger was accounted for under the purchase method of accounting.  Although ZiaSun and Telescan are bothwholly-owned subsidiaries of INVESTools, ZiaSun was deemed the acquirer ofTelescan for accounting purposes.  CostsZiaSun incurred related to the acquisition totaling $1 million are included inthe purchase price.  Costs that Telescanincurred related to the acquisition were expensed on Telescan’s financialstatements prior to the date of the opening balance sheet.

 

Underthe terms of the Merger Agreement, the Company assumed Telescan’s outstandingoptions in the Merger resulting in an increase of 596,020 options to purchaseshares of the Company’s common stock. The fair value of these options has been included in the determinationof the purchase price of the Merger. The Company did not allocate any cost to 

 

38

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deferredcompensation for these options, as the portion that had not yet vested had nointrinsic value at the opening balance sheet date.

 

Uponthe closing of the Merger, certain officers of ZiaSun were entitled to receiveMerger Transition Awards totaling $3.4 million in cash that vest on theanniversary date of the Merger for the next three years as long as theseofficers are still employed with the Company. In August, 2002, the total amount of these awards was decreased to$400,000, all of which was expensed in 2002.

 

Thepurchase price for the acquisition consisted of the following (in thousands):

 
| Value of common stock and options issued |   | $     | 10,318 |   |
|------------------------------------------|--------|-------|--------|--------|
| Transaction costs                        |   | 1,043 |   |
| Total purchase price                     |   | $     | 11,361 |   |

 

Thepurchase price for the acquisition was allocated as follows (in thousands):

 
| Current assets                    |   | $      | 1,733  |   |
|-----------------------------------|--------|--------|--------|--------|
| Current liabilities               |   | (4,914 | )      |
| Furniture, fixtures and equipment |   | 125    |   |
| Deferred tax asset                |   | 4,799  |   |
| Intangibles                       |   | 500    |   |
| Goodwill                          |   | 9,118  |   |
| Total purchase price              |   | $      | 11,361 |   |

 

TheCompany expects to amortize the value assigned to the intangible assets on astraight-line basis over 5 to 10 years.

 

Thefollowing unaudited pro forma results of operations for the years endedDecember 31, 2001 and 2000, respectively, assumes the acquisition of Telescanoccurred on January 1, 2000, and assumes the purchase price has been allocatedto the assets purchased and the liabilities assumed based on their values atthe date of acquisition.  Pro forma netloss includes amortization of the intangible assets and the one time adjustmentof $661,000 related to salary adjustments related to the Merger.

 
|                                              |   | **Year Ended December 31,** |       |
|---------------------------------------------------|--------|-----------------------------|------------|
| **(in thousands, except per share data)**         |   | **2001**                    | ** ** | **2000** | ** ** |
|                                              |   |                        |       |   |   |
| Total revenue                                     |   | $                           | 69,441     |   | $ | 89,457 |   |
| Net loss from continuing operations               |   | (18,978                     | )          | (98,381 | ) |
| Net loss attributable to common stockholders      |   | (19,099                     | )          | (98,531 | ) |
| Diluted loss per share from continuing operations |   | (0.54                       | )          | (2.53 | ) |
|                                                   |        |                             |            |  |  |  |  |

 

Theforegoing unaudited pro forma results of operations are presented forillustrative purposes only and are not necessarily indicative of the operatingresults that would have occurred if the transaction had been consummated at thedates indicated.  Furthermore, suchunaudited pro forma results of operations are not necessarily indicative offuture operating results of the combined companies, due to changes in operatingactivities following the Merger, and should not be construed as representativeof the operating results of the combined companies for any future dates orperiods.

 

### ***Asia***

 

OnSeptember 7, 2001, OIA along with two Singapore individuals entered into aJoint Venture Agreement under which the parties formed a Singapore corporation,Asia, to expand OIA’s business in the Asian marketplace, including theperformance of marketing services, the distribution of OIA’s materials andconducting workshops initially in Singapore, Malaysia, Brunei and HongKong.  Prior to the acquisitiondiscussed above under “2002 Acquisition,” Asia was 75% owned by OIA and 25%owned by the individuals.

 

39

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# **3.                Goodwilland Intangible Assets**

** **

The Company has goodwillrelated to two acquisitions; the acquisition of OIA in 1999 and the acquisitionof Telescan in 2001.  In accordance withSFAS 142, goodwill is no longer amortized, but tested for impairment annually.  In connection with the preparation of thefinancial statements as of December 31, 2002, the Company compared the carryingvalue of the goodwill to the fair value of the reporting unit and determinedthat no additional impairment was warranted.

 

As part of the transitionprovisions of SFAS 142, the Company completed the impairment testing ofgoodwill during the second quarter of 2002. The impairment testing is performedin two steps: (i) the determination of impairment, based upon the fair value ofa reporting unit as compared to its carrying value, and (ii) if there is animpairment, measure the amount of impairment loss by comparing the implied fairvalue of goodwill with the carrying amount of that goodwill. Using conservativebut realistic assumptions, the Company determined that the carrying value ofthe Investor Education segment was greater than the derived fair value,indicating an impairment in the recorded goodwill. To determine fair value, theCompany relied on a discounted cash flow analysis.  Significant estimates used in the methodology included estimatesof future earnings, future growth rates and a weighted average cost ofcapital.   For goodwill valuationpurposes only, the revised fair value of this segment was allocated to theassets and liabilities of the business unit to arrive at an implied fair valueof goodwill, based upon known facts and circumstances, as if the acquisitionoccurred currently. This allocation resulted in a write-down of recordedgoodwill in the amount of $28.4 million, which has been reported as thecumulative effect of a change in accounting principle, as of January 1, 2002,in the accompanying consolidated statements of operations.

 

The carrying value ofgoodwill attributable to each reporting unit was as follows:

 
|                                    |   | **Investor  Education** |   | **Publishing  and Business  Services** |   | **Total** |   |
|-----------------------------------------|--------|-------------------------|--------|----------------------------------------|--------|-----------|--------|
| Balance at December 31, 2001            |   | $                       | 40,445 |                                   | $      | —    |   | $ | 40,445 |   |
| Adjustment to purchase price allocation |   | (70                     | )      | —                                 |   | (70       | )      |
| Impairment charge                       |   | (28,417                 | )      | —                                 |   | (28,417   | )      |
| Balance at December 31, 2002            |   | $                       | 11,958 |                                   | $      | —    |   | $ | 11,958 |   |

 

The following unauditedpro forma results of operations data for the years ended December 31, 2002,2001 and 2000 are presented as if the provisions of SFAS No. 142 had been ineffect for all periods presented:

 
|                                                            |   | **Years  Ended December 31,** |       |
|-----------------------------------------------------------------|--------|-------------------------------|------------|
|                                                            |   | **2002**                      | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                            |   |                          | ** ** |   | ** ** |   | ** ** |
| **Net loss as  reported:**                                      |   | $                             | (29,873    | ) | $ | (7,903 | ) | $ | (77,226 | ) |
| Add:  cumulative effect of change in accounting  principle |   | 28,417                        |       | — |   | — |   |
| Add:  goodwill amortization                                |   | —                        |       | 4,480 |   | 3,000 |   |
| Adjusted net loss                                               |   | $                             | (1,456     | ) | $ | (3,423 | ) | $ | (74,226 | ) |
|                                                            |   |                          |       |   |   |   |   |   |   |   |
| **Basic and diluted EPS:**                                      |   |                          |       |   |   |   |   |
| Net  loss                                                       |   | $                             | (0.71      | ) | $ | (0.24 | ) | $ | (2.60 | ) |
| Add:   cumulative effect of change in accounting principle |   | 0.68                          |       | — |   | — |   |
| Add:  goodwill amortization                                |   | —                        |       | 0.14 |   | 0.10 |   |
| Adjusted net loss                                               |   | $                             | (0.03      | ) | $ | (0.10 | ) | $ | (2.50 | ) |

 

As discussed in Note 1,in connection with the Merger, the Company reviewed the intangible assetsacquired and valued them using an allowable valuation methodology.  The Company determined that its softwareplatforms containing ProSearch and its Orbit marketing/publishing engine shouldbe capitalized at a value of $250,000 each and assigned useful lives of 10 and5 years, respectively.  The useful liveswere determined based on the proprietary nature of the software, absence ofequivalent competitive products and the unlikelihood of any being developed,and the useful lives already realized.

 

40

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|                         |   | **ProSearch** |   | **Marketing/  Publishing  Engine** |   |
|------------------------------|--------|---------------|--------|------------------------------------|--------|
| Balance at December 31, 2001 |   | $             | 248    |                               | $      | 247 |   |
| Additions                    |   | 60            |   | —                             |   |
| Amortization                 |   | (25           | )      | (50                                | )      |
| Balance at December 31, 2002 |   | $             | 283    |                               | $      | 197 |   |

 

In 2002, the Companyentered into an agreement with a third party to improve ProSearch with newfeatures for subscribers, thus enhancing the value of the intangible asset.

 

Amortization of theintangibles for the next five years is as follows (in thousands):

 
| **Years  Ending December 31,** |   |
|--------------------------------|--------|
|                           |   |   | ** ** |
| 2003                           |   | $ | 75 |   |
| 2004                           |   | 75 |   |
| 2005                           |   | 75 |   |
| 2006                           |   | 72 |   |
| 2007                           |   | 25 |   |
| Thereafter                     |   | 98 |   |
| Total                          |   | $ | 420 |   |

# **4.                IncomeTaxes**

** **

The provision for incometaxes consists of the following (in thousands):

 
|                               |   | **Years Ended December 31,** |       |
|------------------------------------|--------|------------------------------|------------|
|                               |   | **2002**                     | ** ** | **2001** | ** ** | **2000** | ** ** |
| **Current:**                       |   |                         |       |   |   |   |   |
| Federal                            |   | $                            | (2,391     | ) | $ | — |   | $ | 3,101 |   |
| State                              |   | 161                          |       | — |   | — |   |
| **Deferred:**                      |   | —                       |       | — |   | — |   |
| Federal                            |   | 2,385                        |       | — |   | — |   |
| State                              |   | (349                         | )          | — |   | — |   |
| Total income tax expense (benefit) |   | $                            | (194       | ) | $ | — |   | $ | 3,101 |   |

 

The following tablereconciles the differences between the statutory Federal income tax rate andthe effective tax rate for continuing operations (in thousands):

 
|                                                      |   | **Years Ended December 31,** |       |
|-----------------------------------------------------------|--------|------------------------------|------------|
|                                                      |   | **2002**                     | ** ** | **2001** | ** ** | **2000** | ** ** |
| Federal statutory rate                                    |   | $                            | (561       | ) | $ | (2,727 | ) | $ | (23,986 | ) |
| State income taxes, net of Federal income  tax benefit    |   | (124                         | )          | — |   | — |   |
| Expenses not deductible for tax purposes                  |   | (30                          | )          | 1,545 |   | 25,453 |   |
| Disallowed loss on foreign subsidiaries                   |   | —                       |       | 15 |   | 1,227 |   |
| Effect of net income not subject to taxing  jurisdictions |   | —                       |       | — |   | 923 |   |
| Adjustment to valuation allowance                         |   | 1,945                        |       | 2,376 |   | — |   |
| Change in deferred tax rate                               |   | (826                         | )          | — |   | — |   |
| Other                                                     |   | (598                         | )          | 1,209 |   | (516 | ) |
| Total income tax expense (benefit)                        |   | $                            | (194       | ) | $ | — |   | $ | 3,101 |   |

 

41

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The tax effects oftemporary differences that give rise to significant portions of the Federal andstate deferred tax assets are comprised of the following (in thousands):

 
|                             |   | **Years Ended December 31,** |       |
|----------------------------------|--------|------------------------------|------------|
|                             |   | **2002**                     | ** ** | **2001** | ** ** |
| **Deferred tax  liabilities**    |   | $                            | —     |   | $ | — |   |
| **Deferred tax  assets:**        |   |                         |       |   |   |
| Allowance for bad debts          |   | 59                           |       | 89 |   |
| Accrued liabilities              |   | 480                          |       | 118 |   |
| Book/tax depreciation            |   | 997                          |       | 570 |   |
| Net operating loss carry forward |   | 5,548                        |       | 6,398 |   |
| Total deferred tax assets        |   | 7,084                        |       | 7,175 |   |
| Valuation allowance              |   | (4,321                       | )          | (2,376 | ) |
| Net deferred tax assets          |   | $                            | 2,763      |   | $ | 4,799 |   |

 

At December 31, 2002, theCompany had available approximately $14 million of net operating loss carry forwardsfor federal income tax purposes.  Thiscarry forward, which may provide future tax benefits, begins to expire in2009.  Additionally, U.S. Federal incometax law limits a corporation’s ability to utilize net operating losses if itexperiences an ownership change of greater than 50% over a three-yearperiod.  The company’s utilization ofits net operating loss is subject to an annual limitation of $791,000.

 

In assessing therealizability of deferred tax assets at December 31, 2002, the Company consideredwhether it was more likely than not that some portion or all of the deferredtax assets would not be realized.  Theultimate realization of deferred tax assets is dependent upon the generation offuture taxable income during the periods in which those temporary differencesbecome deductible.  The Companyconsiders the scheduled reversal of deferred tax liabilities, projected futuretaxable income and tax planning strategies in making this assessment.  Management believes that it is more likelythan not that future operations will generate the approximately $18 million intaxable income required over the next 15 years to utilize the deferred taxasset.

 

# **5.                Commitmentsand Contingencies**

** **

## **Commitments**

 

### ***Interest Paid***

 

TheCompany paid $3,000, $8,000 and $26,000 for interest during the years endedDecember 31, 2002, 2001 and 2000, respectively.

 

### ***Operating Leases***

 

TheCompany has commitments to lease office space in six locations through2006.  Two of these leases are on amonth-to-month basis and the remaining four are non-cancelable leases.  At December 31, 2002, the Company hadmodified its lease in Houston to month-to-month and reduced the rent expense to$6,000 per month, beginning in May 2003. The Company is in a free rent period until that time.  The Company is in the process of expandingits back office operations in Provo, Utah and expanding this lease from itscurrent 8,000 square feet to approximately 15,000 square feet by April of2003.  This will increase the rentexpense by approximately $7,000 per month for the remaining two years of thelease term.

 

TheCompany also continues to lease space for data center operations at a rate of$18,000 for a term running through April 2005.

 

Rentexpense for property leases totaled $1.1 million, $371,000 and $299,000 for theyears ended December 31, 2002, 2001 and 2000, respectively.

 

Leaseexpense for operating leases totaled $951,000, $62,000 and $11,000 for theyears ended December 31, 2002, 2001 and 2000, respectively.  By the end of 2002, the Company had terminatedalmost all operating leases covering equipment.

 

42

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Futureminimum payments under non-cancelable leases are as follows (in thousands):

 
| **Years  Ending December 31,** |
|--------------------------------|
|                           |
| 2003                           |   | $ | 833 |   |
| 2004                           |   | 831 |   |
| 2005                           |   | 259 |   |
| 2006                           |   | 155 |   |
| 2007                           |   | — |   |
| Thereafter                     |   | — |   |
| Total                          |   | $ | 2,078 |   |

### *** ***

### ***EmploymentAgreements***

 

InAugust 2002, the Company amended the employment agreements of twoexecutives.  Under the new agreements,these employees will each receive 1) salary totaling $250,000 per year ascompared to $350,000 as originally agreed, 2) merger transition bonusestotaling $400,000 to be paid during 2002 and 2003 as compared to $1.2 millionto be paid over three years as originally agreed, and 3) options to purchase300,000 shares of the Company’s common stock at an exercise price of $.18 pershare in lieu of the $175,000 cash payment as originally agreed.  These changes will reduce expensesapproximately $1 million over the next two years.

## ** **

## **Contingencies**

 

From time to time, theCompany is involved in certain legal actions arising from the ordinary courseof business.  It is the opinion ofmanagement that such litigation will be resolved without a material adverseeffect on the Company’s financial position or results of operations.

** **

# **6.                Stockholders’Equity**

** **

## **Classes of Capital Stock**

 

The Company has twoclasses of capital stock: convertible preferred stock and common stock.  The Company is authorized to issue up to 60million shares of common stock with a par value of $.01 per share and 1 millionshares of convertible preferred stock with a par value of $.01 per share.

 

As part of the Merger,holders of Telescan 4% Convertible Preferred Stock received 120,000 shares ofINVESTools 4% Convertible Preferred Stock. In accordance with the agreement to which the stock was issued, on May15, 2002 the 120,000 outstanding shares of the Series A Convertible PreferredStock converted into 1,666,667 shares of common stock.  Accrued dividends of $75,000 were convertedinto 41,667 shares of common stock in accordance with the preferred stockagreement.  At December 31, 2002, thereare no shares of preferred stock outstanding.

## ** **

## **Common Stock Activity**

### *** ***

### ***2002***

 

In2002, the Company compensated officers with a total of approximately 694,000shares in lieu of cash payment of bonuses. During the third quarter, the Company also issued to the outside membersof the Board of Directors a total of 20,000 shares of common stock as paymentin lieu of cash bonuses.  The Companyrecorded expense of $187,000, the estimated fair value of the stock issued.

 

Aspart of the compensation to Messrs. Chong and Tan for their minority interestin Asia and Hong Kong, the Company issued each of them 35,000 shares of commonstock in December 2002.  The Companyrecognized $16,000 of additional consideration for the acquisition of theminority interest in connection with the share issuance.

 

Aspart of finalizing the share rescission offer to former stockholders initiatedin 2001, the Company received approximately 78,000 shares from employees duringthe first quarter of 2002.  The Companyretired these shares upon receipt. Refer to Note 13 above for more information.

### *** ***

### ***2001***

 

In2001, the Company compensated its Board of Directors members with a total of48,000 shares of restricted common stock for their service.  The Company recorded expense of $30,000, theestimated fair value of the stock issued.

 

43

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### ***2000***

 

InNovember 2000, the Company compensated its Board of Directors members with atotal of 71,660 shares of restricted common stock for their service.  The Company recorded expense of $137,000,the estimated fair value of the stock issued.

 

InMarch 2000, the Company issued 30,000 shares of restricted common stock to aconsulting firm for services rendered. The Company recorded expense of $273,000, the estimated fair value ofthe stock issued.

 

# **7.                StockOption Plans**

 

## **Employee Stock Option Plans**

 

The Company’s purpose ofgranting stock options is to attract, retain, motivate and reward officers,directors and employees of the Company.

 

### ***Description ofPlans***

 

#### INVESTools 2001Stock Option Plan

 

This plan isthe only plan the Company can grant options out of at this time.  The Company has reserved 6.0 million sharesfor grant under this plan, which was approved by stockholders in December 2001,for issuance to officers, directors and employees.  Incentive options are granted at fair market value of theCompany’s common stock at the date of grant, as determined by the Board ofDirectors, and generally expire ten years from the date of grant.

 

#### Telescan StockOption Plans

 

The Companyreserved 427,456 shares of its common stock for issuance under three stockoption plans for the employees and former directors of Telescan.  No new options are being granted under theseplans.  Options granted under theseplans were granted at fair market value at the date of grant and generallyexpire ten years from the date of grant.

 

#### INVESToolsCalifornia Stock Option Plans

 

The Companyreserved 13,139 shares of its common stock for issuance under three stockoption plans for employees and consultants of INVESTools, Inc., a Californiacorporation and wholly owned subsidiary of Telescan.  No new options are being granted under these plans.  Options granted under these plans weregranted at fair market value at the date of grant and generally expire tenyears from the date of grant.

 

#### ZiaSun StockOption Plans

 

The Companyreserved 1,296,600 shares of its common stock for issuance under one stockoption plan for the officers, employees and former directors of ZiaSun.  No new options are being granted under thisplan.  Options granted under this planwere granted at fair market value at the date of grant and generally expire tenyears from the date of grant.  In 2000one grant from this plan was granted at a discount and deferred compensation ofapproximately $50,000 was recorded at the date of grant.  Deferred compensation expense of $36,000 and$14,000 was recognized into the consolidated statements of operation in 2001and 2000, respectively.

 

44

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### ***Employee StockOption Plan Activity***

 

Thefollowing is a summary of option activity under these plans:

 
|                                   |   | **Total Shares****Under Option** |   | **Weighted Average  Exercise Price** |   |
|----------------------------------------|--------|----------------------------------|--------|--------------------------------------|--------|
| Balance, December 31, 1999             |   | 75,000                           |   | $                                    | 2.00   |   |
| Granted                                |   | 342,400                          |   | 5.73                                 |   |
| Exercised                              |   | (50,000                          | )      | 2.00                                 |   |
| Cancelled                              |   | (42,000                          | )      | 6.38                                 |   |
| Balance, December 31, 2000             |   | 325,400                          |   | 5.36                                 |   |
| Grants related to Telescan acquisition |   | 596,020                          |   | 10.78                                |   |
| Granted                                |   |                             |   |                                 |   |
| ZiaSun grants                          |   | 1,366,500                        |   | 0.75                                 |   |
| New INVESTools grants                  |   | 2,050,000                        |   | 0.49                                 |   |
| Cancelled                              |   | (267,624                         | )      | 3.43                                 |   |
| Balance, December 31, 2001             |   | 4,070,296                        |   | 2.28                                 |   |
| Granted                                |   | 600,000                          |   | 0.18                                 |   |
| Cancelled                              |   | (283,101                         | )      | 8.85                                 |   |
| Balance, December 31, 2001             |   | 4,387,195                        |   | $                                    | 1.57   |   |

 

Thefollowing table summarizes information about options outstanding at December31, 2002:

 
|                           |   | **Options Outstanding** |       | **Options Exercisable**                                       |       |
|--------------------------------|--------|-------------------------|------------|---------------------------------------------------------------|------------|
| **Range  of Exercise  Prices** |   | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Years of  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number********Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $0.00 -$10.00                  |   | 4,302,659               |       | 7.88                                                          |       | 1.00 |   | 1,520,863 |   | 1.73 |   |
| $10.01 - $20.00                |   | 23,777                  |       | 5.85                                                          |       | 14.61 |   | 23,777 |   | 14.61 |   |
| $20.01 - $30.00                |   | 9,749                   |       | 6.82                                                          |       | 24.66 |   | 9,749 |   | 24.66 |   |
| $30.01 - $40.00                |   | 50,456                  |       | 7.05                                                          |       | 38.99 |   | 50,456 |   | 38.99 |   |
| $40.01 - $50.00                |   | 554                     |       | 7.18                                                          |       | 44.12 |   | 554 |   | 44.12 |   |
|                           |   | 4,387,195               |       | 7.86                                                          |       | $ | 1.57 |   | 1,605,399 |   | $ | 3.25 |   |
|                                |        |                         |            |                                                               |            |  |  |  |  |  |  |  |  |

### *** ***

### ***Stock OptionsGranted to Third Parties***

 

Telescanand ZiaSun granted options to certain outside vendors as payment for servicesrendered in years prior to 2001.  Theoptions were valued based on the value of the services received, if morereadily determinable, or at fair market value of the option at the date of thegrant.  At the date of the Merger, theseoptions converted into options to purchase 62,472 shares of common stock of theCompany with a weighted average exercise price of $29.32 and a weighted averageremaining contractual life of two years. There has been no additional activity of this type during 2002 or 2001.

 

ZiaSun issued 308,000 options that vest over fouryears to contractors the company used in the educational area of thebusiness.  The Company recorded $132,000of deferred compensation expense that is being recognized into income over thefour year vesting period.

 

# **8.                EmployeeBenefits**

** **

At December 31, 2002, theCompany has two defined contribution 401(k) Profit Sharing Plans for itsemployees; the OIA 401(k) Plan and the Telescan 401(k) Plan.  The plans provide participants a mechanismfor making contributions for retirement savings.  Each participant may contribute specified amounts of eligiblecompensation.

 

45

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There is no Company matchof participant contributions to the OIA 401(k) Plan at this time.  The Company matches participantcontributions in the Telescan 401(k) Plan up to 1% of salary.

 

The Company intends toconsolidate the plans during 2003.

 

# **9.                RelatedParties**

** **

## **Generation Marketing, LLC**

 

In the second half of2000, D. Scott Elder and Ross W. Jardine, each an executive officer anddirector of the Company, and Scott Harris and David McCoy, each an executiveofficer of the Company, each contributed 20% of the capital towards theformation of a new marketing company, Generation Marketing, to ensurecontinuity in the Company’s marketing efforts. In 2001, this ownership percentage fell to 16.7% for each of them.  Prior to 2002, Generation Marketing handledall of the Company’s marketing expenditures. In May 2002, David McCoy sold his interest to a third party.  In December 2002, a shareholder not relatedto INVESTools approached Messrs. Elder, Jardine and Harris to buy out theirinterests in Generation Marketing.  Thesale was finalized in February 2003.

 

The Company paid $4.9 million,$6.0 million and $400,000 in marketing expenses to Generation Marketing in eachof the periods ended December 31, 2002, 2001 and 2000, respectively.

## ** **

## **OIA Earn-Out**

 

On July 26, 2001, ZiaSunentered into a Second Amendment to Acquisition Agreement, effective as of July1, 2001, with D. Scott Elder and Ross Jardine, each an officer and a directorof the Company, and David McCoy and Scott Harris, each an officer of theCompany.  Due to the accrual of apotential liability for sales taxes payable by OIA to various states, ZiaSunand Messrs. Elder, Jardine, McCoy and Harris determined that an adjustment ofthe number of shares received by Messers. Elder, Jardine, McCoy and Harrispursuant to the provisions for the OIA earn-out, as provided for in the originalacquisition agreement might be required. Such sales tax liability is reflected on the Company’s financialstatements for the year ended December 31, 2000 for sales by OIA that hadoccurred in 1998, 1999 and 2000.

 

Paragraph 1.6 of theoriginal acquisition agreement between ZiaSun and Messers. Elder, Jardine,McCoy and Harris provided for an adjustment of the number of shares each wouldreceive based on the actual earnings of OIA during the period of April 1, 1999through March 31, 2000.  In the eventthat the actual OIA earnings were greater than $2.5 million, ZiaSun was toissue additional shares to each recipient on the basis of one additional sharefor each $1.00 of actual OIA earnings greater than $2.5 million.

 

Following the end of theearn-out period, OIA’s audited EBITDA earnings for the period were reported as$10.9 million, which would result in the Company owing 21,820,152 post-splitadjusted shares of common stock at March 31, 2000 to each recipient.  The value of these shares at March 31, 2000,was $248.2 million, which amount would have been added to the goodwill ofZiaSun’s balance sheet.  ZiaSun andMessers. Elder, Jardine, McCoy and Harris jointly recognized that it would notbe in the best interest of the company to have such a large goodwill burdengoing forward.  As a result, the partiesentered into an Amendment to Agreement dated May 31, 2000, amending theearn-out provisions of the acquisition agreement.  Pursuant to the amendment, Messers. Elder, Jardine, McCoy andHarris would exchange 12,000,000 of the post-split adjusted shares they were toreceive pursuant to the acquisition agreement for $6.0 million in cash andwould receive 9,820,152 post-split adjusted shares of the company’s commonstock, of which 5,000,000 shares had been previously of ZiaSun issued and wereheld in escrow pursuant to the terms of the acquisition agreement.  A total of 4,840,152 new restricted shareswere issued on an aggregate basis to Messers. Elder, Jardine, McCoy and Harris.

 

Pursuant to the SecondAmendment to Acquisition Agreement, the Company and Messers. Elder, Jardine,McCoy and Harris reached an agreement such that if, during a three-year periodcommencing on July 1, 2001 through June 30, 2004, any sales tax liability ispaid for sales made during the earn-out period, the Company shall absorb and besolely responsible for the payment of any actual sales tax liability up to anamount of $554,000.  In the event thatthe actual sales tax paid by the ZiaSun on sales made by OIA during such three-year period exceeds $554,000,then Messers. Elder, Jardine, McCoy and Harris shall reduce, return and deliverto ZiaSun one share of ZiaSun’s common stock for each $0.50 of actual sales taxpaid in excess of $554,000.

** **

# **10.             Segments**

** **

Following the Merger, theCompany has two reportable business segments: Investor Education, which isprimarily the operations of OIA, and Publishing and Business Services, which isprimarily the operations of Telescan. The reportable segments are managed separately by the management teamsin place before the Merger.  Corporateand Eliminations consists primarily of the corporate operations of ZiaSunexcluding OIA and intercompany eliminations, the most significant of which

 

46

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is an $11 millionelimination of intercompany receivables in 2001.  Prior to the Merger, ZiaSun operated in a single segment.  The accounting policies of the segments arethe same as those described in Note 1. Financial results of the Company for the years ended December 31, 2002and 2001 for each segment are as follows (in thousands):

 
| **As of and  for the years ended December 31,**    |   | **Investor  Education** |       | **Publishing and  Business Services** |       | **Corporate and  Eliminations** |       | **Total** |       |
|----------------------------------------------------|--------|-------------------------|------------|---------------------------------------|------------|---------------------------------|------------|-----------|------------|
| **2002**                                           |   |                    | ** ** |                                  | ** ** |                            | ** ** |      | ** ** |
| Revenue                                            |   | $                       | 48,784     |                                  | $          | 7,949                           |       | $         | (591       | ) | $ | 56,142 |   |
| Depreciation and amortization                      |   | 120                     |       | 555                                   |       | —                          |       | 675       |       |
| Cumulative effect of accounting change, net of tax |   | (28,417                 | )          | —                                |       | —                          |       | (28,417   | )          |
| Net loss                                           |   | (26,664                 | )          | (3,171                                | )          | (38                             | )          | (29,873   | )          |
| Assets                                             |   | 24,738                  |       | 6,963                                 |       | (6,500                          | )          | 25,201    |       |
| Goodwill and intangibles                           |   | 11,958                  |       | 485                                   |       | —                          |       | 12,443    |       |
| **2001**                                           |   |                    |       |                                  |       |                            |       |      |       |
| Revenue                                            |   | $                       | 51,991     |                                  | $          | 700                             |       | $         | —     |   | $ | 52,691 |   |
| Depreciation and amortization                      |   | 4,522                   |       | 5                                     |       | 9                               |       | 4,536     |       |
| Net income (loss)                                  |   | 43                      |       | (210                                  | )          | (7,736                          | )          | (7,903    | )          |
| Assets                                             |   | 50,471                  |       | 15,916                                |       | (11,213                         | )          | 55,174    |       |
| Goodwill and intangibles                           |   | 31,327                  |       | 9,618                                 |       | —                          |       | 40,945    |       |

 

Enterprise wideinformation regarding our geographical concentration is presented below.  Revenues are attributable to countries basedon the location of the classroom workshop. Foreign revenues consist solely of sales in the Investor EducationSegment.

 
| **(in thousands)**     |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net revenue            |   |     |   |     |   |     |   |
| United States          |   | $        | 49,907 |     | $      | 44,771   |   | $ | 46,218 |   |
| North America-non U.S. |   | 3,384    |   | 3,914    |   | 5,826    |   |
| Europe                 |   | 497      |   | 271      |   | 527      |   |
| Asia                   |   | 1,749    |   | 720      |   | 1,569    |   |
| Australia              |   | 530      |   | 2,192    |   | 339      |   |
| Africa                 |   | 75       |   | 823      |   | 188      |   |
| Total                  |   | $        | 56,142 |     | $      | 52,691   |   | $ | 54,667 |   |

** **

# **11.             DiscontinuedOperations**

** **

On May 10, 2001, ZiaSunsold its subsidiary Momentum Asia, Inc. (“MAI”).  ZiaSun acquired MAI on October 5, 1998 in a stock-for-stockexchange.  Under the terms of the saleagreement, the Company received 200,000 shares of ZiaSun common stock that wereowned by the purchaser.  In connectionwith the sale, ZiaSun paid MAI $50,000 to provide MAI with working capital andMAI transferred to ZiaSun 130,000 shares of ZiaSun common stock that was ownedby MAI.  All the shares acquired as aresult of this transaction, were subsequently canceled.  The Company recognized a $564,000 gain onthe sale in 2001.

 

On June 29, 2001, ZiaSunsold Asia PrePress Technology, Inc. (“APT”), a wholly-owned subsidiary ofZiaSun acquired on May 22, 2000.  TheCompany received 100,000 restricted shares of ZiaSun common stock owned by thepurchaser and have been canceled, and for $50,000 note payable in twoinstallments to ZiaSun over a three year period.  Further, APT obtained the release of ZiaSun’s guaranty of APT’sline of credit with First Union National Bank. The Company recognized a $385,000 loss on the sale in 2001.

 

On June 29, 2001, ZiaSunsold Asia Internet Services.com, Inc. (“AIS”), a wholly owned subsidiary ofZiaSun acquired on May 22, 2000.  TheCompany received 150,000 restricted shares of ZiaSun common stock owned by thepurchaser and have been canceled, and for $100,000 note payable in twoinstallments to ZiaSun over a three year period.  The Company recognized a $176,000 gain on the sale in 2001.

 

On October 1, 2001,ZiaSun sold its entire 25% equity interest (5,400,000 restricted shares) inAsia4Sale.com, Inc. in 

 

47

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consideration for 200,000shares of ZiaSun common stock and $30,000 in cash payable at closing.  Following the close of the transaction inearly October 2001, the 200,000 shares of ZiaSun common stock were canceled.  The Company recognized a $106,000 loss onthe sale in 2001.

** **

# **12.             Investments**

** **

In July 2000, the Companyentered into a venture fund agreement with the McKenna Group, a third partyentity.  The name of the newly formedfund is McKenna-ZiaSun (“MKZ” or the “Fund”). The purpose of the Fund is to invest in emerging, early-stage technologycompanies, either through the McKenna Venture Accelerator, now know as McKennaCapital, LLC (“MVA”), a limited liability company formed in July 2000, orthrough other means as determined by the Investment Board of MKZ.  Under the terms of the venture fundagreement, as amended, the Company shall receive 60% of the distributed profitsof MKZ, and the McKenna Group will receive 40%.  The accounts of MKZ have been consolidated with those of theCompany and its subsidiaries as ZiaSun controls the investment making decisionsof the Fund.  The Company issued 100,000shares of restricted common stock in 2000 to two advisors, one of whom is arelated party who assisted in consummating the venture fund agreement.  The Company recorded expense of $433,000related to the restricted stock grant, which is the estimated fair value of thestock on the date of grant.  The Companyrecorded operating expense related to MKZ of approximately $649,000 and$1,095,000, included in the Statement of Operations under the caption “Writedown of assets and other charges,” in 2001 and 2000, respectively.

 

Under the original MKZagreement, the Company agreed to fund MKZ with $15,000,000.  However, in April 2001, the Company andMcKenna Enterprises, Inc. agreed to limit ZiaSun’s commitment to MKZ to$9,150,000, $7,500,000 of which had been contributed to MKZ during the yearended December 31, 2000.  As of December31, 2000, the Company had an outstanding commitment to MKZ in the amount of$1,650,000.  During 2001, the Companycontributed $250,000 to MKZ.  Byagreement between the McKenna Group, McKenna Enterprises, Inc. and ZiaSun inDecember 2001, certain assets and liabilities of the Fund were specificallyassumed by the parties with McKenna Enterprises, Inc. taking 100% ownership ofcertain equity investments and assuming responsibility for a $504,000 fundingobligation to MVA and ZiaSun taking 100% ownership of the investment in MVA andassuming responsibility for a $1,400,000 funding obligation to MVA.  MKZ had no other assets and liabilities thanthose described herein.

 

The Company hasdetermined that the best use of its liquid assets is to keep them available tofinance its Investor Education segment. In April 2002, the Company reached an agreement with the other partiesthat it will contribute its investment in MVA to MVA as in-kind satisfaction ofits $1,400,000 funding obligation.

 

The Company has certaininvestments valued at zero, which it acquired in its merger with Telescan.  All such investments had been earlierwritten off by Telescan.

 

The Company accounted forits investment in MVA under the equity method of accounting.  The Company recorded approximately $1.2million and $200,000 in 2001 and 2000, respectively, related to equity inlosses of MVA.  In conjunction with theagreement to liquidate its investment in MVA, as disclosed above, the Companybelieves its investment in MVA is impaired. The Company recorded a non-cash charge of approximately $4.6 millionrelated to the impairment of its investment in MVA.  Both the equity in losses and the write down of the investmentare included in the Statement of Operations under the caption “Write down of assetsand other charges.”

** **

# **13.             SharesSubject to Rescission**

** **

In September 2000, theCompany acquired all of the issued and outstanding shares of Seminar MarketingGroup, Inc. (“SMG”) for 370,000 shares of unregistered and restricted shares ofthe Company’s common stock.  The issuanceof these shares was intended to be issued in a transaction exempt from theregistration requirements under the Securities Act of 1933 (Securities Act)pursuant to Rule 506 of Regulation D. Upon subsequent review of the transactionby the Company’s attorneys, it was determined that the issuance of the sharesdid not meet the technical requirements of the Securities Act.  In January 2001, the Company made an offerof rescission to the former SMG Stockholders pursuant to which they would becompensated with a cash amount equal to the consideration paid for the sharesoriginally granted plus the statutory rate of interest of 12%.  The SMG Stockholders had until February 6,2002 to accept or reject the offer. During 2001, the Company paid approximately $90,000 to SMG Stockholdersto rescind their shares.  All but sixSMG Stockholders accepted the offer to rescind the shares.  The liability at December 31, 2001 of$366,000 does not include the amount reclassified from the share rescissionliability into additional paid in capital related to these six Stockholders asthe deadline for these individuals had passed and the possibility of having anyof these individuals later exerting their rights to the rescission offer isconsidered very remote.  Refer to Note15 for additional discussion of first quarter 2002 activity related to theshare rescission liability.

 

48

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# **14.             SubsequentEvents**

** **

## **Tax Refund Received**

 

In February 2003, theCompany received a tax refund from the Internal Revenue Service of $462,000related to taxes paid in prior years.

## ** **

## **Generation Marketing**

 

In December 2002, ashareholder not related to INVESTools approached Messrs. Elder, Jardine andHarris to buy out their interests in Generation Marketing.  This sale was finalized in February 2003 andGeneration Marketing is no longer considered a related party to INVESTools.

## ** **

## **Shares Issued to Officers**

 

In November 2002, theBoard of Directors authorized payment of the third quarter bonuses to certainofficers of the Company.  Each officerelected to receive part of his bonus either in Company common stock, in cash,or in a combination thereof.  By March15, 2003, approximately $40,000 had been paid in cash for these bonuses, butthe stock portion had not been distributed.

 

49

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# **15.             UnauditedSelected Quarterly Results of Operations**

** **
|                                                                             |   | **Quarters Ended** |       |
|----------------------------------------------------------------------------------|--------|--------------------|------------|
| **(in thousands, except per share data)**                                        |   | **12/31/02**       | ** ** | **9/30/02** | ** ** | **6/30/02** | ** ** | **3/31/02** | ** ** |
|                                                                             |   |               | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Revenue                                                                          |   | $                  | 16,028     |   | $ | 12,228 |   | $ | 14,466 |   | $ | 13,420 |   |
| Income from continuing operations before  cumulative effect of accounting change |   | 603                |       | (367 | ) | (838 | ) | (854 | ) |
| Cumulative effect of change in accounting  principle                             |   | (243               | )          | 10 |   | — |   | (28,184 | ) |
| Net income (loss)                                                                |   | $                  | 300        |   | $ | (357 | ) | $ | (838 | ) | $ | (29,038 | ) |
| Basic earnings per share of stock                                                |   |               |       |   |   |   |   |   |   |
| Income (loss) from continuing operations                                         |   | $                  | 0.01       |   | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) |
| Cumulative effect of change in accounting principle                              |   | (0.00              | )          | — |   | — |   | (0.69 | ) |
|                                                                             |   |               |       |   |   |   |   |   |   |
| Net income (loss)                                                                |   | $                  | 0.01       |   | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.71 | ) |
|                                                                             |   |               |       |   |   |   |   |   |   |
| Weighted average shares outstanding - basic                                      |   | 41,983             |       | 42,653 |   | 41,578 |   | 40,778 |   |
|                                                                             |   |               |       |   |   |   |   |   |   |
| Diluted earnings per share of common stock                                       |   |               |       |   |   |   |   |   |   |
| Income (loss) from continuing operations                                         |   | $                  | 0.01       |   | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) |
| Cumulative effect of change in accounting principle                              |   | $                  | (0.00      | ) | $ | — |   | $ | — |   | $ | (0.69 | ) |
|                                                                             |   |               |       |   |   |   |   |   |   |
| Net income (loss)                                                                |   | $                  | 0.01       |   | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.71 | ) |
|                                                                             |   |               |       |   |   |   |   |   |   |
| Weighted average shares outstanding -  diluted                                   |   | 42,943             |       | 42,653 |   | 41,578 |   | 40,778 |   |
|                                                                             |   |               |       |   |   |   |   |   |   |
|                                                                             |   | **Quarters Ended** |       |
|                                                                             |   | **12/31/01**       |       | **9/30/01** |   | **6/30/01** |   | **3/31/01** |   |
|                                                                             |   |               |       |   |   |   |   |   |   |
| Revenue                                                                          |   | $                  | 12,814     |   | $ | 10,103 |   | $ | 15,541 |   | $ | 14,233 |   |
| Income from continuing operations                                                |   | (5,579             | )          | (1,418 | ) | 70 |   | (1,093 | ) |
| Income from discontinued operations                                              |   | 311                |       | (50 | ) | (4 | ) | (140 | ) |
| Net income (loss)                                                                |   | $                  | (5,268     | ) | $ | (1,468 | ) | $ | 66 |   | $ | (1,233 | ) |
|                                                                             |   |               |       |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted earnings per share                                             |   |               |       |   |   |   |   |   |   |
| Continuing operations                                                            |   | $                  | (0.16      | ) | $ | (0.04 | ) | $ | — |   | $ | (0.04 | ) |
| Discontinuing operations                                                         |   | 0.01               |       | (0.01 | ) | — |   | — |   |
|                                                                             |   |               |       |   |   |   |   |   |   |
| Earnings per share – basic and diluted                                      |   | $                  | (0.15      | ) | $ | (0.05 | ) | $ | — |   | $ | (0.04 | ) |
|                                                                             |   |               |       |   |   |   |   |   |   |
| Weighted average shares outstanding – basic  and diluted                    |   | 34,245             |       | 31,825 |   | 32,317 |   | 32,315 |   |

 

Earnings per share are computed independently for each of the quarterspresented.  Therefore, the sum of thequarterly earnings per share may not equal the total for the year.

 

50

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