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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal quarter ended January 31, 2004

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)

Registrant’s telephone number, including area code: (602) 794-4199

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 whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

The number of shares of the registrants’ common stock, $.001 par value, outstanding as of March 12, 2004 was 24,221,326 shares.

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PROSOFTTRAINING

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PART I

Item 1. Financial Statements

PROSOFTTRAINING AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

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

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PROSOFTTRAINING AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

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

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PROSOFTTRAINING AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

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

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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 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC. The results of operations for any interim period are not necessarily indicative of results that can be expected for the fiscal year ending July 31, 2004. 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 reclassifications have been made in the prior-period consolidated financial statements to conform with the current-period presentation.

2. Comprehensive Income

The components of comprehensive income for the three and six months ended January 31, 2004 and 2003 are as follows:

3. New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board, or the FASB, issued FASB Interpretation No. 46, or FIN No. 46, Consolidation of Variable Interest Entities (“VIE”). FIN No. 46 requires that if a company holds a controlling interest in a VIE, the assets, liabilities and results of the VIE’s activities should be consolidated in the entity’s financial statements. In December 2003, the FASB revised FIN No. 46 which, among other revisions, resulted in the deferral of the effective date of applying the provisions of FIN No. 46 to the first interim or annual period ending after March 15, 2004 for qualifying VIE’s. The Company does not expect that the adoption of FIN No. 46, as revised, will have a material impact on its consolidated financial condition or results of operations.

4. Earnings (Loss) Per Share of Common Stock

Basic earnings (loss) per share, or basis EPS, of common stock is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during each the period. Diluted earnings (loss) per share, or diluted EPS, is computed by dividing net income (loss) by the weighted average numbers of common shares and common share equivalents outstanding (if dilutive) during each period. Common share equivalents include stock options and warrants. Since the Company recorded losses for all periods presented, the diluted EPS of common stock is the same as the basic EPS, as any potentially dilutive securities would be anti-dilutive.

5. Goodwill and License Agreements

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

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Intangible assets consist of the following:

Amortization expense related to intangible assets totaled $64 and $127 during the three and six months ended January 31, 2004 and 2003. The aggregate estimated amortization expense for intangible assets remaining as of January 31, 2004 is as follows:

6. Valuation of Long-Lived Assets

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

7. Stock-Based Compensation

The Company follows the accounting treatment prescribed by Accounting Principles Board, or APB, Opinion No. 25 in accounting for stock options issued to its employees and directors. Accordingly, no compensation expense was recognized in connection with the grant of options during the periods presented, as all options granted had an exercise price equal to the market value of the underlying stock on the date of grant.

SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123, amends the disclosure requirements of FASB No. 123. The following table illustrates the effect on net loss if the fair-value-based method had been applied to our stock-based employee compensation plans in each period.

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8. Subsequent Event

On February 23, 2004, the Company announced it had entered into a definitive plan of merger with Trinity Learning Corporation (OTC: TTYL), pursuant to which Trinity Learning will merge into a newly formed subsidiary of the Company. Under the terms of the agreement, the Company will issue one share of common stock in exchange for each outstanding Trinity Learning common share and will assume Trinity’s obligations under its existing warrant and option agreements and convertible notes. At closing, current Trinity Learning shareholders are expected to have a majority interest in the combined company, with the exact amount of the interest to be determined based upon the number of shares issued to Trinity shareholders prior to the merger as a result of their exercise of outstanding warrants and options and conversion of notes. The Board of Directors of the merged company will consist of eight members, six of who will be appointed by the current stockholders of Trinity Learning. The transaction is expected to close in the first half of 2004 and is contingent upon the fulfillment of certain conditions outlined in the merger agreement including, but not limited to, stockholder approval by each company, regulatory approval, satisfactory agreements being reached with certain secured creditors, and other customary conditions. The merger is intended to be a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended. At closing, Prosoft will change its corporate name to Trinity Learning Corporation. Prosoft and its divisions will retain their existing brand names and identities in their current markets.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this document. Results for interim periods are not necessarily indicative of results for the full year. Statements in this report that relate to future results and events are based on our current expectations. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties, including those discussed under “Additional Factors That May Affect Results of Operations and Market Price of Stock” on Page 11.

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 and certifications 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. Fixed 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. 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 propriety content solutions to academic institutions and adult education providers.

Results of Operations

Revenues

Total revenues were $2.00 million in the three months ended January 31, 2004, compared with $2.84 million in the three months ended January 31, 2003, a decrease of $0.84 million. Total revenues decreased to $4.33 million in the six months ended January 31, 2004 from $6.56 million in the six months ended January 31, 2003, a decrease of $2.23 million. The decline in total revenues was driven by continuing weakness in corporate training budgets resulting in reduced purchases of our training products and certifications by our learning center customers and by overall softness in demand for technology training. In addition, academic customer purchases continue to be limited by budget constraints, though academic adoption for our programs continues to progress.

Costs of Revenues

Costs of revenues decreased $0.62 million, or 49 percent, compared with the year-ago quarter, and decreased $1.41 million, or 49 percent, compared with the year-ago six-month period. This decrease is related to the decrease in revenues. As a percentage of revenue, gross profit, defined as total revenues less costs of revenues, increased to 68 percent from 56 percent in the year-ago quarter and to 67 percent from 57 percent in the year-ago six-month period. The increase in gross profit percentage was largely due to cost reduction measures implemented over the past 12 months.

Content Development

Content development expenses decreased $0.28 million, or 66 percent, compared with the year-ago quarter and decreased $0.66 million, or 69 percent, compared with the year-ago six-month period. The decrease in content development expenses was attributable to lower personnel costs associated with the strategic reduction in headcount implemented during the year.

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Sales and Marketing

Sales and marketing expenses decreased $0.19 million, or 22 percent, compared with the year-ago quarter, and decreased $0.88 million, or 40 percent, 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 $0.62 million for the current quarter compared with $1.38 million for the year-ago quarter, a reduction of $0.76 million, or 55 percent. General and administrative expenses decreased $1.48 million, or 53 percent, for the six months ended January 31, 2004, compared with the year-ago six-month period. The decrease was primarily attributable to lower personnel costs and the closing of our Austin, Texas and Santa Ana, California offices.

Depreciation and Amortization

Depreciation and amortization expenses decreased 55 percent compared with the year-ago quarter and decreased 49 percent compared with the year-ago six-month period. The decrease was attributable to the closing of the Austin, Texas and Santa Ana, California offices.

Interest Income and Interest Expense

Interest expense is attributable to a $2.50 million, Subordinated Secured Convertible Note issued in October 2001 that carries a 10 percent interest rate.

Liquidity and Capital Resources

Net cash used in operating activities was $0.36 million in the six months ended January 31, 2004, compared with $1.91 million for the six months ended January 31, 2003, a decrease of $1.55 million. Cash used in operating activities for the six months ended January 31, 2004 was the result of our net loss.

Net cash used in investing activities was $0.02 million for the six months ended January 31, 2004, compared with $0.05 million in the same year-ago period. The decrease in cash used in investing activities was primarily due to a decrease in courseware expenditures.

Net cash used in financing activities was $0.03 million in the six months ended January 31, 2004 and 2003, which consists of payments on capital leases.

Management believes that cash on hand and any cash provided by operations will be sufficient to meet our cash requirements for at least the next twelve months. However, if future financing is required, we will seek to arrange a financing to meet our requirements with the timing, amount and form of issue depending on the prevailing market and general economic conditions. There can be no assurance that external sources of financing will be available if needed or that we will be able to obtain any additional financing required to fund our cash needs on reasonable terms, or at all.

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

Critical Accounting Policies

Our critical accounting policies are as follows:

Revenue recognition

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

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

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

Valuation of 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 and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, the measurement of any impairment is determined and the carrying value is reduced as appropriate. Goodwill is tested for impairment at least annually in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets.

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

This report 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 that involve a number of risks and uncertainties. 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 the announced merger with Trinity Learning, future financing needs, changes in business strategy, competitive advantage, market growth, future profitability, and factors affecting liquidity. Although we believe that these statements are reasonable in view of the facts available to us, no assurance can be given that 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 and those discussed in our Annual Report on Form 10-K for the year ended July 31, 2003 on file with the SEC and subsequent reports on Forms 10-Q and 8-K.

Factors Affecting Liquidity

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

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 we could not raise additional funds on terms satisfactory to us, we would be forced to raise funds on terms that we would not otherwise accept or seek funds through other means such as the sale of some or all of our assets or operations.

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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 listed on the Nasdaq SmallCap Market, the Company must satisfy the $1.00 bid price requirement by having a Common Stock closing bid price of at least $1.00 for a minimum of ten consecutive days, which we have not done to date. On November 21, 2002, Nasdaq notified us that we had until May 19, 2003 to regain compliance with the bid price requirement. On March 11, 2003, the SEC declared effective Nasdaq’s rule, which extends compliance periods by an additional 90 days for issuers meeting certain more stringent financial criteria. On May 20, 2003, Nasdaq notified us that we had qualified for the additional grace period and had until August 18, 2003 to regain compliance. On August 19, 2003, Nasdaq notified us that as a result of our failure to satisfy the bid price requirement at the expiration of the grace period, the Company’s securities were immediately subject to delisting. On August 25, 2003 the Company requested a hearing, which stayed the delisting. On October 21, 2003, Nasdaq notified the Company that it had granted the Company an exception to the $1.00 bid price requirement through December 1, 2003, to allow for further developments in the SEC rule-making process regarding Nasdaq’s proposal to the SEC for modifications to its bid price rules. Nasdaq indicated that if we did not comply by December 1, 2003 and the SEC did not approve Nasdaq’s proposal, Nasdaq would provide us written notification that our securities would be delisted. On January 12, 2004, Nasdaq notified the Company that a Nasdaq Listing Qualifications Panel determined that ProsoftTraining is entitled to an extension period within which to remedy its $1.00 minimum bid price deficiency, through not later than May 23, 2004. The Panel based its decision upon SEC approval of modifications to Nasdaq’s Marketplace Rule 4310(C)(8)(D), and upon the Company’s continued compliance with all requirements for initial listing other than bid price.

If we do not remedy the $1.00 minimum bid price deficiency by May 23, 2004 and if Nasdaq delists our Common Stock, then our Common Stock may be traded on the OTC Bulletin Board or the “pink sheets”. Many institutional and other investors refuse to invest in stocks that are traded at levels below the Nasdaq markets, which could reduce the trading liquidity in our Common Stock or make our effort to raise capital more difficult. OTC Bulletin Board and “pink sheets” stocks are often lightly traded or not traded at all on any given day. Any reduction in trading liquidity or active interest on the part of the investors in our Common Stock could have adverse consequences on our stockholders, either because of reduced market prices or the 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, 2004. Our ability to generate revenue growth in the future is subject to uncertainty. There can be no assurance that we will be able to increase revenues, manage expenses or achieve sustained profitability. Should revenues decrease in the future, we may not be able to stem losses thereafter through expense reductions, given the magnitude of the reductions already implemented.

Intense Competition in Training Market

We face substantial competition in the education and training market. Competition in the ICT training market is intense and is affected by the rapidly evolving nature of the information technology industry. A number of other companies offer products and services similar to ours, and additional new competitors may emerge in the future. Many of our existing competitors have substantially greater capital resources, technical expertise, marketing experience, research and development status, established customers and facilities than do we. As a result, there is a risk that we will not be able to successfully compete with existing and future competitors, which would adversely affect our financial performance.

Need to Respond to Rapid Technological Changes

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

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Volatility of Stock Price

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

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

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PART II

Item 1. Legal Proceedings

We are not currently involved in any legal proceedings, nor are we aware of any pending legal proceedings which would have a material affect on our operations.

Item 5. Other Information

We are not in compliance with the Nasdaq Marketplace Rules for continued listing on the Nasdaq SmallCap Market. We have until not later than May 23, 2004 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 not later than May 23, 2004, Nasdaq has indicated it will provide written notification that our Common Stock will be delisted from Nasdaq for failure to satisfy the Nasdaqmarket Place Rules.

Item 6. Exhibits and Reports on Form 8-K

a) Exhibits

b) Reports on Form 8-K

A current Report on Form 8-K dated November 19, 2003, was filed with the SEC announcing the Company’s financial results for its fiscal first quarter ended October 31, 2003.

A current Report on Form 8-K dated December 12, 2003, was filed with the SEC announcing that a Nasdaq Listing Qualifications Panel had granted the Company an exception to the $1.00 minimum bid price requirement to allow for further developments in the SEC rule-making process. The exception extended through January 30, 2004.

A current Report on Form 8-K dated January 14, 2004, was filed with the SEC announcing that a Nasdaq Listing Qualifications Panel had determined that the Company is entitled to an extension period within which to remedy its $1.00 minimum bid price deficiency, through not later than May 23, 2004. The Panel based its decision upon the SEC’s recent approval of certain modifications to Nasdaq’s Marketplace Rule 4310(C)(8)(D), and upon the Company’s continued compliance with all requirements for initial listing other than bid price.

A current Report on Form 8-K dated February 22, 2004 was filed with the SEC announcing that the Company had entered into a merger agreement with Trinity Learning Corporation.

A current Report on Form 8-K dated February 24, 2004 was filed with the SEC furnishing the text of a joint statement read by Robert Gwin, chief executive officer of the Company, and Douglas D. Cole, chief executive officer of Trinity Learning Corporation, during a conference call to stockholders and other interested parties concerning the proposed merger between the Company and Trinity.

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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.

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