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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-K

(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 ¨

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

The aggregate market value of common stock held by non-affiliates (excludes outstanding shares beneficially owned by directors and officers) as of October 24, 2003, was approximately $10.4 million. As of such date 24,209,414 shares of common stock, $.001 per value, were outstanding.

Part III is incorporated by reference from the Registrant’s definitive proxy statement for its 2003 Annual Meeting of Stockholders to be filed with the Commission within 120 days of July 31, 2003.

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

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PROSOFTTRAINING

INDEX TO ANNUAL REPORT ON FORM 10-K

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FORWARD-LOOKING STATEMENTS

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

ITEM 1.    BUSINESS

Organization History

ProsoftTraining (the “Company” or “Prosoft” or “we” or “our”) is incorporated under the laws of the State of Nevada. 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, to ProsoftTraining.com. in December 1998, and to ProsoftTraining in July 2001.

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

The Company’s content is focused on education and training for job-role and vendor-specific certifications. Other products offered by Prosoft assist in developing proficiency in specific computer programs, programming languages or operating systems. As of July 2003, the Company’s library consisted of approximately 800 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 Convergent Technologies Professional (“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”), and assessment. These products are also sold combined into a “blended learning” offering called Classroom-in-a-Box.

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Content Distribution

Through its ComputerPREP division, Prosoft has built a worldwide distribution network with a wide range of customers including academic institutions, commercial training centers, corporations, and individuals. The Company provides products to a diverse client list that includes entities such as the University of Phoenix, New Horizons, CompUSA, American Express, IBM, Lockheed Martin, Time Warner Cable, the Federal Aviation Administration (FAA), the United States Department of Agriculture (USDA), NETg, SBC Communications, Siemens, Avaya and a broad variety of community colleges, technical colleges and high schools. The learning center channel represented approximately 44 percent of Prosoft’s fiscal year 2003 content revenues, followed by 33 percent for the academic channel and 21 percent for corporate customers.

ComputerPREP also manages an authorized channel of over 750 CIW Authorized Training Providers (“ATP”) and Authorized Academic Partners (“AAP”) worldwide. Commercial channel partners generally pay a small membership fee for the rights to sell and teach Official Curriculum while academic channel partners usually agree to place a minimum courseware order when joining the authorized channel program.

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

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

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

The Company distributes its content broadly outside the United States. The majority of the Company’s content revenues are from the United States and Canada (87 percent), followed by EMEA (10 percent). Prosoft distributes its content and maintains a direct sales presence in the Europe, Middle East and Africa (“EMEA”) region through its ProsoftTraining Europe Ltd. wholly owned subsidiary, based in Limerick, Ireland. The Company’s wholly owned subsidiary ProsoftTraining Hong Kong Ltd. (“PHK”), based in Hong Kong, expands its reach, develops partnerships, combats piracy of its products, and seeks endorsements in the rapidly growing Asia-Pacific region. Prosoft also distributes content through a formal partnership in Japan.

Content Development

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

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

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

Certification Development, Ownership and Management

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

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

The Company’s certification revenues primarily consist of student testing fees (91 percent of fiscal year 2003 certification revenues) and fees paid by institutions for participation in the Company’s authorized programs (9 percent of fiscal year 2003 certification revenues). The Company believes it has certification growth potential due to the integration of certifications into academic curricula, the continuing shortage of ICT skills in today’s workforce, and the increasing recognition of portable vendor-neutral job-role certifications.

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

CIW

Prosoft owns both the CIW certification and the Official CIW Curriculum. With over 70,000 certifications earned by September 2003, the CIW program has become one of the largest programs among the more than 350 existing ICT certifications. The CIW certification covers job roles in network administration, security, application development, programming, Web design and e-commerce. Candidates from more than 100 countries have earned a CIW certification.

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

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

CCNT

In December 2000, Prosoft acquired Mastery Point Learning Systems. Mastery Point developed the CCNT certification program under the direction of the TIA to serve the needs of telephone companies and network service providers. CCNT is a vendor-neutral credential program for the convergence technology industry that validates an individual’s knowledge of basic data communications, basic telecommunications and telephony. Convergence technology is the merging of voice, video and data on a single network, integrating telecommunications and computer technologies. 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. In China, Beijing Telecom delivers CCNT educational programs as part of its company-wide employee training program and is the master distributor of CCNT education and testing for all of China.

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 created Official CTP courseware and a CTP authorized training channel. Prosoft shares testing revenue from this program with the TIA. To date, CTP has been endorsed by Cisco, Avaya, Nortel, Mitel, Inter-Tel and Iwatsu as either a prerequisite to those entities’ IP telephony certifications, product certifications, or dealer network certifications.

Services

The Company effectively exited the services business in fiscal year 2002, currently has no employees or investments in the services business and does not anticipate any material services revenue in the future. This business was the primary source of revenue for the Company for the fiscal years 1998 through 2000. In fiscal year 2003, the Company earned residual services revenue related to training instructors to teach CIW and providing CIW instruction to some corporate customers, primarily in Europe.

Customers

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

Commercial Learning Centers.    In fiscal year 2003, 44 percent of the Company’s content revenue came from commercial learning centers. The commercial learning center channel is composed of companies that provide individuals and corporations short-format courses in a commercial setting. Course length in this channel ranges from one day to two weeks. The primary customer of our channel partners is a corporation seeking specialized training on technical topics. This channel is highly fragmented, with the largest companies responsible for a small percentage of the total market. Large chains in this channel are New Horizons, Learning Tree, and CompUSA. In fiscal year 2003 New Horizons and its franchisees accounted for nine percent of the Company’s content revenue. No other company accounted for more than five percent of content revenue.

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Academic Institutions.    In fiscal year 2003, 33 percent of the Company’s content revenue came from academic institutions. The academic channel is composed of high schools, community colleges, technical and vocational schools and other degree-granting institutions. Course length in this channel is tied to academic semesters or quarters. This channel also provides “continuing education” in a format that competes directly with commercial learning centers. The academic channel is highly fragmented and no customer in this channel accounted for more than five percent of our content revenue in fiscal year 2003.

Corporations.    In fiscal year 2003, 21 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. No customer in this channel accounted for more than five percent of content revenue in fiscal year 2003.

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

Competition

Both the content and certification business segments are highly competitive, and there currently are only minor economic barriers to entry into either business. We face competition from many other companies offering training and certification services and products, including the internal training departments of corporations and publishing units of large corporations. Some of 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 that competes directly with our CIW Associate certification. Trade associations such as the World Organization of Webmasters have released certification exams that compete with aspects of our certification programs. Individuals can and often do earn multiple certifications, and our certifications focus on the job-skills rather than product-specific curricula offered by Microsoft, Cisco and other large vendors. However, these vendors have more resources to attract candidates to their programs than do we.

Sources of Revenue

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

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

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

The Company formally exited the services business in fiscal 2002, yet continues to earn some residual revenue in this business when it trains the instructors of learning center providers of companies that plan to conduct courses internally. We recognize services revenue when instruction or consulting services are provided.

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Sales, Marketing and Customer Support

We sell and market our certification exams, content and integrated courses to students primarily through a channel of academic institutions and commercial learning centers. As of September 30, 2003, we had 24 people directly involved in sales, marketing and customer support in the United States, Asia, and Europe. Our customer service organization in Phoenix, Arizona accepts, enters and reviews domestic and EMEA courseware orders. Because many of our customers need to make last-minute adjustments or wait to order courseware until a few days before a class starts, 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 through New Year’s Day tends to be slow for the education and training industry. Other seasonality is due to academic market purchasing cycles, customers’ spending patterns and variations in corporate training budgets.

Trademarks and Copyrights

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

Employees

As of September 30, 2003, we employed 54 people worldwide.

Regulations

Most of the jurisdictions in which we operate regulate and license certain kinds of vocational, trade, technical or other post-secondary education. We believe that employer-funded or reimbursed ICT training is exempt from such requirements in most of the United States. To the extent that we participate in programs funded by government entities, we 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.

ITEM 2.    PROPERTIES

As of September 30, 2003, the Company had entered into leases for commercial space in the following locations:

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

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During fiscal year 2003, we determined to close our Santa Ana, California facility, which lease expired July 31, 2003. We relocated our Human Resources and Content Development functions to our Phoenix, Arizona location.

We do not intend to renew the leased facility in Eden Prairie, Minnesota after February 2004.

ITEM 3.    LEGAL PROCEEDINGS

The Free Methodist Foundation and other related parties filed a complaint against the Company on March 11, 1999, alleging misrepresentations and failure to properly register stock sold to the Foundation. The complaint was filed 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. The Circuit Court affirmed the decision of the Trial Court finding no liability on the part of the Company.

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 legal proceedings.

ITEM 4.    SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

None.

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PART II

The Company’s common stock currently trades on the NASDAQ SmallCap Market, under the trading symbol of “POSO”. Prior to October 8, 2002, the Company’s common stock traded on the NASDAQ National Market. The following table sets forth for each quarter during fiscal years 2003 and 2002 the high and low bid quotations for the common stock as reported by NASDAQ.

On October 24, 2003, the Company had approximately 3,600 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.

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.

The following discussion and analysis should be read in conjunction with our Audited Consolidated Financial Statements and related Notes thereto contained elsewhere in this Report. The information contained in this Annual Report on Form 10-K is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by

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us in this Report and in our other reports filed with the Securities and Exchange Commission, including our subsequent reports on Form 10-Q and 8-K, which discuss our business in greater detail.

The section entitled “Additional Factors That May Affect Results of Operations and Market Price of Stock”, set forth on page 14 in this Report, and similar discussions in our other SEC filings, discuss some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this Report and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock.

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

Development of Business

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

Results of Operations

Revenues

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

Total revenues for 2002 were $17.92 million, a decrease of 43 percent 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.

Content revenues in 2003 decreased by 31 percent, or $4.20 million, compared to 2002, and decreased 40 percent, or $8.97 million, for 2002 compared with 2001. The decline in content revenues was driven by continued weakness in corporate training budgets resulting in sharply reduced purchases of our content products by our learning center customers.

Certification revenues in 2003 decreased by 33 percent to $2.60 million compared to 2002, and increased 8 percent to $3.85 million for 2002 compared with 2001. Certification revenues consist of CIW, CTP and CCNT

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certification exam fees and annual fees received from CIW ATP’s. The decrease in 2003 was related to continuing weakness in the technology training sector.

Services revenue in 2003 decreased by 84 percent, or $0.45 million, compared with 2002, and decreased 90 percent, or $4.80 million, for 2002 compared with 2001. The decrease in 2003 was the result of our exiting the services business during the fiscal year. The decrease in 2002 was 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 2003 decreased $4.86 million, or 51 percent, compared with 2002. As a percentage of revenue, gross profit, defined as total revenue less costs of revenue, increased to 62 percent in 2003, from 47 percent in 2002. The decrease in cost of revenues was primarily due to the decrease in content and services revenues and cost reductions. The increase in gross profit percentage was primarily due to substantial operating cost reductions achieved through a broad restructuring of our operations and our exit from the low-margin services business.

Cost of revenues in 2002 decreased $5.00 million, or 35 percent, compared with 2001. As a percentage of revenue, gross profit decreased to 47 percent in 2002 from 54 percent in 2001. This decrease was primarily a result of lower revenue and a decrease in content selling prices resulting from competitive pressures and weakness in customer budgets.

Content Development

Content development expenses in 2003 decreased $0.69 million, or 32 percent, when compared with 2002. Content development expenses in 2002 increased $0.08 million, or 4 percent, when compared with 2001. The 2003 dollar decrease was largely the result of lower personnel costs associated with the strategic reduction in headcount implemented during the year. Content development expenses as a percentage of revenue was 12 percent in 2003 and 2002, and 7 percent in 2001. The increase in 2002 compared with 2001 was primarily due to lower revenues.

Sales and Marketing

Sales and marketing expenses decreased $2.95 million, or 46 percent, in 2003 as compared with 2002 and decreased $1.15 million, or 15 percent, in 2002 as compared with 2001. As a percent of revenue, sales and marketing expenses decreased 7 percentage points in 2003 as compared with 2002 and increased 11 percentage points in 2002 as compared with 2001. The dollar decrease in 2003 is attributable to lower sales commissions and personnel costs associated with cost reductions implemented during the year. The dollar decrease in 2002 is attributable to lower sales volume.

General and Administrative

General and administrative expenses decreased $1.56 million, or 28 percent, in 2003 as compared with 2002. General and administrative expenses decreased $2.36 million, or 29 percent, in 2002 as compared with 2001. As a percent of revenue, general and administrative expenses increased 2 percentage points in 2003 as compared with 2002 and increased 7 percentage points in 2002 as compared with 2001. The dollar decreases in 2003 and 2002 were primarily a result of ongoing workforce reductions and other cost reduction measures implemented throughout the period.

Depreciation and Amortization

Depreciation expense was $0.57 million, $0.79 million and $0.67 million for the years ended July 31, 2003, 2002 and 2001, respectively. The decrease in 2003 when compared to 2002 was primarily due to the closing of the Austin, Texas office.

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Amortization expense associated with goodwill and other acquired intangibles was $0.26 million, $2.35 million and $2.94 million for the years ended July 31, 2003, 2002 and 2001, respectively. The decrease in amortization expense for 2003 when compared to 2002 and 2001 was attributable to no amortization of goodwill due to the adoption of SFAS No. 142 effective August 1, 2002.

Write-down of Courseware and Licenses

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

Impairment of Goodwill

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 fiscal year 2002. The carrying value of goodwill was not supported by estimated future cash flow. The write-down to fair value was determined utilizing the discounted cash flow method.

Special (Credit) Charges

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

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

During fiscal year 2001, we recorded a $0.66 million special 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 services 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%.

Interest Income and Interest Expense

Interest income decreased $0.06 million in 2003 as compared with 2002 and decreased $0.34 million in 2002 as compared with 2001. The decreases were attributable to lower average cash balances and lower interest rates. The lower average cash balances were primarily a result of operating losses.

Interest expense increased $0.06 million in 2003 as compared with 2002 and increased $0.19 million in 2002 as compared with 2001. Higher interest expense for 2003 and 2002 is attributable to the issuance of a $2.50 million Subordinated Convertible Note in the first quarter of fiscal year 2002.

Income Tax (Expense) Benefit

There was no income tax expense or benefit in 2003. Income tax expense was $0.93 million in 2002 compared with income tax benefits of $0.40 million in 2001. During 2002, the Company increased its valuation

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allowance related to deferred income taxes due to operating losses and the then-current economic slowdown. Income tax benefits in 2001 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 $1.92 million in 2003 compared with $3.71 million in 2002, a decrease of $1.80 million. The decrease in net cash used in operating activities was due to a lower net loss in 2003 compared with 2002, as adjusted for non-cash income and expenses, of $3.88 million, offset by a $2.08 million net decrease in changes in operating assets and liabilities in 2003 compared with 2002.

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 a higher net loss in 2002 compared with 2001, as adjusted for non-cash income and expenses of $4.56 million, offset by a net increase in changes in operating assets and liabilities in 2002 compared to 2001 of $4.24 million.

Cash used in investing activities, primarily consisting of capital expenditures and content and license purchases in 2003 and 2002, was $0.07 million in 2003, $0.59 million in 2002, and $6.16 million in 2001. The 2001 amount was related to acquisition activity and substantial content and property purchases during that year.

Cash used in financing activities was $0.06 million in 2003, compared with cash provided from financing activities of $2.58 million in 2002. In 2002, we