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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549



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FORM 10-K



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(Mark One)

|x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------



For the fiscal year ended: July 31, 2004



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



For the transition period from              to
            .



Commission File Number 000-21535



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ProsoftTraining

(Exact name of Registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|NEVADA                                                         |  | 87-0448639                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



410 N. 44thStreet, Suite 600, Phoenix, AZ 85008

(Address of principal executive offices) (Zip Code)



(602) 794-4199

(Registrants telephone number, including area code)



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

None



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

Common Stock, Par Value $.001 Per Share

(Title of class)



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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve (12) months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90)
days.    YES  x    NO ̈



Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. ̈



Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the
Act).    YES ̈NO  x



The aggregate market value of common stock held by non-affiliates (excludes
outstanding shares beneficially owned by directors and officers) as of October 27, 2004, was approximately $8.0 million. As of such date 24,309,624 shares of common stock, $.001 per value, were outstanding.



Part III is incorporated by reference from the Registrants definitive
proxy statement for its 2004 Annual Meeting of Stockholders to be filed with the Commission within 120 days of July 31, 2004.



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PROSOFTTRAINING



TABLE OF CONTENTS



|         |  |                                                                                       |  |     
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                       |  | Page
|         |  | PART I                                                                                |  |     
|Item 1.  |  | Business                                                                              |  | 3   
|         |  | Organization History                                                                  |  | 3   
|         |  | Businesses                                                                            |  | 3   
|         |  | Customers                                                                             |  | 6   
|         |  | Competition.                                                                          |  | 7   
|         |  | Sources of Revenue                                                                    |  | 7   
|         |  | Sales, Marketing and Customer Support                                                 |  | 7   
|         |  | Seasonality                                                                           |  | 8   
|         |  | Trademarks and Copyrights                                                             |  | 8   
|         |  | Employees                                                                             |  | 8   
|         |  | Regulations                                                                           |  | 8   
|Item 2.  |  | Properties                                                                            |  | 8   
|Item 3.  |  | Legal Proceedings                                                                     |  | 9   
|Item 4.  |  | Submission of Matters to Vote of Security Holders                                     |  | 9   
|         |  | PART II                                                                               |  |     
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  | 10  
|Item 6.  |  | Selected Financial Data                                                               |  | 10  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 10  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 18  
|Item 8.  |  | Financial Statements and Supplementary Data                                           |  | 19  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting & Financial Disclosure    |  | 35  
|Item 9A. |  | Controls and Procedures                                                               |  | 35  
|Item 9B. |  | Other Information                                                                     |  | 35  
|         |  | PART III                                                                              |  |     
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  | 36  
|Item 11. |  | Executive Compensation                                                                |  | 36  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 36  
|Item 13. |  | Certain Relationships and Related Transactions                                        |  | 36  
|Item 14. |  | Principal Accountant Fees and Services                                                |  | 36  
|         |  | PART IV                                                                               |  |     
|Item 15. |  | Exhibits and Financial Statement Schedules                                            |  | 37  
|         |  | Signatures                                                                            |  | 39  
|         |  | Exhibit Index                                                                         |  | 40  



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PART I



FORWARD-LOOKING
STATEMENTS



This Annual Report on Form 10-K contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than historical or current facts, including, without limitation, statements about
our business strategy, plans and objectives of management and our future prospects, are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such forward-looking
statements are subject to risks and uncertainties that could cause actual results to differ materially from these expectations. These risks and uncertainties are beyond our control and, in many cases, we cannot predict the risks and uncertainties
that could cause our actual results to differ materially from those indicated by the forward-looking statements.



ITEM I. BUSINESS



Organization History



ProsoftTraining (Prosoft or the Company or we or our) was originally incorporated under the laws of the State of Nevada as Tel-Fed, Inc. (Tel-Fed). Beginning in February 1995, the
Companys business was operated as a sole proprietorship (the Proprietorship). In December 1995, Pro-Soft Development Corp., a California corporation (Old ProSoft), was incorporated and acquired the business from the
Proprietorship effective January 1, 1996. In March 1996, Tel-Fed entered into an Agreement and Plan of Reorganization (the Reorganization Agreement) with Old ProSoft and the Old ProSoft stockholders. Under the terms of the Reorganization
Agreement, Old ProSoft stockholders received one share of Tel-Fed common stock in exchange for each of their shares of Old ProSoft, and Old ProSoft became a wholly-owned subsidiary of Tel-Fed (the Reorganization). As part of the
Reorganization, all of the executive officers and directors of Tel-Fed resigned and the executive officers and directors of Old ProSoft became the executive officers and directors of Tel-Fed and the Company changed its name from Tel-Fed, Inc. to
ProSoft Development, Inc. The Company changed its name to Prosoft I-Net Solutions, Inc. in October 1996, to ProsoftTraining.com. in December 1998, and to ProsoftTraining in July 2001.



Businesses



Content Development and
Distribution



Prosoft develops content for, and
distributes one of the largest libraries of, Information and Communications Technology (ICT) curriculum in the world. Content revenue is derived from the sale of course materials in the form of books, CD-ROMs, self-study kits, assessment
products, Internet-based course books, royalties and content licenses. The Company derives the majority of its content revenue from the sales of course books and related materials. Content licenses represent a minor portion of the Companys
revenue and are sold either on a fee-per-use basis or for a one-time fee.



The Companys content is focused on education and training for job-role and vendor-specific certifications. Other products offered by Prosoft assist in developing proficiency in specific computer programs,
programming languages or operating systems. As of July 2004, the Companys library consisted of approximately 800 unique course titles covering software and hardware products, programming, and certification programs such as, A+, Network+,
Microsoft, Linux, Cisco, Sun and the Companys proprietary certification programs including CIW, CCNT, and Convergent Technologies Professional (CTP). Many of these titles are produced in multiple learning modalities such as
instructor-led training (ILT), Web-based training (WBT), and computer-based training (CBT) and often include supplementary assessment products. These products are also sold combined into a blended
learning offering called Classroom-in-a-Box.



Content
Distribution



Through its ComputerPREP division, Prosoft
has built a distribution network with a wide range of customers including academic institutions, commercial training centers, corporations, and individuals. The



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Company provides products to a diverse client list that includes New Horizons, Corinthian Colleges, NETg, IKON Office Solutions, CompUSA, American Express,
IBM, General Dynamics, Chevron, Proctor & Gamble, Dupont, SBC Communications, Iwatsu, Mitel, Toshiba, Inter-Tel, AT&T, Avaya, Panasonic, CALPERS, the NYSE, the Food & Drug Administration, the Federal Aviation Administration, the Federal
Reserve Bank, the Department of State, the U.S. Naval Academy, the U.S. Air Force, the U.S. Department of Agriculture, the Pennsylvania House of Representatives, and a broad variety of community colleges, technical colleges and high schools. The
learning center channel represented approximately 37 percent of Prosofts fiscal year 2004 content revenues, followed by 34 percent for the academic channel and 23 percent for corporate customers.



ComputerPREP also manages an authorized channel of over 500 CIW Authorized
Training Providers (ATP) and Authorized Academic Partners (AAP) worldwide. Commercial channel partners generally pay a small membership fee for the rights to sell and teach Official Curriculum while academic channel partners
usually agree to place a minimum courseware order when joining the authorized channel program.



ComputerPREP seeks to establish a competitive advantage by distributing in-house developed education solutions for IT job certifications such as CIW, A+, MOS and Network+. ComputerPREP proprietary curriculum provides
a comprehensive ILT solution that includes innovative features, integrates classroom and Web-based learning, and appeals to a wide variety of learners. ComputerPREP classroom materials for A+, Network+, Linux+ and Security+ have earned the CompTIA
Authorized Quality Curriculum seal of approval. This third-party review, conducted by ProCert Labs, states that it highly recommends the curriculum to ICT educators and learners.



ComputerPREP offers academic market versions of all of its major products and
has pursued a focused initiative to increase revenue from the academic channel. Its education solutions include a classroom-based assessment that allows teachers to control questions and monitor scores. Academic products also include syllabi, extra
labs, WebCT cartridges, Blackboard e-packs and other teaching aids that meet the needs of this market. All of these features can be purchased in a single product package called Classroom-in-a-Box.



Prosoft has reached agreement with seven states for the endorsement and
implementation of the CIW program in their education systems. These arrangements position the Company to provide states, school districts and workforce development agencies with education solutions designed to integrate an industry-standard
certification into statewide curricula. Prosoft believes it is uniquely positioned to meet the needs of this growing market.



The Company distributes its content broadly outside the United States. The majority of the Companys content revenues are from the United States and
Canada (84 percent), followed by Europe, Middle East and Africa (EMEA) (12 percent). Prosoft distributes its content and maintains a direct sales presence in the EMEA region through its Prosoft Europe Ltd. wholly-owned subsidiary, based
in Limerick, Ireland. The Companys wholly-owned subsidiary Prosoft Hong Kong Ltd. (PHK), based in Hong Kong, expands its reach, develops partnerships, combats piracy of its products, and seeks endorsements in the Asia-Pacific
region. Prosoft also distributes content through a contractual relationship in Japan and has established a representative office in China.



Content Development



The Company has built a sizable library of proprietary content through a disciplined internal development process. Prosoft has a content development team
responsible for new product development and regular updates of existing titles in its library. The team is comprised of course directors, project managers, editors, publishers, and subject matter experts.



Prosoft develops content using its Proprietary Content Architecture
(PCA). All proprietary content has been developed using PCA. This modular architecture allows Prosoft to create comprehensive products for instructors and students in both the learning center and academic channels from a single set of
underlying



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content. The Company has developed and owns content for all of its major product lines including CIW, A+, MOS, Network+, Linux+, CTP and CCNT. The Company
believes its commitment to frequently update its content to reflect the most recent technology, evolving industry standards and best practices provides a competitive advantage. This commitment helps ensure Prosofts core products
remain relevant and continue to meet the needs of its customers.



Certification Development, Ownership and Management



The Company owns and manages two proprietary job-role certifications, CIW and CCNT, and has developed and manages the CTP certification program for the Telecommunications Industry Association (TIA).
Prosoft develops certification exams and provides candidates with access to these exams through commercial testing sites in the Prometric and VUE networks, each of which has testing affiliates in over 100 countries. These are the same testing
services used by other leading certification providers such as Novell, Microsoft and Cisco. As the owner and manager of the certification programs, the Company also creates official preparatory courseware and manages an authorized channel of
official training centers.



The Company develops certification
exams that validate a level of knowledge related to a set of skills or topics. The CIW program focuses on certification for job roles such as Site Designer, Web Developer and Security Professional. The CCNT program targets basic data communications,
basic telecommunications and telephony, while the CTP program focuses on data networking, telephone networking and convergence technologies. The exams are published electronically through the testing provider network and cost the candidate between
$65 and $175 in the United States. Entry-level certifications generally require a single exam, while professional-level certifications typically require between three and seven exams. Prosofts certification programs have received the support
and endorsement of non-profit, widely recognized organizations that have important visibility and credibility among policy makers, academic institutions and industry leaders.



The Companys certification revenues consist of student testing fees (94 percent of fiscal year 2004 certification
revenues) and fees paid by institutions to participate in the Companys authorized programs (6 percent of fiscal year 2004 certification revenues). Prosoft believes it has certification growth potential due to the integration of certifications
into academic curricula, the continuing shortage of ICT skills in todays workforce, and the increasing recognition of portable vendor-neutral job-role certifications.



Prosoft also provides certification management services to organizations and associations that want to develop and promote
their own ICT certifications. Through its successful creation and development of the CIW and CCNT certification programs, the Company proved its ability to develop certifications, develop supporting content to provide education in support of those
certifications, establish and develop proprietary distribution channels, implement testing delivery networks, build and implement certified faculty and instructor programs, and drive content demand through certification success. As a result of these
successes, Prosoft was chosen by the TIA to develop, manage and serve as the official content provider for the CTP certification program, which launched in July 2002.



CIW



Prosoft owns both the CIW certification and the Official CIW Curriculum. With over 75,000 certifications earned by September 2004, the CIW program has
become one of the largest programs among the more than 300 existing ICT certifications. The CIW certification covers job roles in network administration, security, application development, programming, Web design and e-commerce. Candidates from more
than 100 countries have earned a CIW certification.



The
Company seeks to create more growth of CIW by promoting vendor-neutral job-role standards in workforce development and academic communities. In the United States, CIW has received support and endorsement from the National Workforce Center for
Emerging Technology, along with statewide educational agencies in seven states.



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Internationally, CIW has also received recognition or endorsement from governmental and
quasi-governmental organizations. As a result of PHKs active involvement in Australia, Hong Kong, Singapore, India, and China, numerous endorsements of CIW and CCNT have been received in those countries. The Master CIW Administrator track has
been endorsed by the Hong Kong Computer Society and certified by the IT Training Quality and Certification Institute of Hong Kong. The CIW certification has been accredited by Singapores National Infocomm Competency Centre and endorsed under
the Critical Infocomm Technology Resource Programme.



CCNT



In December 2000, Prosoft acquired Mastery Point Learning
Systems. Mastery Point developed the CCNT certification program under the direction of the TIA to serve the needs of telephone companies and network service providers. CCNT is a vendor-neutral credential program for the convergence technology
industry that validates an individuals knowledge of basic data communications, basic telecommunications and telephony. Convergence technology is the merging of voice, video and data on a single network, integrating telecommunications and
computer technologies. CCNT is a six-test low-stakes program is supported by both classroom and Web-based e-learning courses. Prosofts CCNT exams and curriculum are sponsored and endorsed by the TIA. In China, Beijing Telecom serves as the
master distributor of CCNT education and testing for all of China.



CTP



Prosoft began working with the TIA in
2001 to fulfill its members need for a convergence certification for the customer-premise equipment side of the telecommunications industry. The CTP Certification Advisory Council was formed in January 2002, with representatives from Cisco,
Avaya, IBM, Siemens, Nortel, Mitel and First Communications, to provide assistance in creating the CTP certification exam. Prosoft created Official CTP courseware and a CTP authorized training channel. Prosoft shares testing revenue from this
program with the TIA. To date, CTP has been endorsed by Comdial, Cisco, Avaya, Nortel, Mitel, Inter-Tel, Iwatsu, NEC America and Toshiba as either a prerequisite to those entities IP telephony certifications, product certifications, or dealer
network certifications.



Services



The Company effectively exited the services business in fiscal year 2002,
currently has no employees or investments in the services business and does not anticipate any material services revenue in the future. This business was the primary source of revenue for the Company for the fiscal years 1998 through 2000.



Customers



We serve four major
customer groups: commercial learning centers, academic institutions, corporations and individuals.



Commercial Learning Centers. In fiscal year 2004, 37 percent of Prosofts content revenue came from commercial learning centers. The
commercial learning center channel is composed of companies that provide individuals and corporations short-format courses in a commercial setting. Course length in this channel ranges from one day to two weeks. The primary customer of the
Companys channel partners is a corporation seeking specialized training for its employees on technical topics. This channel is highly fragmented, with the largest companies responsible for a small percentage of the total market. Large chains
in this channel are New Horizons, Learning Tree, and CompUSA. In fiscal year 2004, New Horizons and its franchisees accounted for 10 percent of the Companys content revenue. No other customer accounted for more than five percent of content
revenue.



Academic Institutions. In fiscal year 2004, 34
percent of Prosofts content revenue came from academic institutions. The academic channel is composed of high schools, community colleges, technical and vocational



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schools and other degree-granting institutions. Course length in this channel is tied to academic semesters or quarters. This channel also provides
continuing education in a format that competes directly with commercial learning centers. The academic channel is highly fragmented and no customer in this channel accounted for more than five percent of Prosofts content revenue in
fiscal year 2004.



Corporations. In fiscal year 2004, 23
percent of Prosofts content revenue came from corporate customers. Internal training departments and corporate universities represent the majority of customers in this channel. These customers typically purchase the same products as commercial
learning centers. No customer in this channel accounted for more than five percent of Prosofts content revenue in fiscal year 2004.



Individuals. A small amount of content revenue is generated from sales directly to individuals. These sales generally occur through our
ComputerPREP.com website. In addition, virtually all certification exams are sold directly to individuals. Individuals register and pay for exams through an authorized Prometric or VUE testing center. Individuals are not required to complete
training courses or buy content prior to taking an examination.



Competition



Both the content and
certification business segments are highly competitive and there currently are only minor economic barriers to entry into either business. Prosoft faces competition from many other companies offering training and certification services and products,
including the internal training departments of corporations and publishing units of large corporations. Some of Prosofts competitors have access to greater resources and capital than are currently available to the Company. Prosoft competes in
general ICT skills courseware with Element K, Thomson Learning and Pearson LLC, each of which has one or more subsidiaries that sells courseware. The trade association CompTIA offers i-Net+, a certification that competes directly with Prosofts
CIW Associate certification. Trade associations such as the World Organization of Webmasters have released certification exams that compete with aspects of Prosofts certification programs. Individuals can and often do earn multiple
certifications, and Prosofts certifications focus on job skills rather than product-specific curricula offered by Microsoft, Cisco and other large vendors. However, these vendors have more resources to attract candidates to their programs than
does Prosoft.



Sources of Revenue



We derive
revenue primarily from two sources: content sales and certification testing.



Content Revenue. Content revenue includes fees received from the sale of course materials such as books, CD-ROMs, Web-based course books, assessment products and content licenses. Prosoft recognizes content
revenue from the sale of course books and other products when they are shipped. License revenue is recognized over the period in which Prosoft has a commitment for continuing involvement or obligation to provide services to the customer. In most
cases, no such commitment exists, and revenue is recognized when content is shipped.



Certification Revenue. Certification revenue includes fees paid by certification candidates to take Prosofts certification examinations and annual fees received from CIW and CTP ATPs and AAPs. Prosoft
recognizes certification revenue when certification tests are administered, and partner fees over the period during which it has a commitment for continuing involvement or obligation to provide services to the partner.



The Company effectively exited the services business in fiscal 2002, yet
continues to earn some residual revenue in this business when it trains the instructors of learning center providers of companies that plan to conduct courses internally. Prosoft recognizes services revenue, if any, when such services are provided.



Sales, Marketing and Customer Support



Prosoft sells and markets its certification exams, content and integrated courses to students primarily through a channel of academic institutions and commercial learning centers. As of September 30, 2004, we had



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21 people directly involved in sales, marketing and customer support in the United States, Asia, and Europe. Our customer service organization in Phoenix
accepts, enters and reviews domestic and EMEA courseware orders. Because many of our customers need to make last-minute adjustments or wait to order courseware until a few days before a class starts, its quick-response capability is a competitive
advantage.



Seasonality



Our revenue and
income can vary from quarter to quarter due to seasonal and other factors. We generally experience greater revenue in the second half of the fiscal year (February through July) than in the first half of the fiscal year (August through January). In
the European market, August is usually a poor month because many workers take their summer holiday at that time. In the United States, the period from Thanksgiving through New Years Day tends to be slow for the education and training industry.
Other seasonality is due to academic market purchasing cycles, customers spending patterns and variations in corporate training budgets.



Trademarks and Copyrights



Copyright laws protect most of our content. We have also received or filed for trademark and service mark registration for certain of our products, tag lines and feature names. We will continue to protect our trademarks and seek copyright
registration for newly developed content, software products and any other material assets.



Employees



As of September 30,
2004, we employed 47 people worldwide.



Regulations



Most of the
jurisdictions in which we operate regulate and license certain kinds of vocational, trade, technical or other post-secondary education. Management believes that employer-funded or reimbursed ICT training is exempt from such requirements in most of
the United States. To the extent that Prosoft participates in programs funded by government entities, it applies for licensing in the regulatory jurisdiction. If Prosoft was found to be in violation of a states licensing or other regulatory
requirements, it could be subject to civil or criminal sanctions, including monetary penalties. We are also subject to federal, state and local regulations concerning the environment, occupational safety and health standards. We have not experienced
significant difficulty in complying with such regulations and compliance has not had a material effect on our business or its financial results.



ITEM 2. PROPERTIES



As of
September 30, 2004, the Company had entered into leases for commercial space in the following locations:



|                  |  |                |  |              |        |                  |              
|----------------- |  | -------------- |  | ------------ | ------ | ---------------- | -------------
|Location          |  | Square Footage |  | Monthly Cost |        | Lease Expiration
|Phoenix, Arizona  |  | 13,301         |  | $            | 29,209 |                  | April 2006   
|Limerick, Ireland |  | 1,900          |  | $            | 2,082  |                  | February 2005



The Phoenix, Arizona
location is our headquarters, which provides a location for executive and administrative offices and serves our content development activities, sales, content publishing, IT, certification and customer service purposes. The Limerick facility serves
sales and customer service purposes.



During fiscal year 2004,
we closed our Eden Prairie, Minnesota and our Santa Ana, California facilities following the expiration of the leases on these properties.



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ITEM 3. LEGAL PROCEEDINGS



From
time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of this report, we are not a party to any legal proceedings.



ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS



The Companys 2003 Annual Meeting of Stockholders was held on August 26, 2004. At the Annual Meeting, the following directors were elected to serve as Class I directors for a three-year term and until their
respective successors are elected and qualified.



|                  |  |            |  |               
|----------------- |  | ---------- |  | --------------
|                  |  | Votes For  |  | Votes Withheld
|Robert G. Gwin    |  | 20,935,527 |  | 231,824       
|J. William Fuller |  | 20,990,622 |  | 231,824       



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PART II



ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS



The Companys common stock currently trades on the NASDAQ SmallCap Market, under the trading symbol POSO. Prior to October 8, 2002, the
Companys common stock traded on the NASDAQ National Market. The following table sets forth for each quarter during fiscal years 2004 and 2003, the low and high sale prices per share of our common stock as reported by NASDAQ.



|                                  |  |     |      |      |   |     
|--------------------------------- |  | --- | ---- | ---- | - | ----
|Quarter                           |  | Low |      | High
|May 1, 2004July 31, 2004         |  | $   | 0.38 |      | $ | 0.96
|February 1, 2004April 30, 2004   |  | $   | 0.44 |      | $ | 1.89
|November 1, 2003January 31, 2004 |  | $   | 0.44 |      | $ | 0.97
|August 1, 2003 October 31, 2003   |  | $   | 0.30 |      | $ | 0.60
|May 1, 2003July 31, 2003         |  | $   | 0.14 |      | $ | 0.66
|February 1, 2003April 30, 2003   |  | $   | 0.09 |      | $ | 0.20
|November 1, 2002January 31, 2003 |  | $   | 0.12 |      | $ | 0.28
|August 1, 2002October 31, 2002   |  | $   | 0.14 |      | $ | 0.38



On October 24, 2004,
the Company had approximately 6,900 stockholders of record.



To
date, no dividends have been declared or paid on any capital stock of the Company, and the Company does not anticipate paying any dividends in the foreseeable future.



ITEM 6. SELECTED FINANCIAL DATA



The selected financial data set forth below should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto and other information contained elsewhere in this report.



|                                             |  |                                       |        |   |      |   |        |      |  |   |         |   |  |      |        |   |  |   |       
|-------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | - |  | ---- | ------ | - |  | - | ------
|                                             |  | Year Ended July 31,                  
|                                             |  | 2004                                  |        |   | 2003 |   |        | 2002 |  |   | 2001    |   |  | 2000
|                                             |  | (In thousands, except per share data)
|Consolidated Statement of Operations Data:   |  |                                       |        |   |      |   |        |      |  |   |         |   |  |      |        |   |  |   |       
|Revenue                                      |  | $                                     | 8,048  |   |      | $ | 12,020 |      |  | $ | 17,922  |   |  | $    | 31,425 |   |  | $ | 19,572
|Income (loss) from operations                |  |                                       | (1,264 | ) |      |   | (2,024 | )    |  |   | (41,372 | ) |  |      | (4,932 | ) |  |   | 1,427 
|Net income (loss)                            |  |                                       | (1,566 | ) |      |   | (2,308 | )    |  |   | (42,459 | ) |  |      | (4,167 | ) |  |   | 1,631 
|Net income (loss) per share:                 |  |                                       |        |   |      |   |        |      |  |   |         |   |  |      |        |   |  |   |       
|Basic                                        |  |                                       | (.06   | ) |      |   | (.10   | )    |  |   | (1.77   | ) |  |      | (.18   | ) |  |   | .09   
|Diluted                                      |  |                                       | (.06   | ) |      |   | (.10   | )    |  |   | (1.77   | ) |  |      | (.18   | ) |  |   | .08   
|                                             |  |                                       |        |   |     
|Consolidated Balance Sheet Data at Year End: |  |                                       |        |   |      |   |        |      |  |   |         |   |  |      |        |   |  |   |       
|Total assets                                 |  | $                                     | 8,622  |   |      | $ | 10,579 |      |  | $ | 15,107  |   |  | $    | 55,216 |   |  | $ | 58,519
|Short-term debt                              |  |                                       | 98     |   |      |   | 54     |      |  |   | 59      |   |  |      | 121    |   |  |   | 85    
|Long-term debt                               |  |                                       | 3,264  |   |      |   | 3,032  |      |  |   | 2,816   |   |  |      | 158    |   |  |   | 246   
|Stockholders equity                         |  |                                       | 3,837  |   |      |   | 5,351  |      |  |   | 7,576   |   |  |      | 49,572 |   |  |   | 50,372



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following discussion and analysis should be read in conjunction with our Audited Consolidated Financial Statements and related Notes thereto contained
elsewhere in this Report. The information contained in this Annual Report on Form 10-K is not a complete description of our business or the risks associated with an



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investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed
with the Securities and Exchange Commission (SEC), including our subsequent reports on Forms 10-Q and 8-K, which discuss our business in greater detail.



The section entitled Additional Factors That May Affect Results of Operations and Market Price of Stock set
forth on Page 16 in this report, and similar discussion in our other SEC filings, discusses some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in
addition to the other information in this Report and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock.



All statements included or incorporated by reference in this Report, other than statements or characterizations of historical fact, are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to, statements regarding future results, future financing needs, changes in business strategy,
competive advantages, market growth, future profitability, and factors affecting liquidity. Without limiting the foregoing, the words believes, anticipates, plans, expects may,
could, continue, potential and similar expressions are intended to identify forward-looking statements. Those forward-looking statements represent the Companys judgement as of the date of the filing of this
Annual Report on Form 10-K. Our actual results could differ materially and adversely from those expressed in any forward-looking statement as a result of various factors, some of which are listed under the section Additional Factors That May
Affect Results of Operations and Market Price of Stock. The Company disclaims any intent or obligation to update any forward-looking statements for any reason.



Development of Business



ProsoftTraining was founded in 1995 as a proprietorship that delivered training in vocational and advanced technical subjects. After completing a private
placement of stock in March 1997, the Company embarked on a strategy to build a nationwide network of learning centers to teach technical skills for the emerging Internet market. Overhead costs associated with the bricks-and-mortar
network significantly outpaced revenues. In fiscal year 1999, the Company closed the learning center network and focused exclusively on selling its content and instructional services to the technology training industry and building its proprietary
certification programs. The demand for instruction services declined sharply from fiscal year 2000 to fiscal year 2002. At the end of fiscal year 2002, the Company reduced its full-time instructor base to zero and effectively exited the services
business. The Company has refocused its business on offering job-role certifications and proprietary content solutions to academic institutions and adult education providers.



Proposed Merger and Termination of Proposed Merger



On February 22, 2004 the Company entered into a definitive merger agreement with Trinity Learning Corporation
(Trinity), with the intent of merging with Trinity to create a global learning company. Despite the efforts of Trinity and Prosoft, the challenges to completing the merger ultimately could not be overcome. As a result, Prosofts
board of directors determined that the Companys stockholders were better served by remaining an independent entity. On July 23, 2004, Prosoft and Trinity announced they had mutually agreed to terminate the merger agreement between the
companies.



Results of Operations



Revenues



Total revenues for 2004 decreased 33 percent compared with 2003, to $8.05
million. Total revenues for 2003 were $12.02 million, a decrease of 33 percent compared with 2002. The decline in total revenues for both years was driven by continued weakness in corporate training budgets resulting in sharply reduced purchases of
our courseware products by our learning center customers.



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Content revenues in 2004 decreased by 33 percent, or $3.08 million, compared to 2003, and decreased by 31
percent, or $4.20 million, in 2003 compared with 2002. The decline in content revenues for both years was driven by continued weakness in corporate training budgets resulting in sharply reduced purchases of our content products by our learning
center customers.



Certification revenues in 2004 decreased by
31 percent to $1.79 million compared to 2003, and decreased by 33 percent to $2.60 million for 2003 compared with 2002. Certification revenues consist of CIW, CTP and CCNT certification exam fees and annual fees received from CIW and CTP ATPs.
The revenue declines in 2004 and 2003 were related to continued weakness in the technology training sector.



Services revenues in 2003 decreased by 84 percent, or $0.45 million, compared with 2002. The decrease in 2003 was the result of our exiting the services
business at the end of the 2002 fiscal year.



Cost of
Revenues



Cost of revenues in 2004 decreased by $1.72
million, or 39 percent, compared with 2003. As a percentage of revenue, gross profit, defined as total revenue less costs of revenue, increased to 67 percent in 2004 from 63 percent in 2003. The decrease in cost of revenues was primarily a
result of lower revenues. The increase in gross profit percentage was primarily due to operating cost reductions and efficiency gains.



Cost of revenues in 2003 decreased by $4.73 million, or 52 percent, compared with 2002. As a percentage of revenue, gross profit increased to 63 percent
in 2003, from 49 percent in 2002. The decrease in cost of revenues was primarily due to the decrease in content and services revenues and cost reductions implemented during fiscal year 2003. The increase in gross profit percentage was primarily due
to substantial operating cost reductions achieved through a broad restructuring of our operations and our exit from the low-margin services business.



Content Development



Content development expenses in 2004 decreased by $0.83 million, or 57 percent, when compared with 2003. Content development expenses in 2003 decreased
by $0.69 million, or 32 percent, when compared with 2002. The 2004 and 2003 dollar decreases were largely the result of lower personnel costs associated with the strategic reduction in headcount implemented during the second half of 2003 and the
first half of 2004.



Sales and Marketing



Sales and marketing expenses decreased by $0.97
million, or 27 percent, in 2004 as compared with 2003 and decreased by $3.08 million, or 46 percent, in 2003 as compared with 2002. As a percent of revenue, sales and marketing expenses increased 3 percentage points in 2004 as compared with 2003 and
decreased 7 percentage points in 2003 as compared with 2002. The dollar decrease in 2004 is attributable to lower sales commissions. The dollar decrease in 2003 is attributable to lower sales commissions and lower fixed personnel costs.



General and Administrative



General and administrative expenses decreased by $1.25 million, or 30
percent, in 2004 as compared with 2003. General and administrative expenses decreased by $1.56 million, or 28 percent, in 2003 as compared with 2002. As a percent of revenue, general and administrative expenses increased 1 percentage point in 2004
as compared with 2003 and increased 2 percentage points in 2003 as compared with 2002. The dollar decreases in 2004 and 2003 were attributable to personnel reductions and cost containment and efficiency efforts.



During the second half of fiscal 2004, the Company was involved in a planned
merger with Trinity Learning Corporation. The merger was abandoned in July 2004 and the Company has recorded $0.26 million of related non-recurring costs as general and administrative expenses.



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Depreciation and Amortization



Depreciation expense was $0.23 million, $0.57 million and $0.79 million for
the years ended July 31, 2004, 2003 and 2002, respectively. The decrease in 2004 when compared to 2003 was primarily due to the closing of the Santa Ana, California and Eden Prairie, Minnesota offices. The decrease in 2003 when compared to 2002 was
primarily due to the closing of the Austin, Texas office.



Amortization expense associated with goodwill and other acquired intangibles was $0.26 million, $0.26 million and $2.35 million for the years ended July 31, 2004, 2003 and 2002, respectively. The decrease in amortization expense for 2004
and 2003 when compared to 2002 was attributable to no amortization of goodwill following the adoption of SFAS No. 142 effective August 1, 2002.



Write-down of Courseware and Licenses



During the third quarter of fiscal year 2002, we recorded a $1.45 million charge for the write-down of courseware and licenses because the carrying value
of the assets was no longer supported by estimated future cash flows. Of this amount, $0.98 million was associated with the write-down of self-study courseware and $0.47 was associated with the write-down of a long-term license.



Impairment of Goodwill



In fiscal year 2002, as a result of the continuing difficult economic
climate in corporate training, low revenues and operating losses, the carrying value of goodwill was not supported by estimated future cash flow. Accordingly, we recorded $30.30 million of asset impairment due to the write-down of goodwill during
fiscal year 2002. The write-down to fair value was determined utilizing the discounted cash flow method.



Special (Credit) Charges



During fiscal year 2003, we recorded a $0.37 million special credit, which had an approximate $.02 earnings per diluted share impact to our results. The
2003 credit resulted from the settlement of a $0.50 million liability for $0.13 million.



During fiscal year 2002, we recorded a $0.76 million special charge, which had an approximate $0.03 loss per diluted share impact to our results. The charge resulted from a workforce reduction and consisted of
severance and other employee-related costs of $0.73 million and other costs of $0.03 million.



Interest Income and Interest Expense



Interest income for 2004 approximated interest income for 2003 and decreased by $0.06 million in 2003 when compared with 2002. The decrease in 2003 was attributable to lower average cash balances and lower interest
rates. The lower average cash balances were primarily a result of operating losses.



Interest expense for 2004 approximated interest expense for 2003 and increased by $0.06 million in 2003 as compared with 2002. Interest expense is attributable to the issuance of a $2.50 million Subordinated
Convertible Note issued in October 2001, plus capitalized interest. The note carries a 10 percent interest rate and does not require any cash interest payments until maturity.



Income Tax Expense



The Company did not record an income tax benefit in 2004 and 2003 attributable to its net losses as it provided a full valuation allowance thereto.
Income tax expense was $0.93 million in 2002. During 2002, the Company increased its valuation allowance related to deferred income taxes due to operating losses and the then-current economic slowdown.



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Liquidity and Capital Resources



The Companys primary need for liquidity relates to funding its operations and working capital. At July 31, 2004, the
Company had $0.50 million of cash.



Cash used in operating
activities was $1.07 million in 2004 compared with $1.92 million in 2003, a decrease of $0.85 million. The decrease in cash used in operating activities was due to a lower net loss in 2004 compared with 2003, adjusted for non-cash income and
expenses of $0.36 million, offset by a $0.47 million net decrease in changes in operating assets and liabilities in 2004 compared with 2003.



Cash used in operating activities was $1.92 million in 2003 compared with $3.71 million in 2002, a decrease of $1.80 million. The decrease in cash used in
operating activities was due to a lower net loss in 2003 compared with 2002, adjusted for non-cash income and expenses of $3.88 million, offset by a $2.08 million net decrease in changes in operating assets and liabilities in 2003 compared to 2002.



Cash used in investing activities, primarily consisting of
capital expenditures and content and license purchases, was $0.02 million in 2004, $0.07 million in 2003, and $0.59 million in 2002.



Cash used in financing activities was $0.01 million in 2004, compared with $0.06 million in 2003, and consisted primarily of principal payments on capital
leases. In 2002, we received cash from financing activities of $2.58 million, $2.50 million of which was provided by Hunt Capital Growth Fund II, L.P. (Hunt Capital) pursuant to the issuance of a Subordinated Secured Convertible Note.
The Note is secured by all of the assets of the Company, has a five-year term, carries a 10% coupon, and does not require any interest payments until maturity. The Note is convertible into common stock of the Company at $0.795 per share.



Following the end of the 2004 fiscal year, on August 30, 2004, we received
$1.35 million from institutional investors pursuant to the issuance of Secured 8% Convertible Notes due August 30, 2006. The Notes are secured by all of the assets of the Company, subject to an intercreditor agreement between the institutional
investors and Hunt Capital, and require interest payments semi-annually in cash or, at the Companys option, in shares of its Common Stock or in the form of additional one-year notes accruing interest at the rate of 10% per annum. The Notes are
convertible into common stock of the Company at $0.28 per share. In connection with this financing, the Company also issued to the investors (i) warrants to purchase up to 1,205,358 shares of the Companys Common Stock, exercisable at $0.38 per
share and expiring in March 2010, and (ii) warrants to purchase up to 3,857,143 shares, exercisable at $0.35 per share and generally expiring in February 2006.



The following summarizes our contractual cash obligations as of July 31, 2004 (in millions):



|                                   |  |                             |      |      |   |      |  |       |      |  |   |     
|---------------------------------- |  | --------------------------- | ---- | ---- | - | ---- |  | ----- | ---- |  | - | ----
|                                   |  | Payments Due By Fiscal Year
|                                   |  | 2005                        |      | 2006 |   | 2007 |  | Total
|Long-term debt                     |  | $                           |     |      | $ |     |  | $     | 4.03 |  | $ | 4.03
|Capital lease obligations          |  |                             | 0.11 |      |   |     |  |       |     |  |   | 0.11
|Operating leases                   |  |                             | 0.32 |      |   | 0.25 |  |       |     |  |   | 0.57
|                                   |  |                             |      |      |   |      |  |       |      |  |   |     
|Total contractual cash obligations |  | $                           | 0.43 |      | $ | 0.25 |  | $     | 4.03 |  | $ | 4.71
|                                   |  |                             |      |      |   |      |  |       |      |  |   |     



The long-term debt
identified as due in fiscal 2007 in the preceding table represents principal and capitalized interest to date on the Subordinated Secured Convertible Note. In addition, the Secured 8% Convertible Notes issued following the end of fiscal year 2004,
on August 30, 2004, are due early in fiscal year 2007, on August 30, 2006. Accordingly, given the potentially significant cash requirements necessary to meet this debt repayment schedule during fiscal 2007, the Company may need to seek additional
capital to refinance these notes in fiscal 2007 if they have not been converted into common stock prior to that time.



A term of the Subordinated Secured Convertible Note and the Secured 8% Convertible Notes requires that the Company maintain the listing and trading of its
common stock on either the Nasdaq National Market or the



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Nasdaq SmallCap Market. If the Company is unable to maintain its listing on Nasdaq, the Company will be in default on the listing requirement covenant in the
note agreements. Such a default provides the holders of the notes with the ability to require immediate repayment of the principal and interest then owed under the notes.



The Companys stock has remained listed on the Nasdaq SmallCap Market subject to a grace period granted by Nasdaq
through December 20, 2004, as a result of the Companys failure to meet the $1.00 minimum bid price listing maintenance requirement of the exchange. To remain listed past that date, the bid price of the Companys stock must be at least
$1.00 for 10 consecutive trading days prior to that date. The Company has the opportunity to effect a share consolidation prior to that date to attempt to cause the bid price of the stock to reach the required trading level. To effect a share
consolidation, the Company must submit the matter to a stockholder vote and receive stockholder approval of such an action. At its next annual meeting of stockholders, the Company plans to seek stockholder approval of a share consolidation in an
attempt to meet the Nasdaq minimum bid price requirement, if necessary. If the Companys stock is delisted from Nasdaq, if the notes have not been converted to common stock, and if as a result of a delisting the lenders should choose to
accelerate the repayment of their notes, the Company may be unable to repay the principal and interest owed.



Based on our current activity and expectations, including maintaining our listing on Nasdaq, we believe we have sufficient cash resources to enable the
Company to finance its capital requirements. If future financing is required, we will attempt to arrange it to meet our requirements with the timing, amount and form of issue depending on the prevailing market and general economic conditions.



Critical Accounting Policies



Our critical accounting policies are as follows:



Revenue recognition



The Company derives revenue from two primary sources; content and
certification.



| |  | Content revenue includes fees received from the sale of course materials such as books, CD-ROMs, Web-based course books, assessment products and content licenses. We recognize
content revenue from the sale of course books and other products when they are shipped. Content licenses are either purchased on a fee-per-use basis or for a one-time fee. Revenue is recognized over the period in which we have a commitment for
continuing involvement or obligation to provide services to the customer. In most cases, no such commitment exists, and revenue is recognized when content is shipped.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Certification revenue includes fees paid by certification candidates to take our certification tests and annual fees received from our education partners, including CIW and CTP
ATPs. We recognize certification revenue when certification tests are administered, and partner fees over the period during which we have a commitment for continuing involvement or obligation to provide services to the partner.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Valuation of intangibles and long-lived
assets



We assess the impairment of identifiable
intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which could trigger an impairment review include the following:



| |  | Significant underperformance relative to expected historical or projected future operating results;
| | - | ---------------------------------------------------------------------------------------------------



| |  | Significant changes in the manner of our use of the acquired assets or strategy for our overall business;
| | - | ---------------------------------------------------------------------------------------------------------



| |  | Significant negative industry or economic trends; and
| | - | -----------------------------------------------------



| |  | Our market capitalization and other market value indicators relative to net book value.
| | - | ---------------------------------------------------------------------------------------



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When it is determined that the carrying value of intangibles and long-lived assets may not be recoverable
based upon the existence of one or more of the above indicators of impairment, the measurement of any impairment is determined and the carrying value is reduced as appropriate. Goodwill is tested for impairment at least annually in accordance with
the provisions of Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangibles Assets.



Other Matters



In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which supersedes SAB No. 101, Revenue
Recognition in Financial Statements. The adoption of SAB No. 104 did not have a material impact on our consolidated results of operations or financial position. Accounting guidance contained in SAB No. 101 related to multiple-element revenue
arrangements was superseded as a result of the issuance of Emerging Issues Task Force (EITF) 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. SAB No. 104 restates the affected portion of SAB No. 101 to
reflect the issuance of EITF 00-21 while the revenue recognition principles of SAB No. 101 remain largely unchanged. SAB No. 104 was effective upon issuance.



In December 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46R (FIN No. 46R), a revision to FIN
No. 46, Consolidation of Variable Interest Entities(VIE). FIN No. 46R clarifies some of the provisions of FIN No. 46 and exempts certain entities from its requirements. FIN No. 46 requires that if a company is the primary
beneficiary of a VIE, the assets, liabilities and results of the VIEs operations should be consolidated in the companys financial statements. The adoption of FIN No. 46R had no impact on our consolidated financial condition or results of
operations.



Additional Factors That May Affect Results of Operations and
Market Price of Stock



This Annual Report on Form 10-K
contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than historical or current facts, including, without limitation,
statements about our business strategy, plans and objectives of management and our future prospects, are forward-looking statements. Although we believe that the expectations reflected in these statements are reasonable in view of the facts
available to us, no assurance can be given that all of these statements will prove to be accurate. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from these expectations.
Among these risks are those set forth in the following section, as well as those discussed elsewhere herein. If any of these risks materialize, our business, financial condition and results of operations could be harmed, the market price of our
common stock could decline, or both.



We have limited cash resources and may
need to raise additional funds.



We are operating with
limited cash resources. Based on our current activity and expectations, including maintaining our listing on Nasdaq, we believe we have sufficient cash resources for at least the next twelve months of operations. However, a moderate change to our
revenue-generating capability or expense structure could result in increased operating losses. Increased operating losses would erode our liquidity by further reducing cash resources and could result in the need to raise additional funds.



In the first quarter of fiscal year 2007 both the Subordinated
Secured Convertible Note and the Secured 8% Convertible Notes will mature and all outstanding principal and capitalized interest thereupon will become due and payable. Although these securities are convertible into common stock at any time, should
they not be converted into common stock by their holders prior to their maturity dates, the Company may need to seek capital to refinance these debt instruments.



Given our relatively small size and historical operating results, our access to capital is limited. Should we need to raise
additional funds, it cannot be certain that we will be able to obtain them on terms satisfactory to us.



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If we could not raise additional funds on terms satisfactory to us, we would be forced to raise funds on terms that we would not otherwise accept, seek funds
through other means such as a sale of some or all of our assets or operations, or otherwise significantly alter our operating plan, any of which could have a material adverse effect on our business, financial condition, and results of operations.



Our common stock could be delisted from the Nasdaq Stock Market.



On June 23, 2004, we received notice from Nasdaq that for
30 consecutive business days our common stock had closed below the minimum $1.00 per share requirement for continued listing on the Nasdaq SmallCap Market, and were provided a grace period through December 20, 2004, to regain compliance with the
requirement. In order to remain on the Nasdaq SmallCap Market, we will need to satisfy the $1.00 bid price requirement by having a closing bid price of our common stock of at least $1.00 for a minimum of ten consecutive business days. If we do not
comply by December 20, 2004, Nasdaq has indicated it will provide written notification that we did not regain compliance.



If we do not cure our minimum bid price deficiency, and if Nasdaq delists our common stock, then the common stock may be traded on the OTC Bulletin Board
or the pink sheets. Many institutional and other investors refuse to invest in stocks that are traded at levels below the Nasdaq Markets, which could reduce the trading liquidity in our common stock or make our effort to raise capital
more difficult. OTC Bulletin Board and pink sheets stocks are often lightly traded or not traded at all on any given day. Any reduction in trading liquidity or active interest on the part of our investors could have adverse consequences
on our stockholders, either because of reduced market prices or lack of a regular, active trading market for our common stock.



If our common stock is delisted from the Nasdaq Stock Market, payment of our secured debt could be accelerated.



A term of the Subordinated Secured Convertible Note and the Secured 8%
Convertible Notes requires that the Company maintain the listing and trading of its common stock on the Nasdaq SmallCap Market. If we do not cure our minimum bid price deficiency, and if Nasdaq delists our common stock, we will be in default on the
listing requirement covenant in the note agreements. Such a default provides the holders of the notes with the ability to require immediate repayment of the principal and interest then owed under the notes. If the Companys stock is delisted,
and if as a result of that delisting the lenders should choose to accelerate the repayment of their notes, the Company may be unable to repay the principal and interest owed and would be forced to seek alternative financing at that time. Although
the Company intends to cure its minimum price deficiency by effecting a share consolidation which must be approved by its stockholders, no assurances can be given that it will be successful in that regard. As a result, the Companys audited
financial statements for the year ended July 31, 2004 contain a going concern qualification from the Companys auditors.



We have incurred significant losses to date and may continue to incur losses in the future.



We have incurred net losses of approximately $100 million from our inception in 1995 through July 31, 2004. Our ability to
generate revenue growth in the future is subject to uncertainty. There can be no assurance that we will be able to increase revenues, manage expenses, or maintain profitability. Should revenue decrease in the future, we may not be able to stem
losses thereafter through expense reductions, given the magnitude of the reductions already implemented.



Our industry is intensely competitive and we may lose market share to companies developing similar services and products and to larger competitors with greater resources.



We face substantial competition in the education and training market.
Competition in the ICT training market is intense and is affected by the rapidly evolving nature of the information technology industry. A number of other companies offer products and services similar to ours, and additional new competitors may
emerge in the future. Many of our existing competitors have substantially greater capital resources, technical expertise,



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##### Index to Financial Statements

marketing experience, research and development status, established customers and facilities than do we. As a result, there is a risk that we will not be able
to successfully compete with existing and future competitors, which would adversely affect our financial performance.



In our industry, technology advances rapidly and industry standards change frequently. To remain competitive and improve profitability, we must
continually enhance our existing products and promptly introduce new products, services, and technologies to meet the changing demands of our customers. Our failure to respond to technological changes quickly would adversely affect our financial
performance.



Demand for our products is susceptible to adverse economic
conditions and educational funding constraints.



Our
business and financial performance is influenced by adverse financial conditions affecting our target customers and by general weakness in the economy. In the short run, many corporations may not view ICT skills training as critical to the success
of their businesses. When these companies experience poor operating results, whether as a result of adverse economic conditions, competitive issues or other factors, they may decrease or delay spending on training and education. In addition, most of
our academic customers are reliant on the availability of funding to pursue their existing educational programs and new initiatives. If educational funding is limited, whether as a result of overall economic conditions, budgetary constraints, the
political environment or other factors, these institutions may delay or forego spending for our content and certification products.



Shares that may be sold could result in a market overhang that depresses our stock price.



The potential for future sales of our common stock could depress the market price of our common stock. In addition, the
perception that such sales will occur could also adversely affect the price. As long as certain registration statements that have been filed with the SEC remain effective, the selling stockholders under those registration statements may sell
approximately 19.9 million shares, or approximately 46% of the shares of common stock outstanding (assuming the issuance of all shares covered by those registration statements). These shares were privately issued and are otherwise subject to
restrictions on resale under securities laws. Any such sales, or even the market perception that such sales could be made, may depress the price of the common stock.



Our common stock may experience extreme price and volume fluctuations.



Our common stock has experienced substantial price and volume volatility, which may continue in the future. Additionally,
the stock market from time to time experiences significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may also adversely affect the market price of our
common stock. In addition to such broad market fluctuations, factors such as, but not limited to, the following may have a significant effect on the market price of our common stock:



| |  | The delisting of our common stock from the Nasdaq SmallCap Market;
| | - | ------------------------------------------------------------------



| |  | Fluctuations in our operating results, including those caused by our lengthy sales cycle and seasonal effects on our business;
| | - | ------------------------------------------------------------------------------------------------------------------------------



| |  | The perception by others of our ability to obtain any necessary new financing;
| | - | ------------------------------------------------------------------------------



| |  | A limited trading market for our common stock; and
| | - | --------------------------------------------------



| |  | Public announcements concerning us, our competitors or our industry.
| | - | --------------------------------------------------------------------



Item 7A. Quantitative and Qualitative Disclosures About Market Risk



Market risk relating to our operations results primarily from changes in foreign currency exchange rates. A portion of our cash flow is expected to be
received in non-U.S. currencies. In addition, a portion of our assets is held in foreign subsidiaries. Accordingly, we are exposed to foreign currency fluctuations against the U.S. dollar. Such exposure is not significant relative to our overall
operations and we believe that the risk associated with our exposure will not have a material impact on our consolidated results of operations.



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##### Index to Financial Statements

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



PROSOFTTRAINING AND SUBSIDIARIES



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES



|                                                                                                 |  |   
|------------------------------------------------------------------------------------------------ |  | --
|Report of Independent Registered Public Accounting Firm                                          |  | 20
|                                                                                                 | 
|Financial Statements of ProsoftTraining                                                          |  |   
|Consolidated Balance Sheets at July 31, 2004 and 2003                                            |  | 21
|Consolidated Statements of Operations for the years ended July 31, 2004, 2003 and 2002           |  | 22
|Consolidated Statement of Stockholders Equity for the years ended July 31, 2004, 2003 and 2002. |  | 23
|Consolidated Statements of Cash Flows for the years ended July 31, 2004, 2003 and 2002           |  | 24
|Notes to Consolidated Financial Statements                                                       |  | 25
|                                                                                                 | 
|Schedule                                                                                         |  |   
|Schedule IIValuation and Qualifying Accounts                                                    |  | 38



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of ProsoftTraining:



We have audited the accompanying consolidated balance sheets of ProsoftTraining (a Nevada corporation) and subsidiaries as of July 31, 2004 and 2003, and the related consolidated statements of operations,
stockholders equity and cash flows for each of the three years in the period ended July 31, 2004. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.



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



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
ProsoftTraining and subsidiaries at July 31, 2004 and 2003 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended July 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.



The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company is party to certain note agreements that
provide creditors with the ability to demand accelerated repayment of amounts owed to those creditors if the Company is unable to comply with the terms of those note agreements. Should the Company fail to comply with the terms of those agreements
the creditors could demand accelerated repayment of the amounts owed. The Companys ability to comply with the terms of the agreements is uncertain and raises substantial doubt about the Companys ability to continue as a going concern.
Managements plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.



We have also audited Schedule II of ProsoftTraining for each of the three
years in the period ended July 31, 2004. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.



/s/    GRANT THORNTON LLP



Phoenix, Arizona

September 24, 2004



20



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##### Index to Financial Statements

PROSOFTTRAINING AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



|                                                                                                                  |  |          |          |   |      |   |         |  
|----------------------------------------------------------------------------------------------------------------- |  | -------- | -------- | - | ---- | - | ------- | -
|                                                                                                                  |  | July 31, |         
|                                                                                                                  |  | 2004     |          |   | 2003 |  
|ASSETS                                                                                                            |  |          |          |   |      |   |         |  
|Current assets:                                                                                                   |  |          |          |   |      |   |         |  
|Cash and cash equivalents                                                                                         |  | $        | 502      |   |      | $ | 1,567   |  
|Accounts receivable, less allowances of $148 and $494                                                             |  |          | 644      |   |      |   | 1,023   |  
|Prepaid expenses and other current assets                                                                         |  |          | 117      |   |      |   | 157     |  
|                                                                                                                  |  |          |          |   |      |   |         |  
|Total current assets                                                                                              |  |          | 1,263    |   |      |   | 2,747   |  
|                                                                                                                  |  |         
|Property and equipment, net                                                                                       |  |          | 283      |   |      |   | 483     |  
|Goodwill, net of accumulated amortization of $5,506                                                               |  |          | 6,745    |   |      |   | 6,745   |  
|Courseware and licenses, net of accumulated amortization of $2,756 and $2,499                                     |  |          | 331      |   |      |   | 604     |  
|                                                                                                                  |  |          |          |   |      |   |         |  
|Total assets                                                                                                      |  | $        | 8,622    |   |      | $ | 10,579  |  
|                                                                                                                  |  |          |          |   |      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                              |  |          |          |   |      |   |         |  
|Current liabilities:                                                                                              |  |          |          |   |      |   |         |  
|Accounts payable  trade                                                                                          |  | $        | 591      |   |      | $ | 1,061   |  
|Accrued expenses                                                                                                  |  |          | 768      |   |      |   | 826     |  
|Current portion of capital lease obligations                                                                      |  |          | 98       |   |      |   | 54      |  
|Other                                                                                                             |  |          | 64       |   |      |   | 255     |  
|                                                                                                                  |  |          |          |   |      |   |         |  
|Total current liabilities                                                                                         |  |          | 1,521    |   |      |   | 2,196   |  
|                                                                                                                  |  |         
|Long term debt                                                                                                    |  |          | 3,264    |   |      |   | 2,968   |  
|Obligations under capital leases, net of current portion                                                          |  |          |         |   |      |   | 64      |  
|                                                                                                                  |  |          |          |   |      |   |         |  
|Total liabilities                                                                                                 |  |          | 4,785    |   |      |   | 5,228   |  
|                                                                                                                  |  |          |          |   |      |   |         |  
|Stockholders equity:                                                                                             |  |          |          |   |      |   |         |  
|Common shares, par value $.001 per share: authorized shares: 75,000,000; issued: 24,321,326 and 24,221,326 shares |  |          | 24       |   |      |   | 24      |  
|Additional paid-in capital                                                                                        |  |          | 104,436  |   |      |   | 104,422 |  
|Accumulated deficit                                                                                               |  |          | (100,727 | ) |      |   | (99,161 | )
|Accumulated other comprehensive income                                                                            |  |          | 179      |   |      |   | 141     |  
|Less common stock in treasury, at cost: 11,912 shares                                                             |  |          | (75      | ) |      |   | (75     | )
|                                                                                                                  |  |          |          |   |      |   |         |  
|Total stockholders equity                                                                                        |  |          | 3,837    |   |      |   | 5,351   |  
|                                                                                                                  |  |          |          |   |      |   |         |  
|Total liabilities and stockholders equity                                                                        |  | $        | 8,622    |   |      | $ | 10,579  |  
|                                                                                                                  |  |          |          |   |      |   |         |  



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



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PROSOFTTRAINING AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)



|                                      |  |                             |        |   |      |   |        |      |  |   |         |  
|------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                      |  | Fiscal Years Ended July 31, |       
|                                      |  | 2004                        |        |   | 2003 |   |        | 2002 | 
|Revenues:                             |  |                             |        |   |      |   |        |      |  |   |         |  
|Content                               |  | $                           | 6,259  |   |      | $ | 9,339  |      |  | $ | 13,542  |  
|Certification                         |  |                             | 1,789  |   |      |   | 2,596  |      |  |   | 3,850   |  
|Services                              |  |                             |       |   |      |   | 85     |      |  |   | 530     |  
|                                      |  |                             |        |   |      |   |        |      |  |   |         |  
|Total revenues                        |  |                             | 8,048  |   |      |   | 12,020 |      |  |   | 17,922  |  
|                                      |  |                             |        |   |      |   |        |      |  |   |         |  
|Costs and expenses:                   |  |                             |        |   |      |   |        |      |  |   |         |  
|Cost of revenues                      |  |                             | 2,694  |   |      |   | 4,410  |      |  |   | 9,136   |  
|Content development                   |  |                             | 632    |   |      |   | 1,460  |      |  |   | 2,152   |  
|Sales and marketing                   |  |                             | 2,633  |   |      |   | 3,603  |      |  |   | 6,681   |  
|General and administrative            |  |                             | 2,865  |   |      |   | 4,110  |      |  |   | 5,672   |  
|Depreciation and amortization         |  |                             | 488    |   |      |   | 831    |      |  |   | 3,139   |  
|Write-down of courseware and licenses |  |                             |       |   |      |   |       |      |  |   | 1,452   |  
|Impairment of goodwill                |  |                             |       |   |      |   |       |      |  |   | 30,300  |  
|Special (credit) charge               |  |                             |       |   |      |   | (370   | )    |  |   | 762     |  
|                                      |  |                             |        |   |      |   |        |      |  |   |         |  
|Total costs and expenses              |  |                             | 9,312  |   |      |   | 14,044 |      |  |   | 59,294  |  
|                                      |  |                             |        |   |      |   |        |      |  |   |         |  
|Loss from operations                  |  |                             | (1,264 | ) |      |   | (2,024 | )    |  |   | (41,372 | )
|Interest income                       |  |                             | 1      |   |      |   | 5      |      |  |   | 66      |  
|Interest expense                      |  |                             | (303   | ) |      |   | (289   | )    |  |   | (228    | )
|                                      |  |                             |        |   |      |   |        |      |  |   |         |  
|Loss before income taxes              |  |                             | (1,566 | ) |      |   | (2,308 | )    |  |   | (41,534 | )
|Income tax expense                    |  |                             |       |   |      |   |       |      |  |   | (925    | )
|                                      |  |                             |        |   |      |   |        |      |  |   |         |  
|Net loss                              |  | $                           | (1,566 | ) |      | $ | (2,308 | )    |  | $ | (42,459 | )
|                                      |  |                             |        |   |      |   |        |      |  |   |         |  
|Net loss per share:                   |  |                             |        |   |      |   |        |      |  |   |         |  
|Basic and diluted                     |  | $                           | (0.06  | ) |      | $ | (0.10  | )    |  | $ | (1.77   | )
|                                      |  |                             |        |   |      |   |        |      |  |   |         |  
|Weighted average shares outstanding:  |  |                             |        |   |      |   |        |      |  |   |         |  
|Basic and diluted                     |  |                             | 24,239 |   |      |   | 24,204 |      |  |   | 24,012  |  
|                                      |  |                             |        |   |      |   |        |      |  |   |         |  



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



22



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##### Index to Financial Statements

PROSOFTTRAINING AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(In thousands, except share data)



|                                                           |  |              |  |                           |    |                |        |         |                     |        |  |                                      |     |       |  |   |          |   |  |   |     |  |   |         |  
|---------------------------------------------------------- |  | ------------ |  | ------------------------- | -- | -------------- | ------ | ------- | ------------------- | ------ |  | ------------------------------------ | --- | ----- |  | - | -------- | - |  | - | --- |  | - | ------- | -
|                                                           |  | Common Stock |  | AdditionalPaid-In Capital |    | Treasury Stock |        |         | Accumulated Deficit |        |  | AccumulatedOtherComprehensive Income |     | Total | 
|                                                           |  | Shares       |  | Amount                    |    |                | Shares |         | Amount              |        |  |                                      |    
|Balances at August 1, 2001                                 |  | 23,686,898   |  | $                         | 24 |                | $      | 104,016 |                     | 11,912 |  | $                                    | (75 | )     |  | $ | (54,394  | ) |  | $ | 1   |  | $ | 49,572  |  
|                                                           |  |              |  |                           |    |                |        |        
|Net loss                                                   |  |             |  |                           |   |                |        |        |                     |       |  |                                      |    |       |  |   | (42,459  | ) |  |   |    |  |   | (42,459 | )
|Foreign currency translation adjustment                    |  |             |  |                           |   |                |        |        |                     |       |  |                                      |    |       |  |   |         |   |  |   | 58  |  |   | 58      |  
|                                                           |  |              |  |                           |    |                |        |         |                     |        |  |                                      |     |       |  |   |          |   |  |   |     |  |   |         |  
|Total comprehensive loss                                   |  |             |  |                           |   |                |        |        |                     |       |  |                                      |    |       |  |   |         |   |  |   |    |  |   | (42,401 | )
|Issuance of common stock for employee stock purchase plan  |  | 57,103       |  |                           |   |                |        | 34      |                     |       |  |                                      |    |       |  |   |         |   |  |   |    |  |   | 34      |  
|Issuance of common stock for services                      |  | 296,225      |  |                           |   |                |        | 187     |                     |       |  |                                      |    |       |  |   |         |   |  |   |    |  |   | 187     |  
|Exercise of stock options, warrants and other transactions |  | 169,100      |  |                           |   |                |        | 184     |                     |       |  |                                      |    |       |  |   |         |   |  |   |    |  |   | 184     |  
|                                                           |  |              |  |                           |    |                |        |         |                     |        |  |                                      |     |       |  |   |          |   |  |   |     |  |   |         |  
|Balances at July 31, 2002                                  |  | 24,209,326   |  |                           | 24 |                |        | 104,421 |                     | 11,912 |  |                                      | (75 | )     |  |   | (96,853  | ) |  |   | 59  |  |   | 7,576   |  
|Net loss                                                   |  |             |  |                           |   |                |        |        |                     |       |  |                                      |    |       |  |   | (2,308   | ) |  |   |    |  |   | (2,308  | )
|                                                           |  |              |  |                           |    |                |        |        
|Foreign currency translation adjustment                    |  |             |  |                           |   |                |        |        |                     |       |  |                                      |    |       |  |   |         |   |  |   | 82  |  |   | 82      |  
|                                                           |  |              |  |                           |    |                |        |         |                     |        |  |                                      |     |       |  |   |          |   |  |   |     |  |   |         |  
|Total comprehensive loss                                   |  |             |  |                           |   |                |        |        |                     |       |  |                                      |    |       |  |   |         |   |  |   |    |  |   | (2,226  | )
|Issuance of common stock for employee stock purchase plan  |  | 12,000       |  |                           |   |                |        | 1       |                     |       |  |                                      |    |       |  |   |         |   |  |   |    |  |   | 1       |  
|                                                           |  |              |  |                           |    |                |        |         |                     |        |  |                                      |     |       |  |   |          |   |  |   |     |  |   |         |  
|Balances at July 31, 2003                                  |  | 24,221,326   |  |                           | 24 |                |        | 104,422 |                     | 11,912 |  |                                      | (75 | )     |  |   | (99,161  | ) |  |   | 141 |  |   | 5,351   |  
|Net loss                                                   |  |             |  |                           |   |                |        |        |                     |       |  |                                      |    |       |  |   | (1,566   | ) |  |   |    |  |   | (1,566  | )
|Foreign currency translation adjustment                    |  |             |  |                           |   |                |        |        |                     |       |  |                                      |    |       |  |   |         |   |  |   | 38  |  |   | 38      |  
|                                                           |  |              |  |                           |    |                |        |         |                     |        |  |                                      |     |       |  |   |          |   |  |   |     |  |   |         |  
|Total comprehensive loss                                   |  |             |  |                           |   |                |        |        |                     |       |  |                                      |    |       |  |   |         |   |  |   |    |  |   | (1,528  | )
|Exercise of stock options, warrants and other transactions |  | 100,000      |  |                           |   |                |        | 14      |                     |       |  |                                      |    |       |  |   |         |   |  |   |    |  |   | 14      |  
|                                                           |  |              |  |                           |    |                |        |         |                     |        |  |                                      |     |       |  |   |          |   |  |   |     |  |   |         |  
|Balances at July 31, 2004                                  |  | 24,321,326   |  | $                         | 24 |                | $      | 104,436 |                     | 11,912 |  | $                                    | (75 | )     |  | $ | (100,727 | ) |  | $ | 179 |  | $ | 3,837   |  
|                                                           |  |              |  |                           |    |                |        |         |                     |        |  |                                      |     |       |  |   |          |   |  |   |     |  |   |         |  



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



23



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##### Index to Financial Statements

PROSOFTTRAINING AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                      |  |                      |        |   |      |   |        |      |  |   |         |  
|------------------------------------------------------------------------------------- |  | -------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                      |  | Years Ended July 31, |       
|                                                                                      |  | 2004                 |        |   | 2003 |   |        | 2002 | 
|Operating Activities:                                                                 |  |                      |        |   |      |   |        |      |  |   |         |  
|Net loss                                                                              |  | $                    | (1,566 | ) |      | $ | (2,308 | )    |  | $ | (42,459 | )
|Adjustments to reconcile net loss to cash provided by (used in) operating activities: |  |                      |        |   |      |   |        |      |  |   |         |  
|Depreciation and amortization                                                         |  |                      | 485    |   |      |   | 1,124  |      |  |   | 5,797   |  
|Gain on settlement of liability                                                       |  |                      |       |   |      |   | (370   | )    |  |   |        |  
|Non-cash interest expense                                                             |  |                      | 297    |   |      |   | 270    |      |  |   | 198     |  
|Impairment of goodwill                                                                |  |                      |       |   |      |   |       |      |  |   | 30,300  |  
|Operating expenses paid in common stock                                               |  |                      |       |   |      |   |       |      |  |   |        |  
|Disposition of property and equipment                                                 |  |                      |       |   |      |   | 113    |      |  |   | 14      |  
|Restructuring                                                                         |  |                      |       |   |      |   |       |      |  |   | 175     |  
|Deferred income taxes                                                                 |  |                      |       |   |      |   |       |      |  |   | 925     |  
|Changes in operating assets and liabilities:                                          |  |                      |        |   |      |   |        |      |  |   |         |  
|Accounts receivable                                                                   |  |                      | 389    |   |      |   | 872    |      |  |   | 1,704   |  
|Prepaid expenses and other current assets                                             |  |                      | 58     |   |      |   | 439    |      |  |   | 392     |  
|Accounts payable                                                                      |  |                      | (470   | ) |      |   | (1,214 | )    |  |   | (222    | )
|Accrued expenses                                                                      |  |                      | (68    | ) |      |   | (954   | )    |  |   | (492    | )
|Other                                                                                 |  |                      | (190   | ) |      |   | 110    |      |  |   | (46     | )
|                                                                                      |  |                      |        |   |      |   |        |      |  |   |         |  
|Net cash used in operating activities                                                 |  |                      | (1,065 | ) |      |   | (1,918 | )    |  |   | (3,714  | )
|                                                                                      |  |                      |       
|Investing Activities:                                                                 |  |                      |        |   |      |   |        |      |  |   |         |  
|Purchases of property and equipment                                                   |  |                      | (24    | ) |      |   | (30    | )    |  |   | (273    | )
|Courseware and license purchases                                                      |  |                      |       |   |      |   | (35    | )    |  |   | (314    | )
|                                                                                      |  |                      |        |   |      |   |        |      |  |   |         |  
|Net cash used in investing activities                                                 |  |                      | (24    | ) |      |   | (65    | )    |  |   | (587    | )
|                                                                                      |  |                      |       
|Financing Activities:                                                                 |  |                      |        |   |      |   |        |      |  |   |         |  
|Issuance of common stock                                                              |  |                      | 14     |   |      |   | 1      |      |  |   | 217     |  
|Issuance of long term debt                                                            |  |                      |       |   |      |   |       |      |  |   | 2,500   |  
|Principal payments on debt and capital leases                                         |  |                      | (20    | ) |      |   | (58    | )    |  |   | (103    | )
|Debt issuance costs                                                                   |  |                      |       |   |      |   |       |      |  |   | (20     | )
|Other                                                                                 |  |                      |       |   |      |   |       |      |  |   | (17     | )
|                                                                                      |  |                      |        |   |      |   |        |      |  |   |         |  
|Net cash (used in) provided by financing activities                                   |  |                      | (6     | ) |      |   | (57    | )    |  |   | 2,577   |  
|                                                                                      |  |                      |       
|Effects of exchange rates on cash                                                     |  |                      | 30     |   |      |   | 81     |      |  |   | 114     |  
|                                                                                      |  |                      |        |   |      |   |        |      |  |   |         |  
|Net decrease in cash and cash equivalents                                             |  |                      | (1,065 | ) |      |   | (1,959 | )    |  |   | (1,610  | )
|                                                                                      |  |                      |       
|Cash and cash equivalents at beginning of year                                        |  |                      | 1,567  |   |      |   | 3,526  |      |  |   | 5,136   |  
|                                                                                      |  |                      |        |   |      |   |        |      |  |   |         |  
|Cash and cash equivalents at end of year                                              |  | $                    | 502    |   |      | $ | 1,567  |      |  | $ | 3,526   |  
|                                                                                      |  |                      |        |   |      |   |        |      |  |   |         |  
|Supplementary disclosure of cash paid during the year for:                            |  |                      |        |   |      |   |        |      |  |   |         |  
|Interest                                                                              |  | $                    | 5      |   |      | $ | 20     |      |  | $ | 29      |  
|                                                                                      |  |                      |        |   |      |   |        |      |  |   |         |  



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



24



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PROSOFTTRAINING AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)



1. Summary of Significant Accounting Policies



Business



ProsoftTraining (Prosoft or the Company) offers
content and certifications for individuals to develop and validate critical ICT workforce skills. Prosoft creates and distributes a library of classroom and e-learning courses. Prosoft distributes its content through its ComputerPREP division to
individuals, schools, colleges, commercial training centers and corporations worldwide. Prosoft owns the CIW and CCNT certification programs and manages the CTP certification for the Telecommunications Industry Association.



Consolidation



The financial statements include the accounts of the Company and its wholly
owned subsidiaries ProsoftTraining Europe Limited and Prosoft Training Hong Kong Limited. Intercompany transactions and balances are eliminated in consolidation.



Currency Translation, Comprehensive Loss and Accumulative Other Comprehensive Income



Assets and liabilities of foreign functional currency financial statements
are translated into United States dollars at the exchange rate in effect at the close of the period. Income statement amounts are translated at the average exchange rates during the period. The Company accumulates translation adjustments as a
separate component of stockholders equity. The Companys accumulated other comprehensive income consists entirely of cumulative translation adjustments of foreign currency. Comprehensive loss presented in the consolidated statement of
stockholders equity consists of net losses and foreign currency translation adjustments.



Cash Equivalents



The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Total cash and cash equivalents in non-U.S. banks at July 31, 2004 and 2003 were $229 and $364, respectively.



Accounts Receivable



The Companys accounts receivable are due from various individuals,
colleges, commercial training centers and corporations worldwide. Credit is extended based on evaluation of the customers financial condition and collateral generally is not required. Accounts receivable are generally due within 30 days and
are stated at amounts due from customers net of an allowance for uncollectible accounts. Accounts outstanding longer than contractual payment terms are considered past due. The Company records an allowance on a specific basis by considering a number
of factors, including the length of time the trade accounts receivable are past due, the Companys previous loss history, the customers current ability to pay its obligation to the Company, and the condition of the general economy and the
industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited back to bad debt expense in the period the payment is received.



Changes in the Companys allowance for doubtful accounts for the years
ended July 31, 2004 and 2003 are as follows:



|                     |  |          |      |   |      |   |     |  
|-------------------- |  | -------- | ---- | - | ---- | - | --- | -
|                     |  | July 31, |     
|                     |  | 2004     |      |   | 2003 |  
|Beginning balance    |  | $        | 494  |   |      | $ | 478 |  
|Bad debt expense     |  |          | 121  |   |      |   | 93  |  
|Accounts written off |  |          | (467 | ) |      |   | (77 | )
|                     |  |          |      |   |      |   |     |  
|Ending balance       |  | $        | 148  |   |      | $ | 494 |  
|                     |  |          |      |   |      |   |     |  



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PROSOFTTRAINING AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except share data)



Financial Instruments



The fair value of the Companys financial instruments, consisting of cash and cash equivalents and accounts receivable
and debt, approximate their carrying values. The Company believes that the fair value of its long-term debt approximates the recorded amount.



Advertising Costs



The Company expenses the costs of advertising as incurred. Advertising expenses were $3, $2, and $59 in 2004, 2003 and 2002, respectively.



Property and Equipment



Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, generally two to seven years. Leasehold improvements are amortized over the shorter of the life of the lease or the improvement.



Goodwill and License Agreements



License agreements are those rights acquired from others through business
combinations to produce and distribute courseware and other publications. License agreements are amortized on a straight-line basis over a period of seven years, subject to impairment based on the carrying value exceeding fair value. Goodwill is not
amortized, but tested for impairment at least annually in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. The Company adopted SFAS No. 142 on August 1, 2002 and identified one reporting unit and discontinued goodwill
amortization at that time.



Valuation of Long-Lived
Assets



The Company evaluates the carrying value of
long-lived assets, including goodwill, whenever events or changes in circumstances indicate the carrying amount may not be fully recoverable. If the total of the expected future undiscounted cash flows is less than the carrying amount of the asset,
a loss is recognized based on the amount by which the carrying value exceeds the assets fair value.



Revenue Recognition



The Company derives revenue from two primary sources: content and certification. Content revenue is derived from the sale of course books and related
products or licenses for training materials. Content revenue is recognized from the sale of course books and other products when they are shipped. License revenue is recognized over the period in which there is a commitment for continuing
involvement or obligation to provide services to the customer. Certification revenue includes fees paid by certification candidates to take certification tests and annual fees received from education partners, including CIW ATPs. The Company
recognizes certification revenue when certification tests are administered and partner fees over the period during which there is a commitment for continuing involvement or obligation to provide services to the partner. Services revenue, if any,
includes instructor training and is recognized when the services are provided.



Stock-based Compensation



The Company has adopted only the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for employee stock options and continues to apply Accounting Board Opinion No. 25,



26



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##### Table of Contents

##### Index to Financial Statements

PROSOFTTRAINING AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except share data)



Accounting for Stock Issued to Employees, for recording stock options granted. Pro forma information regarding net loss and net loss per share is
required by SFAS No. 123 as if the Company had accounted for its stock-based awards to employees under the fair value method. The fair value of the Companys stock-based awards to employees was estimated using the Black-Scholes multiple option
model.



The fair value of the Companys stock-based awards
to employees was estimated assuming no expected dividends and the following assumptions:



|                                |  |         |   |  |         |   |  |         |  
|------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|                                |  | 2004    |   |  | 2003    |   |  | 2002    |  
|Weighted average expected life  |  | 4 years |   |  | 4 years |   |  | 4 years |  
|Expected stock price volatility |  | 111     | % |  | 80      | % |  | 124     | %
|Risk-free interest rate         |  | 3.7     | % |  | 3.9     | % |  | 4.1     | %



For purpose of pro
forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period. The Companys pro forma information for the years ended July 31 is as follows:



|                                                                                                               |  |      |        |   |      |   |        |      |  |   |         |  
|-------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                                               |  | 2004 |        |   | 2003 |   |        | 2002 | 
|Net loss  actual                                                                                              |  | $    | (1,566 | ) |      | $ | (2,308 | )    |  | $ | (42,459 | )
|Deduct total stock-based employee compensation expense determined under fair value based method for all awards |  |      | (1,018 | ) |      |   | (1,820 | )    |  |   | (4,016  | )
|                                                                                                               |  |      |        |   |      |   |        |      |  |   |         |  
|Net loss  pro forma                                                                                           |  | $    | (2,584 | ) |      | $ | (4,128 | )    |  | $ | (46,475 | )
|                                                                                                               |  |      |        |   |      |   |        |      |  |   |         |  
|Basic and diluted loss per share  actual $.                                                                   |  | $    | (.06   | ) |      | $ | (.10   | )    |  | $ | (1.77   | )
|Basic and diluted loss per share  pro forma                                                                   |  | $    | (.11   | ) |      | $ | (.17   | )    |  | $ | (1.94   | )



The weighted average
fair value of options granted during the years ended July 31, 2004, 2003, and 2002 was $0.45, $0.10, and $.68, respectively.



Use of Estimates



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



Income (Loss)
Per Share



The Company uses the weighted-average
number of common shares outstanding during each period to compute basic income (loss) per common share. Diluted income (loss) per share is computed using the weighted-average number of common shares outstanding plus the number of additional common
shares that would have been outstanding if dilutive potential common shares had been issued. In years 2004, 2003 and 2002, all potentially dilutive common shares were anti-dilutive.



Recent Accounting Pronouncements



In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which
supersedes SAB No. 101, Revenue Recognition in Financial Statements. The adoption of SAB No. 104 did not have a material impact on our consolidated results of operations or financial position. Accounting guidance contained in SAB No. 101
related to multiple-element revenue arrangements was superseded as a result of the issuance of Emerging Issues Task Force (EITF) 00-21, Accounting for Revenue Arrangements with Multiple



27



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##### Index to Financial Statements

PROSOFTTRAINING AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except share data)



Deliverables. SAB No. 104 restates the affected portion of SAB No. 101 to reflect the issuance of EITF 00-21 while the revenue recognition principles
of SAB No. 101 remain largely unchanged. SAB No. 104 was effective upon issuance.



In December 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46R (FIN No. 46R), a revision to FIN No. 46, Consolidation of Variable Interest Entities(VIE). FIN No. 46R clarifies some of the provisions of FIN No. 46 and exempts certain entities from its requirements. FIN No. 46 requires that if a company is the primary beneficiary of a VIE, the assets, liabilities and results of
the VIEs operations should be consolidated in the companys financial statements. The adoption of FIN No. 46R had no impact on our consolidated financial condition or results of operations.



Reclassifications





Certain reclassifications were made to the prior years consolidated financial statements to conform to the current year presentation.



2. Liquidity



During fiscal years 2004 and 2003, the Company reduced headcount and operating expenses in response to lower revenue. As a result of these actions, the
Companys losses and uses of cash have been reduced. In addition, the Company raised $1.35 million through the issuance of Secured 8% Convertible Notes (see Note 13) on August 30, 2004, providing additional liquidity.



A term of the Subordinated Secured Convertible Note (see Note 7) and the
Secured 8% Convertible Notes requires that the Company maintain the listing and trading of its common stock on either the Nasdaq National Market or the Nasdaq SmallCap Market (collectively Nasdaq). If the Company is unable to maintain
the trading of its common stock on Nasdaq, the Company will be in default on the listing requirement covenant in the note agreements. Such a default provides the holders of the notes with the ability to require immediate repayment of the principal
and interest then owed under the notes.



The Companys
common stock is listed on the Nasdaq SmallCap Market. However, the Companys stock remains listed on Nasdaq subject to a grace period granted by Nasdaq through December 20, 2004, as a result of the Companys failure to meet the bid price
listing maintenance requirement of the exchange. To remain listed past that date, the bid price of the Companys stock must be at least $1.00 for 10 consecutive trading days prior to that date. If the Company is unable to meet this requirement,
Nasdaq will notify the Company of the delisting of its securities. The Company has the opportunity to effect a share consolidation prior to that date to attempt to cause the bid price of the stock to reach the required trading level. To effect a
share consolidation, the Company must submit the matter to a stockholder vote and receive stockholder approval of such an action. At its next annual meeting of stockholders, the Company plans to seek stockholder approval of a share consolidation in
an attempt to meet the Nasdaq minimum bid price requirement. If the Companys stock is delisted from Nasdaq, and if as a result of that delisting the lenders should choose to accelerate the repayment of their notes, the Company may be unable to
repay the principal and interest owed.



3. Special (Credit) Charges



During 2003, the Company recorded a $0.37 million special
credit which resulted from the settlement of a $0.50 million liability for $0.13 million.



During 2002, the Company recorded a $0.67 million restructuring charge primarily due to severance and other employee-related costs. As of July 31, 2003, all accrued restructuring costs were settled.



28



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##### Table of Contents

##### Index to Financial Statements

PROSOFTTRAINING AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except share data)



4. Valuation of Long-Lived Assets



Long-lived assets, such as property and equipment and content and licenses, are reviewed for impairment annually or when
changes in circumstances indicate that the carrying value may not be recoverable.



At April 30, 2002, based on then-current operations, projected undiscounted cash flow was below the carrying amounts of goodwill and content and licenses. Accordingly, the Company wrote down those assets to estimated
fair value in the quarter ended April 30, 2002. The $23,952 write-down consisted of $22,500 for goodwill and $1,452 for content and licenses.



At July 31, 2002, based on continued operating losses in the fourth quarter of fiscal year 2002, the inability to increase revenues, projected operating
losses in the first quarter of fiscal year 2003, indications of interest regarding a sale of some or all of the Companys assets and operations, and revised future cash flow projections, the Company determined that the recorded value of
goodwill was impaired. As a result, the Company recognized impairment losses of $7,800 related to goodwill.



5. Property and Equipment



Property and equipment consists of the following:



|                                         |  |          |       |      |   |      
|---------------------------------------- |  | -------- | ----- | ---- | - | -----
|                                         |  | July 31,
|                                         |  | 2004     |       | 2003
|Computer equipment and software          |  | $        | 2,810 |      | $ | 2,803
|Office equipment, furniture and fixtures |  |          | 725   |      |   | 693  
|                                         |  |          |       |      |   |      
|                                         |  |          | 3,535 |      |   | 3,496
|Less accumulated depreciation            |  |          | 3,252 |      |   | 3,013
|                                         |  |          |       |      |   |      
|Property and equipment, net              |  | $        | 283   |      | $ | 483  
|                                         |  |          |       |      |   |      



6. Licenses and Goodwill



Intangible assets consist of the following:



|                                   |  |                      |                    |               |                         |               |                    |       |                         |   |        |  |   |      
|---------------------------------- |  | -------------------- | ------------------ | ------------- | ----------------------- | ------------- | ------------------ | ----- | ----------------------- | - | ------ |  | - | -----
|                                   |  | Average Life (Years) |                    | July 31, 2004 |                         | July 31, 2003
|                                   |  |                      | GrossCarryingValue |               | AccumulatedAmortization |               | GrossCarryingValue |       | AccumulatedAmortization
|Amortizable intangible assets:     |  |                      |                    |               |                         |               |                    |       |                         |   |        |  |   |      
|License Agreements                 |  | 7                    |                    | $             | 2,985                   |               | $                  | 2,756 |                         | $ | 2,985  |  | $ | 2,499
|Non-amortizable intangible assets: |  |                      |                    |               |                         |               |                    |       |                         |   |        |  |   |      
|Goodwill                           |  |                      |                    |               | 12,251                  |               |                    | 5,506 |                         |   | 12,251 |  |   | 5,506
|                                   |  |                      |                    |               |                         |               |                    |       |                         |   |        |  |   |      
|Total intangibles                  |  |                      |                    | $             | 15,236                  |               | $                  | 8,262 |                         | $ | 15,236 |  | $ | 8,005
|                                   |  |                      |                    |               |                         |               |                    |       |                         |   |        |  |   |      



License agreements are
amortized using the straight-line method over their estimated useful lives. Goodwill is not amortized, but tested for impairment at least annually in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. The
Company adopted SFAS No. 142 on August 1, 2002.



The
accompanying consolidated statements of operations reflect amortization expense of $257, $257 and $2,352 for 2004, 2003 and 2002, respectively. Estimated amortization expense, assuming the current intangible asset balance and no new acquisitions,
for the year ending July 31, 2005, is $229, and zero thereafter.



29



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##### Index to Financial Statements

PROSOFTTRAINING AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except share data)



In contrast to accounting standards in effect during 2002, SFAS No. 142 provided that goodwill should
not be amortized by the Company in 2003 or thereafter. The information presented below reflects adjustments to information reported in 2002 as if SFAS No. 142 had been applied in that year.



|                                  |  |                     |        |   |      |   |        |      |  |   |         |  
|--------------------------------- |  | ------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                  |  | Year ended July 31, |       
|                                  |  | 2004                |        |   | 2003 |   |        | 2002 | 
|Reported net loss                 |  | $                   | (1,566 | ) |      | $ | (2,308 | )    |  | $ | (42,459 | )
|Goodwill amortization             |  |                     |       |   |      |   |       |      |  |   | 2,228   |  
|                                  |  |                     |        |   |      |   |        |      |  |   |         |  
|Adjusted net loss                 |  | $                   | (1,566 | ) |      | $ | (2,308 | )    |  | $ | (40,231 | )
|                                  |  |                     |        |   |      |   |        |      |  |   |         |  
|Basic and diluted loss per share: |  |                     |        |   |      |   |        |      |  |   |         |  
|Reported net loss                 |  | $                   | (0.06  | ) |      | $ | (0.10  | )    |  | $ | (1.77   | )
|Goodwill amortization             |  |                     |       |   |      |   |       |      |  |   | 0.09    |  
|                                  |  |                     |        |   |      |   |        |      |  |   |         |  
|Adjusted loss per share           |  | $                   | (0.06  | ) |      | $ | (0.10  | )    |  | $ | (1.68   | )
|                                  |  |                     |        |   |      |   |        |      |  |   |         |  



7. Debt



In October 2001, the Company received $2,500 from Hunt Capital Growth Fund
II, L.P. (Hunt Capital) pursuant to the issuance to Hunt Capital of a Subordinated Secured Convertible Note (Note). The Note is secured by all of the assets of the Company, has a five-year term, carries a 10% coupon, and does
not require any interest payments until maturity. The Note is convertible into Common Stock of the Company at $0.795 per share. Hunt Capital may accelerate the maturity of the Note upon certain events, including a sale or change of control of the
Company or an equity financing by the Company in excess of $2,500. In addition, as further consideration for the investment, Hunt Capital received the right to certain payments upon a sale of the Company in a transaction whose value falls below
$145,000. The potential payment is $1,000 unless the transaction value falls below $60,000 at which point the payment would grow on a pro-rata basis to $4,500 if the transaction value falls below $10,000.



The amount reflected for long-term debt on the accompanying consolidated
balance sheet at July 31, 2004 is $3,264. The amount represents the original principal amount of $2,500 and related accrued interest, which is payable at maturity, of $764.



8. Stock Options and Warrants on Common Stock



Stock options



The Companys stock option plans provide for the granting of options to purchase shares of the Companys common stock to employees, officers,
directors and consultants. The plans include nonstatutory options and incentive stock options. Options generally vest over three to four years and expire no earlier than five years and no later than ten years after the date of grant. The plans
authorized the issuance of an aggregate of 7,008,500 shares of common stock. As of July 31, 2004, 1,695,518 options were available for grant under the plans.



30



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##### Table of Contents

##### Index to Financial Statements

PROSOFTTRAINING AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except share data)



Stock option transactions are as follows:



|                              |  |            |   |  |                               |     
|----------------------------- |  | ---------- | - |  | ----------------------------- | ----
|                              |  | Shares     |   |  | WeightedAverageExercise Price
|Outstanding at August 1, 2001 |  | 3,871,518  |   |  | $                             | 4.63
|Granted                       |  | 935,500    |   |  | $                             | 0.83
|Exercised                     |  | (169,100   | ) |  | $                             | 1.26
|Cancelled                     |  | (651,808   | ) |  | $                             | 6.50
|                              |  |            |   |  |                               |     
|Outstanding at July 31, 2002  |  | 3,986,110  |   |  | $                             | 4.63
|Granted                       |  | 722,000    |   |  | $                             | 0.16
|Exercised                     |  |           |   |  |                               |    
|Cancelled                     |  | (2,098,345 | ) |  | $                             | 3.72
|                              |  |            |   |  |                               |     
|Outstanding at July 31, 2003  |  | 2,609,765  |   |  | $                             | 2.43
|Granted                       |  | 662,000    |   |  | $                             | 0.60
|Exercised                     |  | (100,000   | ) |  | $                             | 0.14
|Cancelled                     |  | (536,845   | ) |  | $                             | 2.10
|                              |  |            |   |  |                               |     
|Outstanding at July 31, 2004  |  | 2,634,920  |   |  | $                             | 2.13
|                              |  |            |   |  |                               |     
|Exercisable at July 31, 2002  |  | 2,103,911  |   |  | $                             | 4.02
|                              |  |            |   |  |                               |     
|Exercisable at July 31, 2003  |  | 1,715,114  |   |  | $                             | 2.91
|                              |  |            |   |  |                               |     
|Exercisable at July 31, 2004  |  | 1,974,297  |   |  | $                             | 2.52
|                              |  |            |   |  |                               |     



The following table
summarizes information concerning options outstanding and exercisable as of July 31, 2004:



|                         |  |                     |  |                              |      |                                         |           |        |           |                              |   |     
|------------------------ |  | ------------------- |  | ---------------------------- | ---- | --------------------------------------- | --------- | ------ | --------- | ---------------------------- | - | ----
|                         |  | Options Outstanding |  | Options Exercisable         
|Range of Exercise Prices |  | Number              |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualLife |           | Number |           | WeightedAverageExercisePrice
|$0.10$1.00              |  | 1,394,920           |  | $                            | 0.39 |                                         | 6.3 years |        | 988,404   |                              | $ | 0.34
|$1.01$4.00              |  | 843,500             |  | $                            | 1.39 |                                         | 2.7 years |        | 601,894   |                              | $ | 1.45
|$4.01$11.00             |  | 396,500             |  | $                            | 9.81 |                                         | 1.1 years |        | 383,999   |                              | $ | 9.80
|                         |  |                     |  |                              |      |                                         |           |        |           |                              |   |     
|Total                    |  | 2,634,920           |  |                              |      |                                         |           |        | 1,974,297 |                              |   |     
|                         |  |                     |  |                              |      |                                         |           |        |           |                              |   |     



31



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##### Table of Contents

##### Index to Financial Statements

PROSOFTTRAINING AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except share data)



Warrants



Warrants to purchase shares of common stock are as follows:



|                        |  |           |   |  |               
|----------------------- |  | --------- | - |  | --------------
|                        |  | Warrants  |   |  | Exercise Price
|Balance, August 1, 2001 |  | 1,502,759 |   |  | $.01 to $20.06
|Issued                  |  |          |   |  |              
|Exercised               |  |          |   |  |              
|Expired                 |  |          |   |  |              
|                        |  |           |   |  |               
|Balance, July 31, 2002  |  | 1,502,759 |   |  | $.01 to $20.06
|Issued                  |  |          |   |  |              
|Exercised               |  |          |   |  |              
|Expired                 |  | (15,000   | ) |  | $11.00        
|                        |  |           |   |  |               
|Balance, July 31, 2003  |  | 1,487,759 |   |  | $.01 to $20.06
|                        |  |           |   |  |               
|Issued                  |  |          |   |  |              
|Exercised               |  |          |   |  |              
|Expired                 |  |          |   |  |              
|                        |  |           |   |  |               
|Balance, July 31, 2004  |  | 1,487,759 |   |  | $.01 to $20.06
|                        |  |           |   |  |               



9. Benefit Plan



The Company has established a 401(k) savings plan. Participants include all
employees who have completed three months of service and are at least 21 years of age. Employees can contribute up to 60% of compensation to the plan provided that amount does not exceed the annual dollar limits set by the Internal Revenue Code. The
Company makes a matching contribution on behalf of each participant in an amount equal to 50% of the first 5% of the employees compensation contributed to the plan. In addition, the Company may at its option make discretionary contributions.
Vesting on the Companys contribution occurs over a three-year period. The Company made contributions of $43, $72 and $170 during 2004, 2003 and 2002, respectively.



10. Commitments



The Company leases certain facilities as well as computers, production and other office equipment under noncancellable lease agreements. The
Companys future minimum lease payments at July 31, 2004 under such agreements are as follows:



|                                                         |  |               |     |   |                  |   |    
|-------------------------------------------------------- |  | ------------- | --- | - | ---------------- | - | ---
|                                                         |  | CapitalLeases |     |   | Operating Leases
|2005                                                     |  | $             | 107 |   |                  | $ | 319
|2006                                                     |  |               |    |   |                  |   | 252
|                                                         |  |               |     |   |                  |   |    
|Future minimum lease payments                            |  |               | 107 |   |                  | $ | 571
|                                                         |  |               |     |   |                  |   |    
|Less amounts representing interest                       |  |               | (9  | ) |                  |   |    
|                                                         |  |               |     |   |                  |   |    
|Present value of minimum lease payments                  |  |               | 98  |   |                  |   |    
|Less current portion                                     |  |               | (98 | ) |                  |   |    
|                                                         |  |               |     |   |                  |   |    
|Obligations under capital leases, net of current portion |  | $             |    |   |                  |   |    
|                                                         |  |               |     |   |                  |   |    



Assets held under
capital leases are included in property and equipment and had a total cost of $351, and a net book value of zero, at July 31, 2004 and 2003.



Rent expense for the periods ended July 31, 2004, 2003 and 2002 totaled $437, $710 and $876, respectively.



32



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##### Index to Financial Statements

PROSOFTTRAINING AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except share data)



11. Income Taxes



A reconciliation of income tax (benefit) expense using the statutory federal income tax rate of 34% is as follows:



|                                           |  |                     |      |   |      |   |        |      |  |   |         |  
|------------------------------------------ |  | ------------------- | ---- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                           |  | Year Ended July 31, |     
|                                           |  | 2004                |      |   | 2003 |   |        | 2002 | 
|Income tax benefit at statutory rate       |  | $                   | (532 | ) |      | $ | (785   | )    |  | $ | (14,122 | )
|Amortization of non-deductible goodwill    |  |                     |     |   |      |   |       |      |  |   | 699     |  
|Write-off of goodwill                      |  |                     |     |   |      |   |       |      |  |   | 10,302  |  
|State income taxes, net of federal benefit |  |                     | (62  | ) |      |   | (83    | )    |  |   | (351    | )
|Other                                      |  |                     | 26   |   |      |   | (1,196 | )    |  |   | 332     |  
|Increase in valuation allowance            |  |                     | 568  |   |      |   | 2,064  |      |  |   | 4,065   |  
|                                           |  |                     |      |   |      |   |        |      |  |   |         |  
|Deferred income tax expense (benefit)      |  | $                   |     |   |      | $ |       |      |  | $ | 925     |  
|                                           |  |                     |      |   |      |   |        |      |  |   |         |  



Included in
Other for 2004 are adjustments to prior years tax returns of approximately $49 ($19 after tax effect).



Deferred income taxes reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their basis for
financial reporting purposes. Deferred tax assets and liabilities are as follows:



|                                       |  |          |         |   |      |   |         |      |  |   |         |  
|-------------------------------------- |  | -------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                       |  | July 31, |        
|                                       |  | 2004     |         |   | 2003 |   |         | 2002 | 
|Net operating loss carryforwards       |  | $        | 30,937  |   |      | $ | 29,965  |      |  | $ | 27,550  |  
|Accrued expenses                       |  |          | 99      |   |      |   | 92      |      |  |   | 239     |  
|Accounts receivable                    |  |          | 39      |   |      |   | 188     |      |  |   | 344     |  
|Property and equipment                 |  |          | 122     |   |      |   | 304     |      |  |   | 302     |  
|                                       |  |          |         |   |      |   |         |      |  |   |         |  
|                                       |  |          | 31,197  |   |      |   | 30,549  |      |  |   | 28,435  |  
|Courseware development costs and other |  |          | (953    | ) |      |   | (873    | )    |  |   | (823    | )
|                                       |  |          |         |   |      |   |         |      |  |   |         |  
|                                       |  |          | 30,244  |   |      |   | 29,676  |      |  |   | 27,612  |  
|Valuation allowance                    |  |          | (30,244 | ) |      |   | (29,676 | )    |  |   | (27,612 | )
|                                       |  |          |         |   |      |   |         |      |  |   |         |  
|Net deferred tax assets                |  | $        |        |   |      | $ |        |      |  | $ |        |  
|                                       |  |          |         |   |      |   |         |      |  |   |         |  



As a result of the
significant net losses incurred in fiscal 2004 and 2003, the Company recorded a valuation allowance to fully reserve its deferred tax asset.



At July 31, 2004, the Company had net operating loss carryforwards available to offset future federal taxable income of approximately $79,600. Such
carryforwards expire principally from 2011 to 2024. Federal net operating loss carryforwards of approximately $13,200 were generated from the exercise of employee stock options and any decrease in the valuation reserve related to these carryforwards
will be reflected in the financial statements as a credit to additional paid-in capital. In 2001, the Company recognized a tax benefit of $100 related to these carryforwards which was recorded directly to paid-in capital. Because of various equity
transactions completed by the Company, utilization of all net operating loss carryforwards for federal income tax reporting purposes created prior to those transactions will be subject to annual limitations under the change in ownership provisions
of the Tax Reform Act of 1986.



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##### Index to Financial Statements

PROSOFTTRAINING AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except share data)



12. Business Segment and Foreign Operations



Information regarding foreign operations follows:



|                  |  |                     |       |      |   |        |  |   |       
|----------------- |  | ------------------- | ----- | ---- | - | ------ |  | - | ------
|                  |  | Year Ended July 31,
|                  |  | 2004                |       | 2003 |   | 2002  
|Net sales         |  | $                   | 8,048 |      | $ | 12,020 |  | $ | 17,922
|United States     |  |                     | 6,765 |      |   | 10,160 |  |   | 15,976
|Foreign           |  |                     | 1,283 |      |   | 1,860  |  |   | 1,946 
|Long-lived assets |  | $                   | 283   |      | $ | 483    |  | $ | 1,166 
|United States     |  |                     | 252   |      |   | 416    |  |   | 1,056 
|Foreign           |  |                     | 31    |      |   | 67     |  |   | 110   



The Company manages
its content and certification product lines as one business segment.



13.
Subsequent Event



On August 30, 2004, the Company received
$1.35 million from institutional investors pursuant to the issuance of Secured 8% Convertible Notes due August 30, 2006. The Notes are secured by all of the assets of the Company, subject to intercreditor agreement with the Companys existing
secured creditor, and require interest payments semi-annually, in cash or, at the Company option, in shares of its Common Stock or in the form of additional one-year notes accruing interest at the rate of 10% per annum. The Notes are convertible
into common stock of the Company at $0.28 per share. In connection with this financing, the Company also issued to the investors (i) warrants to purchase up to 1,205,358 shares of the Companys Common Stock, exercisable at $0.38 per share and
expiring in March 2010, and (ii) warrants to purchase up to 3,857,143 shares, exercisable at $0.35 per share and generally expiring in February 2006.



14. Unaudited Quarterly Data



Summarized quarterly financial data for 2004 and 2003 follow:



|                                                 |  |             |        |   |             |   |        |             |  |   |             |   |  |   |       |  
|------------------------------------------------ |  | ----------- | ------ | - | ----------- | - | ------ | ----------- |  | - | ----------- | - |  | - | ----- | -
|                                                 |  | 1st Quarter |        |   | 2nd Quarter |   |        | 3rd Quarter |  |   | 4th Quarter |  
|Year ended July 31, 2004:                        |  |             |        |   |             |   |        |             |  |   |             |   |  |   |       |  
|Revenues                                         |  | $           | 2,331  |   |             | $ | 1,996  |             |  | $ | 1,968       |   |  | $ | 1,753 |  
|Operating loss                                   |  |             | (37    | ) |             |   | (208   | )           |  |   | (459        | ) |  |   | (560  | )
|Net loss                                         |  |             | (110   | ) |             |   | (286   | )           |  |   | (534        | ) |  |   | (636  | )
|Basic and diluted loss per common share          |  |             | (.00   | ) |             |   | (.01   | )           |  |   | (.02        | ) |  |   | (.03  | )
|                                                 |  |             |        |  
|Year ended July 31, 2003:                        |  |             |        |   |             |   |        |             |  |   |             |   |  |   |       |  
|Revenues                                         |  | $           | 3,720  |   |             | $ | 2,840  |             |  | $ | 2,696       |   |  | $ | 2,764 |  
|Operating (loss) income                          |  |             | (1,320 | ) |             |   | (1,368 | )           |  |   | 434         |   |  |   | 230   |  
|Net (loss) income                                |  |             | (1,386 | ) |             |   | (1,440 | )           |  |   | 361         |   |  |   | 157   |  
|Basic and diluted (loss) income per common share |  |             | (.06   | ) |             |   | (.06   | )           |  |   | .01         |   |  |   | .01   |  



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##### Index to Financial Statements

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



None.



ITEM 9A. CONTROLS AND PROCEDURES



Based on an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Act of 1934, as amended) our Chief (principal) Executive Officer and Chief (principal)
Financial Officer has concluded that such controls and procedures were effective as of the end of the period covered by this report. In connection with such evaluation, no change in our internal control over financial reporting was identified that
occurred during the period covered by this report and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



ITEM 9B.
OTHER INFORMATION



None.



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PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



The information required by this item will be included in the Companys Proxy Statement with respect to its 2004 Annual Meeting of Stockholders to be filed with the Commission within 120 days of July 31,
2004 and is incorporated herein by reference.



ITEM 11. EXECUTIVE COMPENSATION



The information required by this item will be included in the Companys Proxy Statement with respect to its 2004 Annual Meeting of Stockholders to be filed with the Commission within 120 days of July 31, 2004 and is incorporated
herein by reference.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The information required by this item will be included in the Companys Proxy Statement with respect to its 2004 Annual Meeting of Stockholders to be
filed with the Commission within 120 days of July 31, 2004 and is incorporated herein by reference.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information required by this item will be included in the Companys Proxy Statement with respect to its 2004 Annual Meeting of Stockholders to be filed with the Commission within 120 days of July 31, 2004 and
is incorporated herein by reference.



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES



The information required by this item will be included in the Companys Proxy Statement with respect to its 2004 Annual Meeting of Stockholders to be filed with the Commission within 120 days of July 31, 2004 and
is incorporated herein by reference.



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##### Index to Financial Statements

PART IV



ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.



a. The following documents are filed as part of this report.



1. Consolidated Financial Statements



See Index to Consolidated Financial Statements Item 8.



2. Consolidated Financial Statement Schedules.



Schedules other than Schedule II are omitted as the required
information is inapplicable or the information is presented in the consolidated financial statements or related notes.



3. Exhibits



See Exhibit Index.



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PROSOFTTRAINING AND SUBSIDIARIES



SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

(In thousands)



|                                 |  |                             |       |                              |   |                                         |  |   |                        |   |  |   |    
|-------------------------------- |  | --------------------------- | ----- | ---------------------------- | - | --------------------------------------- |  | - | ---------------------- | - |  | - | ---
|                                 |  | Balance atbeginning of year |       | Charged to costs andexpenses |   | Deductionswrite-offs, net of recoveries |  |   | Balance at end of year
|Allowance for doubtful accounts: |  |                             |       |                              |   |                                         |  |   |                        |   |  |   |    
|Year ended July 31, 2004         |  | $                           | 494   |                              | $ | 121                                     |  | $ | (467                   | ) |  | $ | 148
|Year ended July 31, 2003         |  | $                           | 478   |                              | $ | 93                                      |  | $ | (77                    | ) |  | $ | 494
|Year ended July 31, 2002         |  | $                           | 1,003 |                              | $ | 295                                     |  | $ | (820                   | ) |  | $ | 478



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##### Index to Financial Statements

SIGNATURES



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



PROSOFTTRAININGBy:

/s/    ROBERT G.
GWINRobert G. Gwin Chairman of the Board and Chief Executive OfficerBy:

/s/    WILLIAM J.
WERONICKWilliam J. Weronick Vice President, Finance




Dated: October 28, 2004



Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on October 28, 2004.



|                                              |  |                                                                                                                                          
|--------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|Signature                                     |  | Title                                                                                                                                    
|/s/    ROBERT G. GWINRobert G. Gwin           |  | Chairman of the Board and Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial
Officer)
|                                              | 
|/s/    WILLIAM J.
WERONICKWilliam J.
Weronick |  | Vice President, Finance (Principal Accounting Officer)                                                                                   
|                                              | 
|/s/    EDWARD M. WALSHEdward M. Walsh         |  | Director                                                                                                                                 
|                                              | 
|/s/    JEFFREY G. KORNJeffrey G. Korn         |  | Director                                                                                                                                 
|                                              | 
|/s/    J. WILLIAM
FULLERJ. William
Fuller     |  | Director                                                                                                                                 
|                                              | 
|/s/    CHARLES P.
MCCUSKERCharles P.
McCusker |  | Director                                                                                                                                 



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##### Index to Financial Statements

EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                                                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                                                              
|2           |  | Agreement and Plan of Reorganization dated March 26, 1996 between the Company, Pro-Soft Development Corp. and the shareholders of Pro-Soft Development Corp. Filed as Exhibit 2 to the
Companys Registration Statement on Form S-1 (No. 333-11247) (Registration Statement No. 333-11247) and incorporated herein by reference.  
|            | 
|2.2         |  | Agreement and Plan of Merger dated February 22, 2004 by and among the Company, Trinity Learning Corporation and MTX Acquisition Corp. Filed as Exhibit 2.1 to the Companys Current Report
on Form 8-K dated February 22, 2004 and incorporated herein by reference.                                                                
|            | 
|2.3         |  | Termination Agreement dated July 23, 2004 by and among the Company, Trinity Learning Corporation and MTX Acquisition Corp.                                                                                                                                                                                                          
|            | 
|3.1         |  | Restated Articles of Incorporation of the Company, as amended. Filed as Exhibit 3.1 to Registration Statement No. 333-76984 and incorporated herein by reference.                                                                                                                                                                   
|            | 
|3.2         |  | Amended and Restated Bylaws of the Company. Filed as Exhibit 3.2 to Registration Statement No. 333-11247 and incorporated herein by reference.                                                                                                                                                                                      
|            | 
|4.1         |  | Specimen Stock Certificate. Filed as Exhibit 4 to Registration Statement No. 333-11247 and incorporated herein by reference.                                                                                                                                                                                                        
|            | 
|4.2         |  | Rights Agreement dated June 27, 2001, between the Company and Interwest Transfer Company, Inc., which includes the form of Right Certificate as Exhibit A and the Summary of Rights as Exhibit
B. Filed as Exhibit 4.1 to the Companys Current Report on Form 8-K dated June 28, 2001 and incorporated herein by reference.        
|            | 
|10.1        |  | Pro-Soft Development Corp. 1996 Stock Option Plan. Filed as Exhibit 10.1 to Registration Statement No. 333-11247 and incorporated herein by reference.                                                                                                                                                                              
|            | 
|10.2        |  | Prosoft I-Net Solutions, Inc. Amended 1996 Stock Option Plan. Filed as Exhibit 10.2 to Registration Statement No. 333-35249 and incorporated herein by reference.                                                                                                                                                                   
|            | 
|10.3        |  | Form of Indemnification Agreement between the Company and its Directors and Officers. Filed as Exhibit 10.13 to Registration Statement No. 333-11247 and incorporated herein by
reference.                                                                                                                                          
|            | 
|10.4        |  | Registration Rights Agreement dated as of December 2, 1998 among the Company and various investors. Filed as Exhibit 10.20 to Registration Statement No. 333-35249 and incorporated herein by
reference.                                                                                                                            
|            | 
|10.5        |  | Accounts Receivable Purchase Agreement dated as of November 6, 1998 by and between the Company and Silicon Valley Financial Services (a division of Silicon Valley Bank). Filed as Exhibit 10.4
to the Companys Quarterly Report on Form 10-Q for the quarterly period ended January 31, 1999 and incorporated herein by reference.
|            | 
|10.6        |  | Securities Purchase Agreement dated November 22, 1999 among the Company and Hunt Capital Growth Fund, II L.P. Filed as Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended October 31, 1999 and incorporated herein by reference.                                                            
|            | 
|10.7        |  | Registration Rights Agreement dated November 22, 1999 among the Company and Hunt Capital Growth Fund, II L.P. Filed as Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended October 31, 1999 and incorporated herein by reference.                                                            
|            | 
|10.8        |  | Warrant Agreement dated November 22, 1999 among the Company and Hunt Capital Growth Fund, II L.P. Filed as Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended October 31, 1999 and incorporated herein by reference.                                                                        



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|            |  |                                                                                                                                                                                                                                                               
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                        
|10.9        |  | Stock Purchase Agreement dated June 27, 2000 by and among the Company, Drake Personnel (New Zealand) Limited and ComputerPREP, Inc. Filed as Exhibit 2.1 to the Companys Current Report
on Form 8-K dated June 27, 2000 and incorporated herein by reference.
|            | 
|10.10       |  | Registration Rights Agreement dated June 27, 2000 by and among the Company and Drake Personnel (New Zealand) Limited. Filed as Exhibit 10.1 to the Companys Current Report on Form 8-K
dated June 27, 2000 and incorporated herein by reference.             
|            | 
|10.11       |  | Common Stock Purchase Warrant dated June 27, 2000 to purchase 300,000 shares issued to Drake Personnel (New Zealand) Limited. Filed as Exhibit 10.2 to the Companys Current Report on
Form 8-K dated June 27, 2000 and incorporated herein by reference.     
|            | 
|10.12       |  | Common Stock Purchase Warrant dated June 27, 2000 to purchase 300,000 shares issued to Drake Personnel (New Zealand) Limited. Filed as Exhibit 10.3 to the Companys Current Report on
Form 8-K dated June 27, 2000 and incorporated herein by reference.     
|            | 
|10.13       |  | Securities Purchase Agreement dated June 27, 2000 by and among the Company and various investors. Filed as Exhibit 10.4 to the Companys Current Report on Form 8-K dated June 27, 2000
and incorporated herein by reference.                                 
|            | 
|10.14       |  | Registration Rights Agreement dated June 27, 2000 by and among the Company and various investors. Filed as Exhibit 10.5 to the Companys Current Report on Form 8-K dated June 27, 2000
and incorporated herein by reference.                                 
|            | 
|10.15       |  | Employment Agreement dated August 1, 2003 between the Company and Robert G. Gwin. Filed as Exhibit 10.16 to the Companys Annual Report on Form 10-K for the year ended July 31, 2003 and
incorporated herein by reference.                                   
|            | 
|10.16       |  | Prosofttraining.com 2000 Stock Incentive Plan. Filed as Exhibit 99.1 to the Companys Registration Statement on Form S-8 (333-51360) and incorporated herein by
reference.                                                                                    
|            | 
|10.17       |  | Prosofttraining.com 2000 Employee Stock Purchase Plan. Filed as Exhibit 99.2 to the Companys Registration Statement on Form S-8 (333-51360) and incorporated herein by
reference.                                                                            
|            | 
|10.18       |  | Subordinated Secured Convertible Note dated October 16, 2001 among the Company and Hunt Capital Growth Fund II, L.P. Filed as Exhibit 10.1 to the Companys Current Report on Form 8-K
dated October 16, 2001 and incorporated herein by reference.           
|            | 
|10.19       |  | Security Agreement dated October 16, 2001 among the Company and Hunt Capital Growth Fund II, L.P. Filed as Exhibit 10.2 to the Companys Current Report on Form 8-K dated October 16, 2001
and incorporated herein by reference.                              
|            | 
|10.20       |  | Securities Purchase Agreement dated October 16, 2001 among the Company and Hunt Capital Growth Fund II, L.P. Filed as Exhibit 10.3 to the Companys Current Report on Form 8-K dated
October 16, 2001 and incorporated herein by reference.                   
|            | 
|10.21       |  | Rights Agreement dated October 16, 2001 among the Company and Hunt Capital Growth Fund II, L.P. Filed as Exhibit 10.4 to the Companys Current Report on Form 8-K dated October 16, 2001
and incorporated herein by reference.                                
|            | 
|10.22       |  | First Amendment to Registration Rights Agreement dated October 16, 2001 among the Company and Hunt Capital Growth Fund II, L.P. Filed as Exhibit 10.5 to the Companys Current Report on
Form 8-K dated October 16, 2001 and incorporated herein by reference.
|            | 
|10.23       |  | First Amendment to Securities Purchase Agreement dated October 16, 2001 among the Company and Hunt Capital Growth Fund II, L.P. Filed as Exhibit 10.6 to the Companys Current Report on
Form 8-K dated October 16, 2001 and incorporated herein by reference.



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                                                                                          
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                                   
|10.24       |  | Separation Agreement dated December 9, 2002, between the Company and Jerrell M. Baird. Filed as Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q dated October 31, 2002 and
incorporated herein by reference.                                                                                 
|            | 
|10.25       |  | Amendment to Securities Purchase Agreement dated December 21, 2001 among the Company and Hunt Capital Growth Fund II, L.P. Filed as Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q dated January 31, 2002 and incorporated herein by reference.                                             
|            | 
|10.26       |  | Exchange Agreement dated June 4, 2004 by and between the Company and Hunt Capital Growth Fund II, L.P. Filed as Exhibit 99.1 to the Companys Current Report on Form 8-K dated June 4,
2004 and incorporated herein by reference.                                                                        
|            | 
|10.27       |  | Form of Warrant Agreement between the Company and Hunt Capital Growth Fund II, L.P. Filed as Exhibit 99.2 to the Companys Current Report on Form 8-K dated June 4, 2004 and incorporated
herein by reference.                                                                                           
|            | 
|10.28       |  | Purchase Agreement dated as of August 30, 2004, among the Company, DKR SoundShore Oasis Holding Fund Ltd. and DKR SoundShore Strategic Holding Fund Ltd. Filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K dated August 30, 2004 and incorporated herein by reference.                   
|            | 
|10.29       |  | $1,080,000 Secured 8% Convertible Note due August 30, 2006, issued by the Company to DKR SoundShore Oasis Holding Fund Ltd. Filed as Exhibit 10.2 to the Companys Current Report on Form
8-K dated August 30, 2004 and incorporated herein by reference.                                                
|            | 
|10.30       |  | $270,000 Secured 8% Convertible Note due August 30, 2006, issued by the Company to DKR SoundShore Strategic Holding Fund Ltd. Filed as Exhibit 10.3 to the Companys Current Report on
Form 8-K dated August 30, 2004 and incorporated herein by reference.                                              
|            | 
|10.31       |  | Series A Warrant dated as of August 30, 2004, issued by the Company to DKR SoundShore Strategic Holding Fund Ltd. Filed as Exhibit 10.4 to the Companys Current Report on Form 8-K dated
August 30, 2004 and incorporated herein by reference.                                                          
|            | 
|10.32       |  | Series A Warrant dated as of August 30, 2004, issued by the Company to DKR SoundShore Oasis Holding Fund Ltd. Filed as Exhibit 10.5 to the Companys Current Report on Form 8-K dated
August 30, 2004 and incorporated herein by reference.                                                              
|            | 
|10.33       |  | Series B Warrant dated as of August 30, 2004, issued by the Company to DKR SoundShore Oasis Holding Fund Ltd. Filed as Exhibit 10.6 to the Companys Current Report on Form 8-K dated
August 30, 2004 and incorporated herein by reference.                                                              
|            | 
|10.34       |  | Series B Warrant dated as of August 30, 2004, issued by the Company to DKR SoundShore Strategic Holding Fund Ltd. Filed as Exhibit 10.7 to the Companys Current Report on Form 8-K dated
August 30, 2004 and incorporated herein by reference.                                                          
|            | 
|10.35       |  | Security Agreement dated as of August 30, 2004, between the Company, DKR SoundShore Oasis Holding Fund Ltd., DKR SoundShore Strategic Holding Fund Ltd. and DKR Oasis. Filed as Exhibit 10.8 to
the Companys Current Report on Form 8-K dated August 30, 2004 and incorporated herein by reference.     
|            | 
|10.36       |  | Registration Rights Agreement dated as of August 30, 2004, by and among the Company, DKR SoundShore Oasis Holding Fund Ltd., and DKR SoundShore Strategic Holding Fund Ltd. Filed as Exhibit
10.9 to the Companys Current Report on Form 8-K dated August 30, 2004 and incorporated herein by reference.
|            | 
|10.37       |  | First Amendment to Security Agreement dated as of August 30, 2004, between the Company and Hunt Capital Growth Fund II, L.P. Filed as Exhibit 10.10 to the Companys Current Report on
Form 8-K dated August 30, 2004 and incorporated herein by reference.                                              



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                                                                             
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                      
|10.38       |  | Amendment to Securities Purchase Agreement and Convertible Note entered into as of August 30, 2004, between the Company and Hunt Capital Growth Fund II, L.P. Filed as Exhibit 10.11 to the
Companys Current Report on Form 8-K dated August 30, 2004 and incorporated herein by reference.
|            | 
|21          |  | Subsidiaries of the Company. Filed as Exhibit 21 to the Companys Annual Report on Form 10-K dated October 22, 2001 and incorporated herein by reference.                                                                                                                                   
|            | 
|23          |  | Consent of Grant Thornton LLP, Independent Certified Public Accountants.                                                                                                                                                                                                                    
|            | 
|31          |  | Section 302 Certification                                                                                                                                                                                                                                                                   
|            | 
|32          |  | Section 1350 Certification                                                                                                                                                                                                                                                                  



43