##### Table of Contents

---




SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D. C. 20549





---




FORM 10-K





(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, 2002
| |  | ----------------------------------------




| ̈ |  | 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





---




ProsoftTraining


(Exact name of Registrant as specified in its charter)





Nevada

87-0448639(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification
No.)





3001 Bee Caves Road, Suite 300, Austin, TX 78746


(Address of principal executive offices) (Zip Code)





(512) 328-6140


(Registrants telephone number, including area code)





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)





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. x





The aggregate market value of common stock held by non-affiliates (excludes outstanding shares beneficially owned by directors and officers) as of October 18, 2002, was approximately $4.3 million. As of such date, 24,197,414
shares of common stock, $.001 par value, were outstanding.





Part III is incorporated by reference from the
Registrants definitive proxy statement for its 2002 Annual Meeting of Stockholders to be filed with the Commission within 120 days of July 31, 2002.





---



---

##### Table of Contents

PROSOFTTRAINING





INDEX TO ANNUAL REPORT ON FORM 10-K





PagePART IItem 1.

Business

1Organization History

1Recent Development

1Business Segments

1Customers

5Competition.

5Sources of Revenue

6Sales, Marketing and Customer Support

6Seasonality

6Trademarks and Copyrights

6Employees

6Regulations

7Item 2.

Properties

8Item 3.

Legal Proceedings

8Item 4.

Submission of Matters to Vote of Security Holders

8PART IIItem 5.

Market for Registrants Common Equity and Related Stockholder Matters

9Item 6.

Selected Financial Data

9tem 7.

Managements Discussion and Analysis of Financial Condition and Results of Operations

9Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

15Item 8.

Financial Statements and Supplementary Data

16Item 9.

Changes in and Disagreements with Accountants on Accounting & Financial Discosure

32PART IIIItem 10.

Directors And Executive Officers Of The Registrant

33Item 11.

Executive Compensation

33Item 12.

Security Ownership Of Certain Beneficial Owners And Management

33Item 13.

Certain Relationships And Related Transactions

33Item 14.

Controls and Procedures

33PART IVItem 15.

Exhibits And Financial Statement Schedules And Reports On Form 8-K

34Signatures

35Certification of Chief Executive Officer and Certification of Chief Financial Officer

36Exhibit Index

38







---

##### Table of Contents

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.





PART I





ITEM
1.    
BUSINESS





Organization History





ProsoftTraining (the Company or Prosoft or
we or our) is incorporated under the laws of the State of Nevada. From its incorporation in May 1985 until March 1996, the Company had no significant operations. 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, the Company entered into an Agreement and Plan of Reorganization (the Reorganization Agreement) with Old ProSoft and the Old ProSoft shareholders. Under the terms of the Reorganization Agreement, Old
ProSoft shareholders received one share of Common Stock of the Company in exchange for each of their shares of Old ProSoft, and Old ProSoft became a wholly owned subsidiary of the Company (the Reorganization). As part of the
Reorganization, all of the executive officers and directors of the Company resigned and the executive officers and directors of Old ProSoft became the executive officers and directors of the Company 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, changed its name to ProsoftTraining.com in December 1998 and changed its name to ProsoftTraining in December 2001.





Recent Development





The Companys Board of Directors engaged an investment banker
in July 2002 to explore strategic options for the Company, including a sale of some or all of its assets and operations. We have been involved in discussions as the result of this engagement that could result in the sale of some or all of our assets
or operations. As a step in this process, an interested party has submitted an indication of interest such that we have agreed to negotiate exclusively with that party for a three-week period through November 29, 2002 in an effort to determine if an
acceptable offer for the sale of some or all of the Companys assets or operations will be received from that party. There can be no assurance than an acceptable offer will be received from that party or any other party, and if an offer is
received there can be no assurance that the offer will be made on terms acceptable to the Board of Directors. For additional information, see the Risk to Continued Operation on page 14.





Business Segments





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 either purchased on a fee-per-use basis or for a one-time fee.




1




---

##### Table of Contents




The Companys content is focused on training and education for job-role and
vendor-specific certifications. Recent trends in the market suggest that the combination of both job-role and vendor-specific curriculum is essential to serving the markets skilled ICT labor needs today and in the future. Other products
offered by Prosoft assist in developing proficiency in specific computer programs, programming languages or operating systems. As of July 2002, the Companys library consisted of approximately 1,000 unique course titles covering software and
hardware products, programming, and certification programs such as Microsoft, Oracle, Linux, A+, Network+, Cisco, Sun and the Companys proprietary certification programs including CIW, CCNT, and CTP. Many of these titles are produced in
multiple learning modalities such as instructor-led training (ILT), web-based training (WBT), computer-based training (CBT), assessment, and self-study. These products have also been combined into a blended
learning offering called Classroom-in-a-Box.





Content Distribution





Through the Companys ComputerPREP division, Prosoft has built a distribution network with a wide range of customers including
academic institutions, commercial training centers, corporations, and individuals worldwide. The Company provides products to a diverse client list that includes educators such as the University of Phoenix, New Horizons, Productivity Point, CompUSA,
Executrain, MicroCenter, IBM, Ford, Lockheed  Martin, Knowledge Alliance, NETg, Drake, SBC Communications, Siemens, Avaya, Expanets, and a broad variety of 4-year, community, and technical colleges. The learning center channel represented
approximately 49 percent of Prosofts fiscal year 2002 content revenues, followed by 30 percent for academic and 17 percent for corporate customers.





ComputerPREP also manages an authorized channel of approximately 800 Authorized Training Providers (ATP) and Authorized Academic Partners (AAP)
worldwide. Commercial channel partners pay a small membership fee for the rights to sell and teach Official Curriculum while academic channel partners agree to place a minimum courseware order.





ComputerPREP seeks to establish a competitive advantage by distributing in-house developed education solutions for IT job certifications such as CIW, A+, MOS (formerly
MOUS) and Network+. ComputerPREP proprietary curriculum provides a comprehensive instructor-led learning solution that includes innovative features, integrates classroom and Web-based learning, and appeals to the widest variety of learners.
ComputerPREP classroom materials for A+, Network+ and Linux+ earned the new CompTIA Authorized Quality Curriculum stamp of approval. The third-party review, conducted by ProCert Labs, states that it highly recommends the curriculum to
ICT educators and learners. Sales of education solutions for these certifications provide the majority of the Companys content revenue.





In the last year, ComputerPREP has released academic versions of all its major products and has pursued a focused initiative to increase revenue from the academic channel. ComputerPREP has agreements
with the states of Louisiana, Oklahoma, Michigan, Virginia and Georgia for endorsement and distribution of CIW in their education systems. ComputerPREP 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 this channel demands. All these features can be purchased in a single package called
Classroom-in-a-Box.





The Company distributes its content broadly outside the United States. The majority of the
Companys content revenues were from the United States and Canada (84 percent), followed by Europe, Middle East and Africa (EMEA) (10 percent), Asia Pacific (5 percent) and the remainder (1 percent) coming from the
rest of the world.





Prosoft distributes its content and maintains a direct sales presence in the EMEA region
through its ProsoftTraining Europe Ltd. wholly owned subsidiary, based in Limerick, Ireland. In 2001, the Company formed ProsoftTraining Asia, based in Hong Kong, to expand its reach, develop partnerships, combat piracy of its products, and seek
endorsements in the rapidly growing Asia Pacific region. Prosoft also distributes content through formal partnerships in Japan and South Korea.




2




---

##### Table of Contents




As a result of ProsoftTraining Asias active
involvement in Australia, Hong Kong, Singapore, India, and China, numerous endorsements of CIW and CCNT have been received. For example, during the last year, the Master CIW Administrator track was endorsed by the Hong Kong Computer Society and
certified by the IT Training Quality and Certification Institute of Hong Kong. In addition, the CIW certification was accredited by Singapores National Infocomm Competency Centre and endorsed under the Critical Infocomm Technology Resource
Programme. In China, Beijing Telecom will deliver CCNT educational programs as part of its company wide employee-training program and will act as the master distributor of CCNT education and testing for all of China.





Content Development





Development Staff.    The Company has built a library of proprietary content through a disciplined internal development process. Prosoft has a content development team of 28 people responsible to
execute new product development and regularly update existing titles in its library. The team, located in Santa Ana, California and Phoenix, Arizona, is comprised of course directors, project managers, editors, publishers, subject matter experts,
XML developers, and database managers. This team publishes updates to over 400 titles two times per year using a controlled and automated process.





Content, Process and Structure.    The Company believes its commitment to frequently update its content to reflect the most recent technology, industry standards and
best practices provides a competitive advantage. The Company 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 content. The Company has developed and owns content for its major product lines including CIW, A+, MOS,
Network+, Linux+, CTP and CCNT.





Certification Development and Management





The Company owns and manages two proprietary job-role certifications, CIW and CCNT, and has developed and manages the CTP program for the Telecommunications Industry
Association (TIA). Prosoft develops certification exams and provides candidates access to these exams primarily through commercial testing sites in the Prometric and VUE networks, which have more than 5,200 and 2,000 testing affiliates
worldwide, respectively. These are the same testing services used by other leading certification providers such as Novell, Microsoft and Cisco. As the owner of the certification programs, the Company also creates official preparatory courseware and
manages an authorized channel of official training centers. Within these programs, the Company develops certification exams that validate a level of knowledge related to a set of skills or topics. The CIW program focuses on job-role certification
for Web, networking and security technologies, while the CCNT program targets basic data communications, basic telecommunications and telephony. The exams, which are published electronically through the testing provider network, generally cost
between $95 and $195 in the United States. Entry-level certifications may only require a single exam, while professional-level certifications typically require between three and seven exams. The 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 business. The Company also provides certification management services to organizations and
associations that want to develop and promote their own ICT certifications.





The Companys certification
revenues primarily consist of student testing fees (approximately 78 percent of fiscal year 2002 certification revenues) and fees paid by learning institutions for participation in the Companys authorized channel program (approximately
16 percent of fiscal year 2002 certification revenues). The certification segment represented $3.9 million, or 21 percent of Prosofts revenues during fiscal year 2002.





The Company believes it has certification revenue growth potential due to the shortage of ICT skills in todays workforce and the increasing adoption of portable
vendor-neutral job-role certifications. Even though many companies have reduced their ICT staff, research published in May 2002 by the Information Technology Association of America indicates an ICT skills shortage continues to exist.




3




---

##### Table of Contents




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, the Company was chosen by the TIA to develop, manage and serve as the official content provider
for the CTP (Convergent Technologies Professional) certification program, which launched in July 2002.





CIW





With over 45,000 certifications earned by September 2002, the CIW program has become one of the largest
certification programs among more than 350 ICT certifications. The certification covers job roles in network administration, security, application development, programming, Web design and e-commerce. Certification candidates have come from more than
100 countries. Prosoft owns both the CIW Certification and the Official CIW Curriculum.





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 certification has received the support and endorsement of the National Workforce Center for
Emerging Technology, and the states of Louisiana, Oklahoma, Michigan, Virginia and Georgia.





Internationally, CIW
has also received recognition or endorsement from governmental and quasi-governmental organizations. As an example, the IT Training Quality and Certification Institute of Hong Kong and the Hong Kong Computer Society endorse the Master CIW
Administrator curriculum along with the National Infocomm Competency Centre and Critical Infocomm Technology Resource Programme of Singapore.





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 (CT) is the merging of voice, video and data on a single network, integrating
telecommunications and computer technologies. This six-test low-stakes program is supported by both classroom and Web-based e-learning courses. The Companys CCNT exams and curriculum are sponsored and endorsed by the TIA. The Company
believes that the CT industry is still emerging and presents future growth potential though current corporate customers for CCNT are experiencing significant economic difficulties.





CTP





Prosoft released the
first industry-sponsored convergence technology certification in July 2002. Prosoft started 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 also received the responsibility and right to create official courseware and an authorized training channel. In addition, Prosoft shares exam revenue with TIA for this program.





Services





The Company maintains relationships with
third-party instructors and will contract with the training industry and corporations to teach the Companys CIW courses and to train its customers instructors. Services




4




---

##### Table of Contents

revenue includes fees received for (i) training the instructors of learning center providers and of companies that plan to conduct the Companys courses internally, (ii) providing
instructors to CIW ATPs or other companies to teach the Companys courseware and (iii) consulting services in which the Company assists clients in the creation of or delivery of custom solutions. Prior to fiscal year 2002, services revenue
included complete training programs provided under contract to companies such as IBM and Arthur Andersen.





Customers





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





Commercial Learning
Centers.    In fiscal year 2002 approximately 49 percent of the Companys content revenue came from commercial learning centers. The commercial learning center channel is comprised 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 customers of this channel are corporations looking for specialized training on technical topics. The
commercial learning center channel is highly fragmented, with the largest companies responsible for less than 10 percent of the total market. Large chains in this channel are New Horizons, Learning Tree, CompUSA and Productivity Point. In fiscal
year 2002 New Horizons and its franchisees accounted for approximately 14 percent of the Companys content revenue. No other customer accounted for more than 5 percent of content revenue.





Academic Institutions.    In fiscal year 2002 approximately 30 percent of the Companys content revenue came from
academic institutions. The academic channel is comprised of degree-granting institutions. Course length in this channel is tied to academic semesters. The primary customer of this channel is the individual who wants to earn a degree or certificate.
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 5 percent of
content revenue in fiscal year 2002.





Corporations.    In fiscal year
2002 approximately 17 percent of the Company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. Since this channel is the primary customer of the learning center channel, the Companys sales force considers corporations a secondary channel and pursues it selectively. No customer in this
channel accounted for more than 5 percent of content revenue in fiscal year 2002.





Individuals.    Almost 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 prior to taking an exam.





Competition





Each segment of our business is highly competitive, and there currently are
only minor economic barriers to entry into any of them. We face competition from many other companies offering training and certification services and products, including the internal training department of corporations and publishing units of large
corporations. Some of our competitors have access to greater resources and capital than are currently available to us. We compete 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 which competes with our CIW Associate certification. Trade associations such as Association of Web Professionals and World Organization of Webmasters
also have either released or announced plans to offer certifications that compete with ours. Although individuals can and do earn multiple certifications, our certifications compete with certifications from Microsoft, Cisco and other large vendors.
These vendors have more resources to attract candidates to their programs than does the Company.




5




---

##### Table of Contents




Sources of Revenue





We derive our revenue primarily from three sources: content,
certification, and services.





Content Revenue.    Content revenue
includes fees received from the sale of course materials such as books, CD-ROMs, self-study kits, and Web-based course books and content licenses. We recognize content revenue from the sale of course books when they are shipped. We also recognize
content revenue from content licenses of various types. Under a reproduction license, a customer purchases the right to print a textbook using that customers own cover page and introduction, while our content remains unchanged. 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 some cases, no such
commitment exists, and revenue is recognized when content is shipped.





Certification
Revenue.Certification revenue includes fees received from the administration of our certification tests and annual fees received from CIW ATPs. We recognize certification revenue when certification tests are
administered, and from CIW ATPs over the period during which we have a commitment for continuing involvement or obligation to provide services to the CIW ATP.





Services Revenue.    Services revenue includes fees received for training the instructors of our learning center providers
and of companies that plan to conduct our courses internally. It also includes fees received for providing instructors to our CIW ATPs or other companies to teach our courseware. Finally, services revenue includes fees received for consulting
services in which we assist our clients in creation or delivery of tailored solutions. Instructors are charged on a per day basis and consulting is charged on a time and materials or fixed-fee basis. We recognize services revenue when instruction or
consulting services are provided.





Sales, Marketing and Customer Support





We sell and market our courses to students mainly
through a channel of learning centers and academic institutions. As of September 30, 2002, we had 43 people directly involved in sales, marketing and customer support in the United States, Hong Kong, and Ireland. Our customer service organization in
Phoenix, Arizona accepts, enters and reviews courseware orders. Because many customers need to make last-minute adjustments or wait to order courseware until a few days before a class starts, our 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 our fiscal year (February through July) than in the first half of our 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 to New Years tends to be slow for the training industry. Other seasonality is due to customers spending patterns and 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 to seek copyright registration for newly developed content and software products.





Employees





As of September 30, 2002, we employed a total of 107 associates located in
the United States, Europe and Asia. Of these associates, 28 are in content development and 43 are in sales, marketing and customer support. We




6




---

##### Table of Contents

use the services of outside contract instructors to teach curriculum. None of our associates is represented by a labor organization. We consider our relations with our associates and outside
contract instructors to be satisfactory.





Regulations





Most of the jurisdictions in which we operate regulate and license certain
kinds of vocational, trade, technical or other post-secondary education. We believe that employer-funded or reimbursed information technology training is exempt from such requirements in most of the United States. To the extent that we want to
participate in programs funded by government entities, we will apply for licensing in the regulatory jurisdiction. If we were found to be in violation of a states licensing or other regulatory requirements, we 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 our financial results.




7




---

##### Table of Contents

ITEM 2.    
PROPERTIES





As of September 30, 2002, the Company had entered into leases for
commercial space in the following locations:





Location

Square Footage

Monthly Cost

Lease ExpirationSanta Ana, CA

7,640

$
10,543

July 2003Phoenix, AZ

13,301

$
26,877

April 2006Austin, TX

18,280

$
34,473

December 2002Eden Prairie, MN

7,040

$
5,690

February 2004Limerick, Ireland

1,900

$
1,472

February 2005Hong Kong, China

400

$
972

Month to Month





The Austin, Texas location is our headquarters which provides a
location for executive offices. The Phoenix, Arizona location serves sales, courseware publishing, and customer service purposes. The facility in Santa Ana, California serves our content development activities. The Limerick and Hong Kong facilities
serve sales and customer service purposes.





ITEM 3.    
LEGAL PROCEEDINGS





On April 22, 1998, we were sued by Frank J. DiSanto in state court
in Jackson County, Michigan. Mr. DiSantos original complaint alleged misrepresentation in connection with a confidential offering memorandum, pursuant to which Mr. DiSanto purchased $600,000 of our common stock. Mr. DiSanto sought
rescission of the stock purchase, interest, attorneys fees and other unspecified damages. We filed an answer and affirmative defenses denying liability. The plaintiff has had the opportunity to amend the complaint four times. The court has
struck all claims for damages except the claim that Prosoft failed to use its best efforts under the terms of a registration rights agreement to which plaintiff was a party. The case went to court ordered non-binding mediation. The mediation panel
ruled that the plaintiff had no basis for damages, and recommended that the plaintiff be ordered to pay costs to Prosoft in the amount of $20,000. The plaintiff rejected the mediation panel ruling. Subsequent to mediation, the court denied a summary
judgment motion filed by Prosoft. In November 2001, the case was settled and dismissed.





The Free Methodist
Foundation and other parties related to Mr. DiSanto filed an identical complaint to Mr. DiSantos amended complaint on March 11, 1999 in state court in Jackson County, Michigan. The lawsuit was removed to the U.S. District Court for the
Eastern District of Michigan. In September 2000, the federal court found that there was no basis for the plaintiffs to seek damages, and entered summary judgment in favor of Prosoft for all claims. The plaintiffs filed a motion for reconsideration,
which was rejected by the court in October 2000. A notice of Appeal was filed in the Circuit Court of Appeals. Oral arguments were heard in April 2002 and a final ruling is expected shortly.





From time to time, we may also 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 other material legal proceedings.





ITEM 4.    
SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS





None.




8




---

##### Table of Contents

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 of POSO. During the period August 14, 2000 through October 8, 2002, the Companys common stock traded on the
NASDAQ National Market. Before August 14, 2000, the Companys common stock was traded on the NASDAQ SmallCap Market. The following table sets forth for each quarter during fiscal years 2002 and 2001 the high and low bid quotations for the
Common Stock as reported by NASDAQ.





Quarter

Low

HighMay 1, 2002July 31, 2002

$
.17

$
.74February 1, 2002April 30, 2002

$
.53

$
1.47November 1, 2001January 31, 2002

$
.37

$
1.80August 1, 2001October 31, 2001

$
.37

$
1.76May 1, 2001July 31, 2001

$
1.03

$
3.19February 1, 2001April 30, 2001

$
2.40

$
14.75November 1, 2000January 31, 2001

$
6.31

$
15.00August 1, 2000October 31, 2000

$
6.62

$
15.06





On October 3, 2002, the Company had approximately 3,603
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 consolidated financial statements and the notes thereto and other information contained elsewhere in this report.





Year Ended July 31,2002


2001


2000

1999


1998(In thousands, except per share data)Consolidated Statement of Operations Data:Revenue

$
17,922


$
31,425


$
19,572

$
8,716


$
8,837Income (loss) from operations


(41,372
)


(4,932
)


1,427


(11,201
)


(16,771
)Net income (loss)


(42,459
)


(4,167
)


1,631


(11,607
)


(16,525
)Net income (loss) per share:Basic


(1.77
)


(.18
)


.09


(.90
)


(1.48
)Diluted


(1.77
)


(.18
)


.08


(.90
)


(1.48
)Consolidated Balance Sheet Data at Year End:Total assets

$
15,107


$
55,216


$
58,519

$
7,634


$
12,524Short-term debt


59



121



85


919



1,465Long-term debt


2,816



158



246


2,840



559Stockholders equity


7,576



49,572



50,372


472



6,716





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




This Managements Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking




9




---

##### Table of Contents

statements. In addition, forward-looking statements include, but are not limited to, statements regarding future financing needs, changes in business strategy, future profitability, and factors
affecting liquidity. A number of important factors could cause the Companys actual results to differ materially from those indicated by such forward-looking statements, including those factors discussed under Additional Factors That May
Affect Results Of Operations and Market Price Of Stock on Page 14. These forward-looking statements represent the Companys judgment as of the date of the filing of this Form 10-K. The Company disclaims any intent or obligation to update
these forward-looking statements. For the purposes of this Form 10-K, we and our refers to the Company.





The following discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this document.





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. At the end of fiscal year 2002, the Company reduced its
full-time instructor base to zero.





Results of Operations





Revenues





Total
revenues for 2002 decreased 43 percent to $17.92 million compared with 2001. The decline in total revenues was largely driven by declines in corporate training budgets resulting in sharply reduced purchases for training products and services.





Total revenues for 2001 increased 61 percent to $31.43 million compared with 2000, due to a broader acceptance of
the Companys proprietary CIW internet certification program, an increase in CIW certified instructors teaching CIW courses with our proprietary courseware and additional courseware revenue related to the ComputerPREP acquisition.





Content revenues in 2002 decreased by 40 percent, or $8.97 million, compared to 2001, and increased 241 percent, or $15.91
million, for 2001 compared with 2000. The 2001 increase was driven by a broader acceptance of the Companys proprietary CIW Internet courseware and the ComputerPREP acquisition.





Certification revenues in 2002 increased by 8 percent to $3.85 million compared to 2001, and increased 41 percent to $3.58 million for 2001 compared with 2000.
Certification revenues consist of CIW certification exam fees and annual fees received from CIW ATPs.





Services revenue in 2002 decreased by 90 percent, or $4.80 million, compared with 2001, and decreased 49 percent, or $5.09 million, for 2001 compared with 2000. The decreases were attributable to the economic slowdown, a
reduction in corporate training activities and a decrease in demand for our non-CIW services business.





Cost
of Revenues





Cost of revenues in 2002 decreased by $5.00 million, or 35 percent, compared with 2001. As a
percentage of revenue, gross profit, defined as total revenue less costs of revenue, decreased to 47 percent in 2002, from 54 percent in 2001. This decrease was primarily a result of less revenue to cover the fixed portion of our cost of
revenues and a decrease in content selling prices resulting from competitive pressures.




10




---

##### Table of Contents




Cost of revenues in 2001 increased $4.57 million, or 46 percent, compared with
2000. As a percentage of revenue, gross profit increased to 54 percent in 2001, from 49 percent in 2000. This increase was primarily due to an increase in content revenue, which generally yields higher gross profits, and to a decrease in services
revenue, which generally yields lower gross profits. This increase in gross profit percentage was partially offset by a shift in the mix of fees in certification revenue. CIW certification exam fees, which generally yield lower gross profits,
increased, and CIW ATP fees, which generally yield higher gross profits, decreased.





Content Development





Content development expenses in 2002 increased $0.08 million, or 4 percent when compared with 2001.
Content development expenses in 2001 increased $0.88 million, or 73 percent when compared with 2000. The 2001 dollar increase was largely the result of higher personnel costs associated with updating an expanded library of courseware associated with
the ComputerPREP acquisition and new e-learning products. Content development expenses as a percentage of revenue increased to 12 percent for 2002 from 7 percent for 2001 and 6 percent for 2000. The increase in 2002 was primarily due to lower
revenues.





Sales and Marketing





Sales and marketing expenses decreased $1.15 million, or 15 percent, in 2002 as compared with 2001 and increased $5.22 million, or 229 percent, in 2001 as compared with
2000. As a percent of revenue, sales and marketing expenses increased 11 percentage points in 2002 as compared with 2001 and increased 12 percentage points in 2001 as compared with 2000. The dollar decrease in 2002 is attributable to lower sales
commissions and reduced marketing expenditures. The dollar increase in 2001 is attributable to higher sales volume and increases in the number of employees, related primarily to the ComputerPREP acquisition in July 2000, the acquisition of Mastery
Point Learning Systems in fiscal year 2001, and our CIW market brand campaign.





General and Administrative





General and administrative expenses decreased $2.40 million, or 29 percent, and increased 6 percentage
points as a percentage of revenues in 2002 as compared with 2001 and increased $3.88 million, or 93 percent, and increased 4 percentage points as a percentage of revenues in 2001 as compared with 2000. The current year dollar decrease was primarily
a result of a cost reduction program implemented in the quarter ended October 31, 2001 and other ongoing cost reductions. The dollar increases in 2001 were primarily attributable to the ComputerPREP acquisition, a larger executive management
team and increased bad debt expense due to specific credit concerns, primarily in the commercial training market.





Depreciation and Amortization





Depreciation expense was $0.79 million, $0.67 million
and $0.18 million for the years ended July 31, 2002, 2001 and 2000, respectively. Amortization expense associated with goodwill and other acquired intangibles was $2.35 million, $2.94 million and $0.80 million for the years ended July 31, 2002,
2001 and 2000, respectively. The increases in 2002 and 2001 when compared to 2000 were primarily due to the acquisitions of ComputerPREP and Mastery Point Learning Systems.





Impairment of Goodwill





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




11




---

##### Table of Contents




Write-down of Courseware and Licenses





During the third quarter of fiscal year 2002, we recorded a $1.45 million loss for the write-down of courseware and licenses because the
carrying value 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 a long-term license.





Severence and Restructuring Charges (Credits)





During the first quarter of fiscal year 2002, we recorded a $0.76 million restructuring charge, which had an approximate $0.03 loss per diluted share impact to our common
stock. The restructuring 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.





During 2001, we recorded a $0.66 million restructuring charge, which had an approximate $.03 loss per diluted share impact to our common stock. The 2001 charge related to
our decision to disinvest in the instructor-led training business and realign the sales structure. The charge consisted of employee severance and other employee-related costs of $0.23 million and fixed asset write-downs, leased facilities, equipment
and other costs of $0.43 million. Headcount was reduced by approximately 25%.





During 2000, we recorded a $0.37
million reversal of the 1999 restructuring reserve, which had an approximate $.02 earnings per diluted share impact to our common stock. The reversal resulted from negotiated lease termination agreements on several leased facilities at a cost lower
than orginally anticipated.





Interest Income and Interest Expense





Interest income decreased $0.35 million in 2002 as compared with 2001 and increased $0.21 million in 2001 as compared with 2000. The
decrease in 2002 was attributable to lower average cash balances and lower interest rates in 2002. The lower average cash balances were primarily a result of operating losses. The increase in 2001 was attributable to higher average cash balances in
2001, primarily due to the private placement of stock in 2000 and the exercise of stock options and warrants in 2001 and 2000.





Interest expense increased $0.19 million in 2002 as compared with 2001 and decreased $0.38 million in 2001 as compared with 2000. The increase in 2002 was attributable to the issuance of a $2.50 million Subordinated Convertible Note
in the first quarter of fiscal year 2002. The decrease in 2001 was primarily the result of lower capital lease obligations.





Deferred Income Taxes





Deferred income tax expense was $0.93 million in 2002
compared with deferred income tax benefits of $0.40 in 2001 and $0.43 in 2000. During 2002, the Company increased its valuation allowance related to deferred income taxes due to operating losses and the current economic slowdown. Deferred income tax
benefits in 2001 and 2000 resulted from a decrease in the deferred tax asset valuation allowance, primarily the result of our analysis of realizing some portion of our future tax benefit of tax loss carryforwards and additional temporary
differences.





Liquidity and Capital Resources





Net cash used in operating activities was $3.71 million in 2002 compared with $3.39 million in 2001, an increase of $0.32 million. The increase in net cash used in
operating activities was primarily a result of higher net loss as adjusted for non-cash income and expenses of $4.76 million, offset by a net increase in changes in operating assets and liabilities in 2002 compared to 2001 of $4.44 million.





Net cash used in operating activities was $3.39 million in 2001 compared to cash provided by operating activities
of $0.45 million in 2000, an increase in net cash used in operating activities of $3.84 million. The




12




---

##### Table of Contents

increase in net cash used in operating activities was primarily due to a net loss in 2001 compared to net income in 2000, as adjusted for non-cash income and expenses, of $2.49 million, and by a
net decrease in changes in operating assets and liabilities in 2001 compared to 2000, of $1.35 million.





Cash used
in investing activities, consisting of capital expenditures, acquisitions and content and license purchases, was $0.59 million in 2002 and $6.16 million in 2001.





Cash provided from financing activities was $2.58 million in 2002 and $1.66 million in 2001. In 2002, we received $2.50 million from the issuance of long-term debt. Cash provided by financing
activities decreased $25.38 million to $1.66 million in 2001 compared to 2000. This decrease was primarily due to the absence of private placements of stock and lower proceeds from the issuances of common stock for stock option exercises.





In October 2001, the Company received $2.50 million from Hunt Capital Growth Fund II, L.P. (Hunt
Capital) pursuant to 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.





Based on
current operations, management believes that cash on hand will be sufficient to meet our cash requirements only until approximately the end of the second quarter of fiscal year 2003. In view of current operations and cash on hand, we will need to
take one or more of the following actions in the very near term in order to continue our operations: (i) significantly reduce operating expenses, (ii) raise additional capital, (iii) discontinue certain operations, or (iv) sell some or all of
our assets. No assurances can be given that we will be successful in taking any of these actions in the near future to meet our liquidity requirements.





The following summarizes our contractual cash obligations as of July 31, 2002 (in millions):





Payments Due By Fiscal Year2003

2004

2005

2006

2007

TotalLong-term debt

$


$


$


$


$
4.03

$
4.03Capital lease obligations


0.08


0.06


0.06


0.01





0.21Operating leases


0.68


0.37


0.33


0.25





1.63Total contractual cash obligations

$
0.76

$
0.43

$
0.39

$
0.26

$
4.03

$
5.87





Critical Accounting Policies





Our critical accounting policies are as follows:





Revenue recognition





The Company derives revenue from three primary
sources; content, certification and services. Content revenue is derived from the sale of books or licensing of our training materials for reproduction or repurposing, or under OEM arrangements. Content revenue is recognized when the products are
shipped. Certification revenue includes testing fees from administration of our certification tests and annual fees received from CIW Authorized Training Providers (CIW ATP). Testing fees are recognized when the tests are administered
and CIW ATP fees are recognized when the funds are received or, if the Company has an obligation for continuing involvement with the CIW ATP, revenue is recognized over the period of the obligation. Services revenue includes training and consulting
services and is recognized when the services are provided.





Valuation of intangible 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;
| | - |  | ---------------------------------------------------------------------------------------------------



13




---

##### Table of Contents




| |  |  | 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 relative to net book value.
| | - |  | -----------------------------------------------------




When it is determined that the carrying value of intangibles, long-lived assets and related goodwill 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.





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





The discussions in this Form 10-K
concerning future financing needs, changes in business strategy, future profitability and factors affecting liquidity contain forward-looking statements. Although management believes that these statements are reasonable in view of the facts
available to it, no assurance can be given that all of these statements will prove to be accurate. Numerous factors could have a material effect upon whether these projections could be realized or whether these trends will continue. Among these
factors are those set forth in the following section, as well as those discussed elsewhere herein.





Risk to Continued Operation





We are operating with very limited cash resources. We cannot maintain our current level of operating losses
and remain a continuing operation given our current cash on hand. We must drastically reduce our operating losses in the near term, obtain additional funds, or do both to remain in operation. We could reduce operating losses by significantly
reducing our operations and staff, provided such actions do not cause revenue to decline greater than we expect as a result of such actions. We could obtain additional funds by raising additional capital or selling some or all of our assets or
operations. The sale of some or all of our assets is subject to approval by the holder of our long-term debt, since those assets secure that debt. There can be no assurance that we will be successful in taking any of these actions nor that these
actions will result in the Company continuing its operations. In the event we choose to obtain additional funding there can be no assurance that we will be able to obtain funds on terms acceptable to us, if at all.





The Companys Board of Directors engaged an investment banker in July 2002 to explore strategic options for the Company, including a
sale of some or all of its assets and operations. We have been involved in a number of discussions as the result of this engagement that could result in the sale of some or all of our assets or operations. Through November 29 th , we will be negotiating exclusively with one party to determine if an acceptable offer for the sale of some or all
of the Companys assets will be received from that party. There can be no assurance that these discussions will result in an offer for some or all of the Companys assets or operations, nor that in the event we receive an acceptable offer
we will be able to close a transaction in sufficient time to allow us to continue operations.





Since a reduction
in operations and staff sufficient to continue operations would likely result in the impairment or abandonment of some assets and operations that might have value in a sale, we have postponed making reductions pending the conclusion of active
discussions. However, this postponement of a reduction in operations and staff has contributed and will continue to contribute to our continuing operating losses and deteriorating cash position.





Possibility of Continuing Losses





We have
incurred net losses of approximately $97 million from our inception through July 31, 2002. Our ability to generate revenue growth in the future is subject to uncertainty. In order to achieve profitability, we must increase our revenues and
significantly reduce operating expenses. There can be no assurance that we will be able to increase revenues, manage expenses, or achieve profitability.




14




---

##### Table of Contents




Uncertainty of Future Funding





Should we need to raise additional funds, we cannot be certain that we will be able to obtain them on terms satisfactory to us, if at all. If we are unable to raise
additional funds on terms satisfactory to us we will be forced to either raise funds on terms that we would not otherwise accept or pursue the alternatives noted under Risk to Continued Operation.





Intense Competition in Training Market





We face substantial competition in the training market. Competition in the ICT training market is intense, rapidly changing and 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, marketing experience, research
and development status, established customers and facilities than we do. 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.





Need to Respond to Rapid Technological Changes





In our industry, technology advances rapidly and industry standards change frequently. To remain competitive and return to profitability, we must continually enhance our
existing products and services 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.





Effect of Market Overhang on Stock Price





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 which have been filed with the SEC remain effective, the selling stockholders under those registration statements may sell approximately 6.3 million shares, or approximately 26 percent of the shares of Common Stock currently
outstanding on a diluted basis. 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. The majority of the shares registered are already saleable under Rule 144.





Volatility of Stock Price





Our Common Stock has experienced substantial price volatility, which may continue to occur 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 the following may have a significant effect on the market price of our Common Stock:





| |  |  | fluctuations in our operating results
| | - |  | -------------------------------------




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




| |  |  | the limited trading market for our Common Stock
| | - |  | -----------------------------------------------




| |  |  | announcements of new ventures or products and services by us or our competitors
| | - |  | -------------------------------------------------------------------------------




Item 7A.    
Quantitative and Qualitative Disclosures About Market Risk





We have risk related to
currency exchange rate fluctuations. A portion of our cash flows is expected to be received in non-U.S. currencies.




15




---

##### Table of Contents

ITEM 8.    
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





PROSOFTTRAINING AND SUBSIDIARIES





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES





Report of Independent Certified Public Accountants

17Financial Statements of ProsoftTrainingConsolidated Balance Sheets at July 31, 2002 and 2001

18Consolidated Statements of Operations for the years ended July 31, 2002, 2001 and 2000

19Consolidated Statement of Stockholders Equity for the years ended July 31, 2002, 2001 and 2000.


20Consolidated Statements of Cash Flows for the years ended July 31, 2002, 2001 and 2000

21Notes to Consolidated Financial Statements

22ScheduleSchedule IIValuation and Qualifying Accounts

37




16




---

##### Table of Contents

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS





The Board of Directors and Stockholders


ProsoftTraining





We have audited the accompanying consolidated balance sheets of ProsoftTraining
(a Nevada corporation) and subsidiaries as of July 31, 2002 and 2001, and the related consolidated statements of operations, stockholders equity and cash flows for each of the three years in the period ended July 31, 2002. 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 auditing standards generally accepted in the United States of America. 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 as of July 31, 2002 and 2001 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended July 31, 2002, 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, the Company incurred a net loss of $42.4 million during the year ended July 31, 2002. The Company also used $3.7 million and $3.4 million of cash
in operating activities for the years ended July 31, 2002 and 2001, respectively. These factors raise substantial doubt about the Companys ability to continue as a going concern. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and classification of liabilities 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, 2002. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.





/s/  GRANT THORNTON LLP





Dallas, Texas


September 13, 2002, except for Note 15, as to which the date is November 7, 2002.




17




---

##### Table of Contents

PROSOFTTRAINING AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


(In thousands, except share data)





July 31,2002


2001ASSETSCurrent assets:Cash and cash equivalents

$
3,526


$
5,136Accounts receivable, less allowances of $478 and $1,003


1,995



3,663Prepaid expenses and other current assets


379



615Total current assets


5,900



9,414Deferred income taxes






925Property and equipment, net


1,166



1,735Goodwill, net of accumulated amortization of $5,506 and $3,450


6,745



39,082Courseware and licenses, net of accumulated amortization of $2,243 and $1,075


1,296



4,060Total assets

$
15,107


$
55,216LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable  trade

$
2,239


$
2,352Accrued expenses


2,266



2,611Current portion of capital lease obligations


59



121Deferred revenue


103



22Accrued restructure costs


48



161Total current liabilities


4,715



5,267Long term debt


2,698



Obligations under capital leases, net of current portion


118



158Other






200Total liabilities


7,531



5,625Commitments and contingencies (Notes 9 and 11)






Common stock subject to redemption






19Stockholders equity:Common shares, par value $.001 per share: authorized shares: 75,000,000; issued: 24,209,326 and 23,686,898
shares


24



24Additional paid-in capital


104,421



104,016Accumulated deficit


(96,853
)


(54,394
)Accumulated other comprehensive income


59



1Less common stock in treasury, at cost: 11,912 shares


(75
)


(75
)Total stockholders equity


7,576



49,572Total liabilities and stockholders equity

$
15,107


$
55,216





The accompanying notes are an integral part of these statements.




18




---

##### Table of Contents

PROSOFTTRAINING AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except per share data)





Fiscal Years Ended July 31,2002


2001


2000Revenues:Content

$
13,542


$
22,513


$
6,608Certification


3,850



3,578



2,538Services


530



5,334



10,426Total revenues


17,922



31,425



19,572Costs and expenses:Cost of revenues


9,465



14,465



9,891Content development


2,152



2,074



1,199Sales and marketing


6,352



7,506



2,282General and administrative


5,672



8,035



4,158Depreciation and amortization


3,139



3,613



981Write-off of courseware and licenses


1,452







Impairment of goodwill


30,300







Severance and restructuring charges (credits)


762



664



(366
)Total costs and expenses


59,294



36,357



18,145Income (loss) from operations


(41,372
)


(4,932
)


1,427Interest income


66



408



200Interest expense


(228
)


(43
)


(421
)Income (loss) before income taxes


(41,534
)


(4,567
)


1,206Income tax (expense) benefit


(925
)


400



425Net income (loss)

$
(42,459
)

$
(4,167
)

$
1,631Net income (loss) per share:Basic

$
(1.77
)

$
(0.18
)

$
0.09Diluted

$
(1.77
)

$
(0.18
)

$
0.08Weighted average shares outstanding:Basic


24,012



23,065



17,297Diluted


24,012



23,065



20,455





The accompanying notes are an integral part of these statements.




19




---

##### Table of Contents




PROSOFTTRAINING AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


(In thousands, except share data)





Common Stock

Additional Paid-In Capital

Treasury Stock


Accumulated Deficit


Accumulated Other Comprehensive Income


TotalShares

Amount


Shares

AmountBalances at August 1, 1999

14,297,133

$
14

$
52,381

11,912

$
(75
)

$
(51,858
)

$
10


$
472Net income
















1,631







1,631Foreign currency translation adjustment




















79



79Total comprehensive income
























1,710Common stock issued for debenture interest

18,937





82
















82Conversion of debentures and warrants to stock

1,787,500


2


1,988
















1,990Issuance of common stock for cash, net of issuance costs of $1,248

3,278,032


4


24,695
















24,699Acquisition of business

1,142,422


1


17,865
















17,866Exercise of stock options, warrants and other transactions

2,121,438


2


3,551
















3,553Balances at July 31, 2000

22,645,462


23


100,562

11,912


(75
)


(50,227
)


89



50,372Net loss
















(4,167
)






(4,167
)Foreign currency translation adjustment




















(88
)


(88
)Total comprehensive loss
























(4,255
)Issuance of common stock for employee stock purchase plan

28,342





30
















30Acquisition of business

164,496





1,500
















1,500Issuance of common stock for services

20,401





61
















61Exercise of stock options, warrants and other transactions

828,197


1


1,863
















1,864Balances at July 31, 2001

23,686,898


24


104,016

11,912


(75
)


(54,394
)


1



49,572Net loss
















(42,459
)






(42,459
)Foreign currency translation adjustment




















58



58Total comprehensive loss
























(42,401
)Issuance of common stock for employee stock purchase plan

57,103





34
















34Issuance of common stock for services

296,225





187
















187Exercise of stock options, warrants and other transactions

169,100





184
















184Balances at July 31, 2002

24,209,326

$
24

$
104,421

11,912

$
(75
)

$
(96,853
)

$
59


$
7,576





The accompanying notes are an integral part of these statements.




20




---

##### Table of Contents

PROSOFTTRAINING AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)





Years Ended July 31,2002


2001


2000Operating Activities:Net income (loss)

$
(42,459
)

$
(4,167
)

$
1,631Adjustments to reconcile net income (loss) to cash provided by(used in) operating activities:Depreciation and amortization


5,797



3,861



981Impairment of goodwill


30,300







Operating expenses paid in common stock






61



Restructuring


175



157



(366
)Disposition of property and equipment


14







Accretion of debt discount










99Debenture interest paid in common stock










82Deferred income taxes


925



(400
)


(425
)Changes in operating assets and liabilities:Accounts receivable


1,704



925



(1,321
)Prepaid expenses and other current assets


392



(845
)


207Accounts payable


(222
)


(3,285
)


(377
)Accrued expenses


(294
)


491



545Accrued restructure costs


(46
)


(192
)


(602
)Net cash provided by (used in) operating activities


(3,714
)


(3,394
)


454Investing Activities:Acquisitions, net of cash acquired






(2,479
)


(14,961
)Purchases of property and equipment


(273
)


(1,004
)


(608
)Courseware and license purchases


(314
)


(2,672
)


Decrease in notes receivable from officers/stockholders










13Net cash used in investing activities


(587
)


(6,155
)


(15,556
)Financing Activities:Issuance of common stock


217



1,757



28,281Issuance of long term debt


2,500







Principal payments on debt and capital leases


(103
)


(93
)


(1,433
)Debt issuance costs


(20
)






Other


(17
)






191Net cash provided by financing activities


2,577



1,664



27,039Effects of exchange rates on cash


114



(23
)


(46
)Net increase (decrease) in cash and cash equivalents


(1,610
)


(7,908
)


11,891Cash and cash equivalents at beginning of year


5,136



13,044



1,153Cash and cash equivalents at end of year

$
3,526


$
5,136


$
13,044Supplementary disclosure of cash paid during the year for:Interest

$
29


$
41


$
209Income taxes

$



$



$
Supplementary disclosure of non-cash investing and financing activities:Equipment acquired under capital leases

$



$



$
Acquisition of businesses:Assets acquired

$



$
4,368


$
35,616Liabilities assumed






(389
)


(5,375
)Common stock issued






(1,500
)


(15,280
)Net cash paid for acquisitions

$



$
2,479


$
14,961





The accompanying notes are an integral part of these statements.




21




---

##### Table of Contents




PROSOFTTRAINING AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(In
thousands, except share data)





1.    Summary of Significant Accounting Policies





Business





ProsoftTraining offers content and certifications for individuals to develop and validate critical ICT workforce skills. Prosoft creates and distributes a complete 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. Prosoft also manages the CTP certification for
the Telecommunications Industry Association.





Consolidation





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





Currency Translation





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.





Cash Equivalents





The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash
equivalents.





Concentration of Credit Risk





Financial instruments that subject the Company to credit risk consist primarily of accounts receivable. Credit risk with respect to accounts receivable is generally
not concentrated due to the number of customers comprising the Companys customer base and their geographic dispersion. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses.





Financial Instruments





The fair value of the Companys financial instruments, consisting of cash and cash equivalents, accounts receivable and debt, approximate their carrying values.





Advertising Costs





The Company expenses the costs of advertising as incurred. Advertising expenses were $59, $107, and $104 in 2002, 2001 and 2000, 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.




22




---

##### Table of Contents



PROSOFTTRAINING AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(In thousands, except share
data)







Goodwill and License Agreements





Goodwill is the excess of the purchase price over the fair value of tangible net assets acquired in business combinations
accounted for as purchases. License agreements are those rights acquired from others through business combinations to produce and distribute courseware and other publications. Goodwill and license agreements are amortized on a straight-line basis
over a period of seven to twenty years, subject to impairment based on the carrying value exceeding fair value.





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 three primary sources;
content, certification and services. Content revenue is derived from the sale of books or licensing of our training materials for reproduction or repurposing, or under OEM arrangements. Content revenue is recognized when the products are shipped.
Certification revenue includes testing fees from administration of our certification tests and annual fees received from CIW Authorized Training Providers (CIW ATP). Testing fees are recognized when the tests are administered and CIW ATP
fees are recognized when the funds are received, or if the Company has an obligation for continuing involvement with the CIW ATP, revenue is recognized over the period of the obligation. Services revenue includes training and consulting services and
is recognized when the services are provided.





Stock-based Compensation





The Company accounts for stock-based compensation to employees using the intrinsic value method. Under this method, compensation cost for
stock-based compensation to employees is the excess, if any, of the quoted market price of the stock at the grant date over the amount an employee must pay to acquire the stock and is amortized over the related vesting period, or immediately if no
further vesting criteria exists.





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.




23




---

##### Table of Contents



PROSOFTTRAINING AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(In thousands, except share
data)







Recent Accounting Pronouncements





In June 2001, the Financial Accounting Standards Board approved for issuance Statement of Financial Accounting
Standards No. 141 (SFAS 141), Business Combinations. This standard eliminates the pooling method of accounting for business combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting for intangible assets and
goodwill acquired in a business combination. This portion of SFAS 141 is effective for business combinations completed after June 30, 2001. The Company does not expect SFAS 141 to have a material effect on the Companys financial position,
results of operations or cash flows.





In June 2001, the Financial Accounting Standards Board approved for issuance
Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Intangible Assets, which clarifies the accounting for impairments to purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with
indefinite lives will no longer be amortized, but will be tested for impairment annually and also in the event of an impairment indicator. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS 142 on
August 1, 2002. The Company expects that the adoption of SFAS 142 will decrease annual operating expenses by approximately $965. The Company has not determined the initial effect on goodwill and equity upon the adoption of SFAS 142.





In August 2001, the Financial Accounting Standards Board approved for issuance Statement of Financial Accounting Standards No.
144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement establishes a single framework,
based on Statement of Financial Accounting Standards No. 121 (SFAS 121), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, for long-lived assets to be disposed of by sale and resolves certain
implementation issues related to SFAS 121. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS 144 on August 1, 2002. Its adoption did not have a material effect on the Companys financial
position, results of operations or cash flows.





Reclassifications





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





2.    Going Concern Assumptions





The Companys financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. As shown in the Companys financial statements, during the years ended July 31, 2002 and 2001, the Company incurred losses of $42.5 million and $4.2 million, respectively. The Company expects to continue losses
in the near future. These factors, among others, may indicate that the Company will be unable to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of assets and
liabilities that might be necessary should the Company be unable to continue as a going concern. The Companys continuation as a going concern is dependent upon its ability to generate sufficient cash flows to meet its obligations on a timely
basis and to obtain additional financing as may be required.





The Company believes that cash on hand will be
sufficient to meet its cash requirements only until approximately the end of the second quarter of fiscal 2003. Given the Companys current cash balances and expected cash requirements, the Company believes that it will be necessary to
implement one or more of the




24




---

##### Table of Contents



PROSOFTTRAINING AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(In thousands, except share
data)




following: significantly reduce operating expenses, secure additional funding, discontinue certain operations, or sell some or all of its assets or operations. There can be no assurance that the
Company will be able to implement any of the above.





3.    Valuation of Long-Lived Assets





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





At April 30, 2002,
based on current operations, projected undiscounted cash flow was below the carrying amounts of goodwill and courseware 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 courseware 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.





4.    Severance and Restructuring Charges (Credits)





During 2002, the Company recorded a $762 charge primarily for severance and other employee related costs.





During 2001, the Company recorded a $664 restructuring charge related to our decision to disinvest in the instructor-led training business and realign our sales structure.





During 2000, the Company recorded a $366 reversal of our 1999 restructuring charge related to negotiated lease
termination agreements on several facilities at a cost lower than originally anticipated.





During 1999, the
Company recorded a $3,723 charge for restructuring associated with our decision to exit the retail training business and $1,230 remained unpaid at August 1, 1999. The following table displays the activity and balances of the accrued restructure
costs account:





Severance and Other Related Employee Costs


Property and Equipment Write-downs

Leased Facilities and
Other Costs


TotalBalance at August 1, 1999


51






1,179



1,230Restructuring Adjustments









(366
)


(366
)Settlements


(51
)





(680
)


(731
)Balance at July 31, 2000









133



133Restructuring Charge


229






435



664Settlements


(229
)





(407
)


(636
)Balance July 31, 2001









161



161Restructuring Charge


729






33



762Settlements


(729
)





(146
)


(875
)Balance July 31, 2002

$



$


$
48


$
48




25




---

##### Table of Contents



PROSOFTTRAINING AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(In thousands, except share
data)







5.    Acquisitions





In July 2000, the Company purchased all of the outstanding common stock of ComputerPREP, Inc. (ComputerPREP), a wholly owned
subsidiary of Drake Personnel (New Zealand) Limited (Drake), in exchange for $15,000, 1,142,422 shares of the Companys common stock and warrants to purchase 600,000 shares of common stock. Shares and warrants issued in
connection with this purchase have been valued at $17,800. As a result of the acquisition of ComputerPREP, which was accounted for as a purchase, goodwill of $36,000 was recorded by the Company. In July 2001, goodwill was reduced $491 due to the
reversal of accrued contract termination costs at the date of acquisition, at a cost lower than originally anticipated.





In December 2000, the Company acquired the assets of Mastery Point Learning Systems (MPLS) in exchange for $2,643 and 164,496 shares of the Companys common stock. Shares issued in connection with this purchase have
been valued at $1,500. As a result of this acquisition, which was accounted for as a purchase, goodwill of $4,167 was recorded by the Company.





The operating results of the acquired businesses have been included in the consolidated statements of operations from the dates of acquisition.





6.    Property and Equipment





Property and equipment consist of the following:





July 31,2002

2001Computer equipment and software

$
2,764

$
2,514Office equipment, furniture and fixtures


1,129


1,0963,893


3,610Less accumulated depreciation


2,727


1,875Property and equipment, net

$
1,166

$
1,735





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. 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.





In November 1998, the Company issued $3,200 of 13% convertible debentures. The debentures were to mature in November 2003 and were convertible into the Companys common stock at $1.60 per share. In connection with the
issuance of these debentures, the Company issued detachable stock warrants. The value assigned to the warrants of $1,124 was reflected as debt discount and was accreted over the term of the debentures using the interest method. In January 2000, the
Company exercised its right to force conversion of all




26




---

##### Table of Contents



PROSOFTTRAINING AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(In thousands, except share
data)




unconverted debentures of $2,490 into the Companys common stock. The debentures were converted into 1,556,250 shares of common stock. As a result of this conversion, the convertible
debenture principal and related debt discount have been reclassified to stockholders equity.





The Company
has a $3,500 credit facility with a bank bearing interest at a current rate of 12% per annum. Available borrowings are based on a formula of eligible accounts receivable. The term of the credit facility is for one year, and from year to year
thereafter, unless terminated by the Company or the bank. As of July 31, 2002 and 2001, there were no amounts outstanding under this credit facility.





8.    Stock Options, Warrants and Put Rights 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 7,080,500 shares of common stock. As of July 31, 2002, 470,328 options were available for grant under the
plans.





Stock option transactions are as follows:





Shares


Weighted Average Exercise
PriceOutstanding at August 1, 1999

2,351,831


$1.96Granted

1,017,601


$7.91Exercised

(931,683
)

$2.29Cancelled

(250,395
)

$4.27Outstanding at July 31, 2000

2,187,354


$4.32Granted

2,635,758


$4.93Exercised

(516,907
)

$2.04Cancelled

(434,687
)

$7.98Outstanding at July 31, 2001

3,871,518


$4.63Granted

935,500


$0.90Exercised

(169,100
)

$1.08Cancelled

(651,808
)

$6.50Outstanding at July 31, 2002

3,986,110


$3.57Exercisable at July 31, 2000

1,232,248


$2.20Exercisable at July 31, 2001

1,214,544


$4.13Exercisable at July 31, 2002

2,103,911


$4.02




27




---

##### Table of Contents



PROSOFTTRAINING AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(In thousands, except share
data)







The following table summarizes information concerning options
outstanding and exercisable as of July 31, 2002:





Options Outstanding

Options ExercisableRange of Exercise Prices

Number

Weighted Average Exercise Price

Weighted Average Remaining Contractual Life

Number

Weighted Average Exercise Price$0.37$3.99

2,883,739

$
1.24

3.4 years

1,431,165

$
1.39$4.00$9.99

416,128

$
8.22

2.8 years

262,018

$
8.01$10.00$15.37

686,243

$
10.53

2.9 years

410,728

$
10.63





The Company has adopted only the disclosure provisions of Statement
of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation, for employee stock options and continues to apply Accounting Board Opinion No. 25, 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 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 pricing model.





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





2002

2001

2000Weighted average expected life

4 years

4 years

3 yearsExpected stock price volatility

124%

109%

100%Risk-free interest rate

4.1%

5.4%

6.7%





For purposes 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:





2002


2001


2000Net income (loss)  actual

$
(42,459
)

$
(4,167
)

$
1,631Net loss  pro forma

$
(46,475
)

$
(7,676
)

$
(705
)Basic income (loss) per share  actual

$
(1.77
)

$
(.18
)

$
.09Basic loss per share  pro forma

$
(1.94
)

$
(.33
)

$
(.03
)Diluted income (loss) per share  actual

$
(1.77
)

$
(.18
)

$
.08Diluted loss per share  pro forma

$
(1.94
)

$
(.33
)

$
(.03
)





The weighted average fair value of options granted during the years
ended July 31, 2002, 2001, and 2000 was $0.68, $3.53, and $6.93, respectively.





Warrants





During 1999, the Company issued warrants to purchase 1,617,500 shares of common stock to purchasers of
its convertible debentures at $1.10 per share. Warrants for 337,500 shares of common stock were exercised at prices ranging from $1.00 to $1.10 and warrants for 4,999 shares expired. During 2000, the Company issued warrants to purchase 1,374,035
shares of common stock exercisable at $.01 to $16.50 per share. Warrants for




28




---

##### Table of Contents



PROSOFTTRAINING AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(In thousands, except share
data)




1,188,209 shares of common stock were exercised at prices ranging from $1.10 to $3.38. During 2001, the Company issued warrants to purchase 17,083 shares of common stock exercisable at $1.25 to
$10.13 per share. Warrants for 225,150 shares of common stock were exercised at prices ranging from $1.10 to $11.00 and warrants for 5,000 shares expired. As of July 31, 2002, warrants for 1,497,759 shares of common stock, exercisable at $.01 to
$20.06 per share and expiring through 2010, remained outstanding.





Put Rights on Common Stock





In connection with prior acquisitions, the Company guaranteed the value of the common stock issued in the
acquisitions by granting put rights covering 68,728 and 152,809 shares at $6.275 and $11.125 per share, respectively. The Company is obligated through these put rights to repurchase the shares for cash. As a result, the redemption amount has been
reclassified from permanent equity to temporary equity under the caption, common stock subject to redemption. During 1998, 11,912 shares were repurchased under these rights. During 1999, the Company issued 567,098 shares of common stock
in settlement of put rights covering 56,816 and 147,717 shares at $6.275 and $11.125 per share, respectively. During 2001, put rights covering 3,394 shares expired. As of July 31, 2001 and 2000, put rights covering 1,698 shares at $11.125 per share
and 5,092 shares at $11.125 per share remained outstanding, respectively. During 2002, put rights covering 1,544 shares were settled for $0.02 and the remaining put rights expired.





9.    Commitments





The
Company leases facilities as well as certain computers, production and other office equipment under noncancellable lease agreements. The Companys future minimum lease payments at July 31, 2002 under such agreements are as follows:





Capital Leases


Operating Leases2003

$
76


$
6822004


64



3672005


58



3312006


10



252Future Minimum Lease Payments


208


$
1,632Less amounts representing interest


(31
)Present value of minimum lease payments


177Less current portion


(59
)Obligations under capital leases, net of current portion

$
118





Assets held under capital leases are included in property and
equipment and had a total cost of $351, and a net book value of $0 at July 31, 2002 and 2001.





Rent expense for
the periods ended July 31, 2002, 2001, and 2000 totaled $876, $788, and $298 respectively.




29




---

##### Table of Contents



PROSOFTTRAINING AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(In thousands, except share
data)







10.    Income (Loss) per Share





The following represents a reconciliation of weighted-average common shares outstanding for purposes of calculating basic and diluted net
income (loss) per share:





Year ended July 31,2002

2001

2000Average common shares outstanding

24,011,822

23,065,271

17,296,560Assumed conversions:Stock options





1,731,361Warrants





1,427,094Diluted average common shares outstanding

24,011,822

23,065,271

20,455,015





In 2002 and 2001, all potential common shares were anti-dilutive.
In 2000, outstanding stock options and warrants not included in the computation of diluted earnings per share because their effect would be anti-dilutive totaled 1,064,375 shares.





11.    Contingencies





The Company is
engaged in the defense of certain claims and lawsuits arising out of the ordinary course and conduct of its business, the outcome of which are not determinable at this time. In the opinion of management, any liability that might be incurred by the
Company upon the resolution of these claims and lawsuits will not, in the aggregate, have a material adverse effect on the Companys consolidated results of operations, cash flows or financial condition.





12.    Income Taxes





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





Year ended July 31,2002


2001


2000Income tax (benefit) expense at statutory rate

$
(14,122
)

$
(1,553
)

$
410Amortization of non-deductible goodwill


699



803



271Write-off of goodwill


10,302







State income taxes, net of federal benefit


(351
)


(99
)


72Other


332



(72
)


(152
)Increase in valuation allowance


4,065



521



(1,026
)Deferred income tax (benefit) expense

$
925


$
(400
)

$
(425
)




30




---

##### Table of Contents



PROSOFTTRAINING AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(In thousands, except share
data)







Deferred income taxes reflect the tax consequences in future years of
differences between the tax basis of assets and liabilities and their basis for financial reporting purposes. Temporary differences that give rise to deferred tax assets are as follows:





2002


2001


2000Net operating loss carryforwards

$
27,550


$
23,748


$
21,712Accrued expenses


239



247



157Accounts receivable


344



210



105Property and equipment


302



313



32928,435



24,518



22,303Other


(823
)


(46
)


(46
)27,612



24,472



22,257Valuation allowance


(27,612
)


(23,547
)


(21,832
)Net deferred tax assets

$



$
925


$
425





As a result of the significant net losses incurred in fiscal 2002,
the Company recorded a valuation allowance to fully reserve its net deferred tax asset.





At July 31, 2002, the
Company has net operating loss carryforwards available to offset future federal and state taxable income of approximately $73,000 and $36,500, respectively. Such carryforwards expire principally in 2011 to 2022 and 2002 to 2007, respectively.
Federal and state net operating loss carryforwards of approximately $13,200 and $6,600 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 the equity transactions completed by
the Company in 1996, utilization of certain 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.





13.    Business Segments and Foreign Operations





Information regarding foreign operations follows:





Year Ended July 31,2002

2001

2000Net sales

$
17,922

$
31,425

$
19,572United States


15,976


29,208


17,958Foreign


1,946


2,217


1,614Long-lived assets

$
1,166

$
1,735

$
1,068United States


1,056


1,584


882Foreign


110


151


186




31




---

##### Table of Contents



PROSOFTTRAINING AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(In thousands, except share
data







14.    Unaudited Quarterly Data





Summarized quarterly financial data for 2002, 2001, and 2000 follow:





1st Quarter


2nd Quarter


3rd Quarter


4th QuarterYear ended July 31, 2002:Revenues

$
4,603


$
4,413


$
4,566


$
4,340Operating loss


(3,168
)


(2,144
)


(26,350
)


(9,710
)Net loss


(3,164
)


(2,195
)


(27,331
)


(9,769
)Basic loss per common share


(.13
)


(.09
)


(1.13
)


(.42
)Diluted loss per common share


(.13
)


(.09
)


(1.13
)


(.42
)Year ended July 31, 2001:Revenues

$
9,464


$
9,152


$
7,187


$
5,622Operating profit (loss)


792



219



(2,854
)


(3,089
)Net income (loss)


1,139



544



(2,790
)


(3,060
)Basic income (loss) per common share


.05



.02



(.12
)


(.13
)Diluted income (loss) per common share


.05



.02



(.12
)


(.13
)





15.    Subsequent Event





The Companys Board of Directors engaged an investment banker in July 2002 to explore strategic options for the Company, including a
sale of some or all of its assets and operations. We have been involved in discussions as a result of this engagement that could result in the sale of some or all of our assets or operations. As a step in this process, an interested party has
submitted an indication of interest such that we have agreed to negotiate exclusively with that party for a three-week period through November 29, 2002 in an effort to determine if an acceptable offer for the sale of some or all of the
Companys assets or operations will be received from that party. There can be no assurance that an acceptable offer will be received from that party or any other party, and if an offer is received there can be no assurance that the offer will
be made on terms acceptable to the Board of Directors.





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





None.




32




---

##### Table of Contents

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 2002 Annual Meeting of Stockholders to be filed with the Commission within 120 days of July 31, 2002 and is incorporated herein by this reference.





ITEM 11.    
EXECUTIVE COMPENSATION





The information required by this Item will be included in the
Companys Proxy Statement with respect to its 2002 Annual Meeting of Stockholders to be filed with the Commission within 120 days of July 31, 2002 and is incorporated herein by this 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 2002 Annual Meeting of Stockholders to be filed with the Commission within 120 days of July 31, 2002 and is incorporated herein by this 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 2002 Annual Meeting of Stockholders to be filed with the Commission within 120 days of July 31, 2002 and is incorporated herein by this reference.





ITEM 14.    
CONTROLS AND PROCEDURES





Not applicable.




33




---

##### Table of Contents




PART IV





ITEM 15.    
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.





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





| | 1. |  | Consolidated Financial Statements
| | -- |  | ---------------------------------




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





| | 2. |  | Exhibits
| | -- |  | --------




See Exhibit Index.





b.    Reports on Form 8-K. No report on Form
8-K was filed during the last quarter of fiscal year ended July 31, 2002.




34




---

##### Table of Contents




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 President and
Chief Financial OfficerBy:

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





Dated: November 12, 2002





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, 2002 .





Signature

Title/s/    JERRELL M.
BAIRD Jerrell M. Baird

Chairman of the Board and Chief Executive Officer (Principal Executive Officer)/s/    ROBERT G.
GWIN Robert G. Gwin

President and Chief Financial Officer (Principal Financial Officer)/s/    WILLIAM J.
WERONICK Willam J. Weronick

Vice President, Finance (Principal Accounting Officer)/s/    J.R. HOLLAND,
JR. J.R. Holland, Jr.

Director/s/    EDWARD M.
WALSH Edward M. Walsh

Director/s/    JEFFREY G.
KORN Jeffrey G. Korn

Director/s/    J. WILLIAM
FULLER J. William
Fuller

Director/s/    CHARLES P.
MCCUSKER Charles P.
McCusker

Director




35




---

##### Table of Contents

CERTIFICATION OF


CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER


PROSOFTTRAINING





I, Jerrell M. Baird, do hereby certify
that:





| | 1. |  | I have reviewed the Annual Report on Form 10-K of ProsoftTraining being filed;
| | -- |  | ------------------------------------------------------------------------------




| | 2. |  | Based on my knowledge, the Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Annual Report; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in the Annual Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in the Annual Report.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date:    November 12, 2002





/s/    JERRELLM. BAIRDJerrell M. Baird Chief Executive Officer





I, Robert G. Gwin, do hereby certify that:





| | 1. |  | I have reviewed the Annual Report on Form 10-K of ProsoftTraining being filed;
| | -- |  | ------------------------------------------------------------------------------




| | 2. |  | Based on my knowledge, the Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Annual Report; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in the Annual Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in the Annual Report.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date:    November 12, 2002





/s/    ROBERT G. GWINRobert G. Gwin Chief Financial Officer




36




---

##### Table of Contents




PROSOFTTRAINING AND SUBSIDIARIES





SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS





Balance at beginning of year

Charged to costs and expenses

Acquired through Business Combination(1)

Deductions (write-offs, net of recoveries)


Balance at end
of year(In thousands)Allowance for doubtful accounts:Year ended July 31, 2002

$
1,003

$
295




$
(820
)

$
478Year ended July 31, 2001

$
251

$
799




$
(47
)

$
1,003Year ended July 31, 2000

$
199

$
93

$
65

$
(106
)

$
251


---

|(1) |  | Acquired through the acquisition of ComputerPREP in July 2000.
|--- |  | --------------------------------------------------------------



37




---

##### Table of Contents




EXHIBIT INDEX





Exhibit No.

Description of Exhibits2

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.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

Employment Agreement dated February 1, 2002 between the Company and Jerrell M. Baird. Filed as Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2002 and incorporated herein by reference.10.7

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.10.8

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.10.9

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.10.10

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.




38




---

##### Table of Contents

Exhibit No.

Description of Exhibits10.11

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.10.12

Common Stock Purchase Warrant dated June 27, 2000 to purchase 300,000 shares issued to Drake. Filed as Exhibit 10.2
to the Companys Current Report on Form 8-K dated June 27, 2000 and incorporated herein by reference.10.13

Common Stock Purchase Warrant dated June 27, 2000 to purchase 300,000 shares issued to Drake. Filed as Exhibit 10.3
to the Companys Current Report on Form 8-K dated June 27, 2000 and incorporated herein by reference.10.14

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.10.15

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.10.16

Employment Agreement dated July 17, 2000 between the Company and Robert G. Gwin. Filed as Exhibit 10.25 to the
Companys Annual Report on Form 10-K for the year ended July 31, 2000 and incorporated herein by reference.10.17

Addendum to Employment Agreement dated October 29, 2001 between the Company and Robert G. Gwin. Filed as Exhibit 10.2
to the Companys Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2002 and incorporated herein by reference.10.18

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.10.19

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.10.20

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.10.21

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.10.22

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.10.23

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.10.24

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.10.25

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.




39




---

##### Table of Contents

Exhibit No.

Description of Exhibits10.26

Separation Agreement dated October 16, 2001, between the Company and David I. Perl. Filed as Exhibit 10.7 to the
Companys Current Report on Form 8-K dated October 16, 2001 and incorporated herein by reference.10.27

Separation Agreement dated October 16, 2001, between the Company and Jeffrey G. Korn. Filed as Exhibit 10.8 to the
Companys Current Report on Form 8-K dated October 16, 2001 and incorporated terein by reference.10.28

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 reference21

Subsidiaries of the Company. Filed as Exhibit 21 to the Companys Annual Report on Form 10-K for the year ended
July 31, 2001 and incorporated herein by reference.23.1

Consent of Grant Thornton LLP, Independent Certified Public Accountants.99.1

Certification of Chief Executive Officer and Chief Financial Officer dated November 12, 2002.




40