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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

Commission File Number 000-21535

ProsoftTraining

(Exact name of Registrant as specified in its charter)

410 N. 44^th Street, Suite 600, Phoenix, AZ 85008

(Address of principal executive offices) (Zip Code)

(602) 794-4199

(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 (            )

The number of shares of the registrants’ common stock, $.001 par value, outstanding as of March 14, 2003 was 24,221,326 shares.

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PROSOFTTRAINING

INDEX TO QUARTERLY REPORT ON FORM 10-Q

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PROSOFTTRAINING AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

See accompanying notes.

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PROSOFTTRAINING AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

See accompanying notes

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PROSOFTTRAINING AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes

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PROSOFTTRAINING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

1.     General

These interim consolidated financial statements do not include certain footnotes and financial information normally presented annually under accounting principles generally accepted in the United States of America and, therefore, should be read in conjunction with the Consolidated Financial Statements and the Notes thereto contained in the Company’s 2002 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission. The results of operations for the six-month period ended January 31, 2003, are not necessarily indicative of results that can be expected for the fiscal year ending July 31, 2003. The interim consolidated financial statements are unaudited but contain all adjustments, consisting of normal recurring adjustments management considers necessary to present fairly its consolidated financial position, results of operations, and cash flows as of and for the interim periods. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Certain prior period amounts have been reclassified to conform to the current period presentation. Certain prior period amounts have been reclassified to conform to the current period presentation.

2.    Comprehensive income

The components of comprehensive income for the three and six months ended January 31, 2003 and 2002 are as follows:

3.    Loss Per Share of Common Stock

Basic loss per common share was calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Since the Company recorded losses for all periods presented, all potentially dilutive securities have been excluded from the calculation of diluted loss per share and basic and diluted loss per share are the same.

4.    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.

5.    Recent Accounting Pronouncements

Effective August 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS 142, Goodwill and Other Intangible Assets. Major provisions of these statements and their effective dates are as follows:

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The Company amortized goodwill and intangible assets until July 31, 2002. Beginning August 1, 2002, quarterly and annual goodwill amortization is no longer recognized. The Company completed a traditional fair value based impairment test of goodwill as of January 31, 2003. There were no impairment losses resulting from the transitional fair value test.

Intangible assets consist of the following:

Amortization expense related to intangibles assets totaled $211 and $284 during the three and six months ended January 31, 2003 and $780 and $1,716 during the three and six months ended January 31, 2002 The aggregate estimated amortization expense for intangible assets remaining as of January 31, 2003 is as follows:

Net loss and loss per share for the three months and six months ended January 31, 2003 and 2002, adjusted to exclude amortization expense, is as follows:

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This Management’s Discussion and Analysis of Financial Condition and Results of Operations contain 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 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 10. These forward-looking statements represent the Company’s judgment as of the date of the filing of this Form 10-Q. The Company disclaims any intent or obligation to update these forward-looking statements. For the purposes of this Form 10-Q, “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 related notes included elsewhere in this document.

OVERVIEW

ProsoftTraining is a leading provider of information and communications technology (“ICT”) curriculum and certifications to help individuals develop, upgrade and validate critical ICT skills. We sell and license our content, certifications and instructional services to academic institutions, commercial training centers, internal corporate training departments and individuals around the world.

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 educational services to the technology training industry and building its propriety 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 were $2.84 million in the three months ended January 31, 2003, compared with $4.41 million in the three months ended January 31, 2002, a decrease of $1.57 million. Total revenues decreased to $6.56 million in the six months ended January 31, 2003 from $9.02 million in the six months ended January 31, 2002, a decrease of $2.46 million. The decline in total revenues was driven by weakness in corporate training budgets that resulted in sharply reduced purchases of our training products, certifications and services by our learning center customers. In addition, the budgets of our academic customers continued to be constrained during the periods, resulting in reduced sales to that channel as well.

Costs of Revenues

Costs of revenues decreased $0.92 million, or 42%, compared with the year-ago quarter, and decreased $1.65 million, or 37%, compared with the year-ago six-month period. This decrease is due primarily to the decrease in revenues. As a percentage of revenue, gross profit, defined as total revenues less costs of revenues, increased to 56% from 51% in the year-ago quarter and to 57% from 50% in the year-ago six-month period. The increase in gross profit percentage was largely due to cost reduction measures implemented over the past year, primarily in the services operation.

Content Development

Content development expenses decreased $0.15 million, or 26%, compared with the year-ago quarter and decreased $0.11 million, or 10%, compared with the year-ago six month period. The decrease in content development expenses was attributable to reduced salary expenses and the suspension of the XML conversion of our content library.

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Sales and Marketing

Sales and marketing expenses decreased $0.69 million, or 44%, compared with the year-ago quarter, and decreased $0.95 million, or 30%, compared with the year-ago six month period. The decrease was attributable to lower revenues and associated sales commissions and a decrease in the number of sales employees.

General and Administrative

General and administrative expenses were $1.38 million for the current quarter compared with $1.37 for the year-ago quarter. The current quarter included a non-cash charge of $0.11 million associated with the disposal of fixed assets in our Austin, Texas office. During the quarter ended January 31, 2003, the Company relocated its headquarters from Austin to Phoenix, Arizona. General and administrative expenses decreased $0.35 million, or 11%, for the six months ended January 31, 2003, compared with the year-ago six-month period. The decrease was attributable to lower personnel costs and other cost reduction measures implemented over the past year.

Depreciation and Amortization

Depreciation and amortization expenses decreased $0.60 million, or 68%, compared with the year-ago quarter and decreased $1.27 million, or 72%, compared with the year-ago six-month period. The decrease was attributable to no goodwill amortization expense due to the adoption of SFAS 142.

Restructuring Charge

A restructuring charge of $0.76 million was recorded in the three months ended October 31, 2001. 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.

Interest Income and Interest Expense

Interest expense was $0.07 million for the three month ended January 31, 2003 and 2002 and $0.14 million for the six month period ended January 31, 2003, compared to $0.09 million for year-ago six-month period. The increase in interest expense was attributable to the issuance of a $2.50 million Subordinated Secured Convertible Note in the first quarter of fiscal year 2002.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $1.91 million in the six months ended January 31, 2003, compared with $1.66 million for the six months ended January 31, 2002, an increase of $0.25 million. Cash used in operating activities of $1.91 million for the six months ended January 31, 2003 was primarily a result of our net loss adjusted for non-cash charges.

Net cash used in investing activities was $0.05 million for the six months ended January 31, 2003, compared with $0.44 million in the same year-ago period. The decrease in cash used in investing activities of $0.39 million was primarily due to a decrease in capital and courseware and licenses expenditures.

Net cash used in financing activities was $0.03 million in the six months ended January 31, 2002, compared with cash provided by financing activities of $2.60 million in the same year-ago period. Cash provided by financing activities in the six months ended January 31, 2002 was due to the issuance of the $2.50 million Subordinated Secured Convertible Note in October 2001.

In November 1998, we entered into an Accounts Receivable Line of Credit agreement with a bank whereby up to 80% of the accounts receivable can be advanced, up to $3.5 million. We have not borrowed under this line of credit.

Management believes, based on current operations, that cash on hand will be sufficient to meet our cash requirements only until approximately the end of the fourth 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) further reduce operating expenses, (ii) raise additional capital, or (iii) 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. Failure to take such action in a timely manner will place us in significant financial jeopardy and could result in us seeking bankruptcy protection.

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The following summarizes our contractual cash obligations as of January 31, 2003 (in millions):

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 a continuing obligation to 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:

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 RESULTS OF OPERATIONS AND MARKET PRICE OF STOCK

The discussions in this Form 10-Q concerning future financing needs, changes in business strategy, future profitability, and factors affecting liquidity contain forward-looking statements. Although we believe that these statements are reasonable in view of the facts available to us, no assurance can be given that all of these statements will prove to be accurate. 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 in this Form 10-Q.

RISK TO CONTINUED OPERATIONS

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 further 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 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 the debt. There can be no assurance that we will be successful in taking any of

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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, although no discussions are currently active or continuing. There can be no assurances that past or future discussions will result in an offer for some or all of the Company’s assets or operations or, in the event we receive an acceptable offer, that we will be able to close a transaction in sufficient time to allow us to continue operations.

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, pursue the alternatives noted under “Risks to Continued Operations,” or seek bankruptcy protection.

POTENTIAL DELISTING FROM THE NASDAQ STOCK MARKET

On October 7, 2002, the trading of our Common Stock was transferred from the Nasdaq National Market System to the Nasdaq SmallCap Market as a result of our failure to satisfy the minimum $1.00 bid price per share requirement set forth in the Nasdaq Market Place Rules. However, in order to remain on the Nasdaq SmallCap Market, the Company must satisfy the $1.00 bid price requirement, which we have not done to date. On November 21, 2002, Nasdaq notified us that we have until May 19, 2003 to regain compliance by having a closing bid price of our Common Stock of sat least $1.00 for a minimum of ten consecutive days. If we do not comply by May 19, 2003, Nasdaq has indicated it will provide written notification that our securities will be delisted from Nasdaq. If Nasdaq delists our Common Stock, then our Common Stock may be traded on the OTC Bulletin Board or the “pink sheets,” or may be not traded at all. Many institutional and other investors refuse to invest in stocks that are traded at levels below the Nasdaq National Market, which could make our effort to raise capital more difficult. OCT Bulletin Board and “pink sheets” stock are often lightly traded or not traded at all on any given day. Any reduction in liquidity or active interest on the part of the investors in our Common Stock could have adverse consequences on our stockholders either because of reduced market prices or lack of a regular, active trading market for our Common Stock.

POSSIBILITY OF CONTINUING LOSSES

We have incurred losses of approximately $100 million from our inception through January 31, 2003. 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.

INTENSE COMPETITION IN TRAINING MARKET

We face substantial competition in the training market. Competition in the information technology 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, established customers and facilities. 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 continue to evolve. To remain competitive and achieve 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 will adversely affect our financial performance.

EFFECT OF MARKET OVERHANG ON STOCK PRICE

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Future sales of our Common Stock could depress the market price of our Common Stock. In addition, the perception that such sales may occur could also adversely affect the price. As long as certain registration statements that have been filed with the SEC remain effective, the selling stockholders under those registration statements may sell approximately 6.3 million shares, or approximately 26% 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:

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.     CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our chief executive and financial officer, based on evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date (the “Evaluation Date”) within 90 days of our filing of this quarterly report on Form 10-Q, believes that, as of the Evaluation Date, our disclosure controls and procedures were effective.

Changes in Internal Controls

There were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART II—OTHER INFORMATION

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

The Company’s Annual Meeting of Stockholders was held on February 7, 2003. At the Annual Meeting, the following director was elected to serve as Class III director for a three-year term and until his respective successor is elected and qualified.

ITEM 5.     OTHER INFORMATION

We are not in compliance with the Nasdaq Market Place Rules for continued listing on the Nasdaq SmallCap Market. We have until May 19, 2003 to regain compliance by having a closing bid price of our Common Stock of at least $1.00 for a minimum of ten consecutive trading days. If we do not comply by May 19, 2003, Nasdaq has indicated it will provide written notification that our Common Stock will be delisted from Nasdaq for failure to satisfy the Nasdaq Market Place Rules.

On December 9, 2002, the Company issued a press release reporting (i) the resignation of its Chairman and Chief Executive Officer and another director and (ii) the appointment of its President as the new Chief Executive Officer and to the Board of Directors.

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the three months ended January 31, 2002

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: March 17, 2003

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CERTIFICATION OF

CHIEF EXECUTIVE AND FINANCIAL OFFICER

PROSOFTTRAINING

CERTIFICATION

I, Robert G. Gwin, certify that:

Date: March 17, 2003

/s/ Robert G. Gwin

Chief Executive and Financial Officer

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