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U.S. SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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AMENDMENT NO. 2 TO


FORM 10-K











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




For the fiscal year ended January 31, 2002





OR





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




For the transition period from
  to





Commission file number: 000-30326





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VSOURCE, INC.


(Exact name of registrant as specified in its charter)





Delaware

77-0557617(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification
No.)











16875 West Bernardo Drive, Suite 250,San Diego, California

92127(Address of principal executive
offices)

(Zip Code)


Registrants telephone number, including area code:


(858) 618-5884





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SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:





NONE





SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:





COMMON STOCK, PAR VALUE $0.01 PER SHARE





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





Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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 this Form 10-K or any amendment to this Form 10-K.  ̈





The aggregate market value of all classes of voting stock of the registrant held by nonaffiliates of the registrant on
March 31, 2002 was $6,723,970 computed upon the basis of the average bid and asked prices of the common stock on that date.





Number of shares of common stock outstanding as of March 31, 2002

34,072,950Number of shares of Series 1-A Convertible Preferred Stock outstanding as of March 31, 2002

1,683,741Number of shares of Series 2-A Convertible Preferred Stock outstanding as of March 31, 2002

1,166,869





DOCUMENTS INCORPORATED BY REFERENCE








None.





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VSOURCE, INC.


Amendment No. 2 to


FORM 10-K ANNUAL REPORT





FOR THE YEAR ENDED


JANUARY 31, 2002





TABLE OF CONTENTS





PagePART IItem 1.

BUSINESS

3Item 2.

PROPERTIES

19Item 3.

LEGAL PROCEEDINGS

19Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

19Item 4A.

CHANGE OF DATE OF ANNUAL STOCKHOLDER MEETING

20PART IIItem 5.

MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

21Item 6.

SELECTED CONSOLIDATED FINANCIAL DATA

23Item 7.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

23Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

31Item 8.

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

32Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

59PART IIIItem 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

60Item 11.

EXECUTIVE COMPENSATION

63Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

70Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

76PART IVItem 14.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

81SIGNATURES

85




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PART I





Item 1.    
BUSINESS





Overview





Our mission is to be the market leader in providing Fortune 500 and Global 500 companies with seamless, customizable and comprehensive business process outsourcing
solutions into and across the Asia-Pacific region. Business process outsourcing is the outsourcing by a company of certain business and operational functions by hiring third-party vendors such as Vsource to perform those functions on their behalf.
If such functions are not outsourced, then a company would need to perform those functions internally, using its own personnel, infrastructure and resources.





We offer sophisticated business process outsourcing solutions to our clients. Our solutions and our operating systems are designed so that Fortune 500 and Global 500
companies can confidently rely on us to operate important technical, administrative and sales functions on their behalf in multiple countries across Asia. Our business process outsourcing services help clients reduce the complexities involved with
operating in Asia and to lower their costs of operating in the region.





We offer a range of business
process outsourcing solutions to our clients including:





| |  |  | Integrated technical service solutions, including comprehensive warranty and after-sales service and support;
| | - |  | -------------------------------------------------------------------------------------------------------------




| |  |  | Payroll and claims solutions;
| | - |  | -----------------------------




| |  |  | Sales solutions; and
| | - |  | --------------------




| |  |  | General outsourcing solutions, which we call Vsource Foundation Solutions, comprising customer relationship management, supply chain management and financial administration services, provided on a stand-alone
basis rather than as part of an integrated multi-service solution.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Our business
process outsourcing solutions are designed to bundle key operating know-how and processes together in a single package. For instance, our integrated technical service solutions permit us to provide warranty and other after-sales support to our
clients through the integration of our customer relationship management, supply chain management and financial administration functions into one package. The key components of our our business process outsourcing solutions are:





| |  |  | customer relationship management;
| | - |  | ---------------------------------




| |  |  | financial and payroll administration;
| | - |  | -------------------------------------




| |  |  | supply chain management; and
| | - |  | ----------------------------




| |  |  | sales management.
| | - |  | -----------------




We support our clients operations in most major countries across the Asia-Pacific region, including Australia, China, Hong Kong, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore and Thailand, from shared service
centers located in Kuala Lumpur, Malaysia and Osaka, Japan. We also have sales and administrative offices in San Diego, California, Hong Kong and Singapore. Our clients include Agilent Technologies, Gateway and Network Appliance.





We were originally incorporated in Nevada in 1980 and re-incorporated in Delaware in November 2000. Prior to March 2001, we
were engaged principally in the development and sale of procurement software, which we discontinued in March 2001 due to the high costs associated with the development of this software product and slow rate of customer acceptance for the product.
However, we continued the development and marketing of a software product called LiquidMarketplace  designed to facilitate trade through public (many to many) and




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private (one to many) exchanges which we would host on behalf of clients and distribute as an application services provider. An application services provider is a person that delivers software
applications online to a client from the providers own information technology systems, rather than requiring each client to install and operate the software applications on the clients own system. On June 22, 2001, we purchased
substantially all of the assets of NetCel360 Holdings Limited, a provider of business process outsourcing solutions, in exchange for 3,709,699 shares of our common stock, which represented approximately 19.8% of our total common stock outstanding at
the time of the acquisition. Following this acquisition, we elected to stop the development and marketing of LiquidMarketplace due to uncertainty as to whether we would be able to develop a commercially viable product and whether there would be
market acceptance of such product, in order to devote our resources towards developing business process outsourcing solutions built upon NetCel360s infrastructure. We generated revenues of more than $12.7 million in the financial year ended
January 31, 2002, of which approximately $9.2 million was recorded in the final quarter as we began to acquire clients for business process outsourcing services developed after the acquisition of NetCel360. All revenues generated since completion of
the acquisition have been derived from lines of business developed after the acquisition or from lines of business developed by NetCel360.





References to we, us, our, Vsource or the Company refers to Vsource, Inc. and its subsidiaries. We maintain our executive offices at 16875
West Bernardo Drive, Suite 250, San Diego, California 92127. Our telephone number is (858) 618-5884 and our website is at www.vsource.com.





INDUSTRY BACKGROUND





Managing a global business today is highly complex. Multinational
companies are faced with many challenges in the execution of their business strategies across the world. A key challenge is attracting, maintaining and managing the human talent required to deliver professional and operating skills reliably and
seamlessly across multi-national borders. In particular, these companies frequently face the need for support services in areas, which are important, but not core competencies for their particular business model. Globally, managers face a
combination of challenges including (i) increasing regulatory complexity; (ii) a need to maintain best-practices; and (iii) a lack of scale in their operations. For managers of Fortune 500 and Global 500 companies operating across multiple countries
in the Asia-Pacific region, these challenges are exacerbated by the complexities of operating in and across countries with different languages, regulations, currencies, business practices and cultural nuances. These complexities make it even more
difficult and costly to deliver internal corporate functions than in a homogeneous market such as the United States.





In the United States, and to a lesser extent, in Europe, many companies have looked to outsource specialized business processes. Until recently, this phenomenon has been far less evident in the Asia-Pacific region. However,
globalization and the development of new enabling technologies such as the internet have resulted in an emerging demand for business process outsourcing services in the Asia-Pacific region in much the same way that these services are being utilized
in other major markets.





According to the Gartner Group, the total worldwide business process outsource market
will grow from $119 billion in 2000 to $234 billion in 2005, representing a compound annual growth rate of 14.4%. According to International Data Corporation (IDC), $5 billion was spent on outsourcing services (including information
systems outsourcing and processing services) in Asia-Pacific excluding Japan in 1999 and is expected to exceed $10 billion by 2004.





OUR STRATEGY





Our strategy is to focus on Fortune 500 and Global 500 companies with
substantial operations across multiple countries in the Asia-Pacific region. Many of these companies utilize business process outsourcing services in the United States and/or Europe, but we believe that few have initiated the use of these services
in the Asia-Pacific region because, until recently, a regional solution has not been available. We believe that our




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business model, which requires substantial investment in client acquisition costs with the worlds largest companies, allows us to establish highly integrated, tailored and long-term
solutions, generating both initial and recurring revenue streams.





We deliver our business process outsourcing
solutions to multiple clients on a regional basis from shared service centers, rather than on a country-by-country basis using separate, duplicative facilities in each country. Our shared service centers utilize a sophisticated technology-based
infrastructure integrating elite transaction processing and customer support functions to deliver our solutions on a regional basis, which allows us to achieve economies of scale which, in turn, helps us to save costs for ourselves and our clients.
Each of our business process outsourcing solutions integrates multiple functions together with our people, processes and technology for the delivery of a complete and integrated solution to our client. The goal is to provide our clients with a
seamless, centralized integrated solution and a single point of accountability through Vsource.





OUR SOLUTIONS





We offer our clients four solutions, which we call Vsource Versatile Solutions  , to handle their technical, administrative and sales functions:





| |  |  | Integrated technical service solutionsa broad range of after-sales and customer support functions including comprehensive warranty and product support for
products and services;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Payroll and claims solutionssophisticated payroll and expense claims solutions delivered to clients with employees spread across the Asia-Pacific region;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Sales solutionsdevelopment of sales and marketing to generate demand and development of market channels to support the sales of our clients products
and services across the Asia-Pacific region, and execution of the sales of such products and services; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Vsource Foundation Solutionsgeneral business process outsourcing services comprising customer relationship management, supply chain management and
financial administration services, provided on a stand-alone basis rather than as part of an integrated multi-service solution.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|Integrated |  | technical service solutions
|---------- |  | ---------------------------




We manage after-sales service for clients on a regional basis to reduce our clients cost of providing support for service or warranty obligations and to provide a single point of accountability.
Our integrated technical service solutions are comprised of:





| |  |  | Warranty services;
| | - |  | ------------------




| |  |  | Parts dispatch and management;
| | - |  | ------------------------------




| |  |  | Field services and on-site repair;
| | - |  | ----------------------------------




| |  |  | Customer contact centers; and
| | - |  | -----------------------------




| |  |  | Return of faulty parts to manufacturers or repair centers to repair or replace such faulty parts, including management of any warranty support provided by such
manufacturers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|Payroll |  | and claims solutions
|------- |  | --------------------




We manage clients payroll and expense claims activities on a regional basis to reduce the cost of operations, improve controls and data management under a regional umbrella and provide a single
point of accountability. Our payroll and claims solution uses an online self-service approach, and includes the following service elements:





| |  |  | Payroll processing;
| | - |  | -------------------




| |  |  | Employee self service assistance;
| | - |  | ---------------------------------



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| |  |  | Payments;
| | - |  | ---------




| |  |  | Statutory reporting and filing;
| | - |  | -------------------------------




| |  |  | Accounting and reporting;
| | - |  | -------------------------




| |  |  | On-line pay slips, annual earnings statements and other reports to employees;
| | - |  | -----------------------------------------------------------------------------




| |  |  | On-line reports to management; and
| | - |  | ----------------------------------




| |  |  | Employee care assistance in local languages.
| | - |  | --------------------------------------------




Sales solutions





In addition to back-end services such as
integrated technical service solutions and payroll and claims solutions, we assist clients with front-end services to support their sales activities, including sales administration, marketing and sales support to help generate demand and
the creation of new direct distribution channels across the Asia-Pacific region, to augment our clients traditional country-based distribution strategies. Our sales solution includes the following:





| |  |  | Total sales solutioncomplete sales solution across the Asia-Pacific region, including sales force management, development and execution of direct
distribution channels, and fully integrated sales administration and support;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Team salesintegrated administration and support for our clients sales team requirements including order processing, coordination with manufacturing
supply chain, lead generation and qualification, and development of marketing and sales materials; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Direct salesdirect sales of clients products across the Asia-Pacific region through the Internet, email, telephone and fax.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------




Vsource Foundation Solutions





For clients that do not require a comprehensive business process outsourcing solution that combines multiple functions in a single solutions package, but only needs one
component of that solution, we offer the following general business process outsourcing services, which we call Vsource Foundation Solutions, which can be delivered on a stand-alone basis rather than as a part of an integrated solution:





| |  |  | Customer relationship management;
| | - |  | ---------------------------------




| |  |  | Financial administration; and
| | - |  | -----------------------------




| |  |  | Supply chain management.
| | - |  | ------------------------




OUR VALUE





We believe that our business process outsourcing solutions add immediate and
long-term value to our clients by reducing the costs, personnel and overheads associated with delivering these functions. We simplify client operations by providing a single point of accountability for each of these solutions. As a result, our
clients can focus on their core competencies and related activities that drive their businesses, including brand development, product development, marketing, pricing, manufacturing and public relations. Our business process outsourcing solutions
have the following key distinctive attributes:





Single Point of Accountability; Elimination of Duplication. Our
business process outsourcing solutions provide our clients with centralized functions that are essential to the regional operation of their business in the Asia-Pacific region. Typically, our clients would be required to build, own and operate these
activities internally, or seek separate vendors in each country in which they operate to deliver services for only that specific country.




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Most companies do not operate shared service centers across the Asia-Pacific region and instead build duplicative facilities in each country in which they operate. As such, their cost of
providing functions from potentially duplicative facilities in multiple countries tends to be higher than would be the case in home markets where these functions are outsourced or centralized. Where vendor support is required, target clients are
typically forced to select different vendors from each country rather than working through a single vendor because few vendors in the Asia-Pacific region currently provide a proven regional solution. Our solutions give our clients a single point of
accountability for the regional delivery of services and uniform service standards across the multiple and varied countries of the Asia-Pacific region.





Shared Service Multi-User Platform. All of our solutions are delivered from our shared service centers in Malaysia and Japan. The markets in many individual countries in the Asia-Pacific region may be
too small to justify the investment required by a client to build the necessary operations to handle after-sales service or payroll and claims operations in just that country. Typically, the costs of providing these essential external and internal
services are high due to the high cost of doing business in major cities in the Asia-Pacific region such as Hong Kong, Singapore, Sydney and Tokyo, as well as the need for duplicative facilities and personnel in each country. Our business process
outsourcing solutions utilize our shared service centers in Malaysia and Japan, which are configured to be leveraged across multiple client users. This multi-user platform permits us to deliver equal or better standards of service at lower
fully-loaded costs.





Scalable Technology Infrastructure. Our advanced technology platform can be expanded
to accommodate greater volumes of transactions, and has been designed to permit combination of multiple service solutions into a single platform that readily integrates with our clients information systems. This technology infrastructure
improves reliability and processing time and cost, while insuring transparency of operating performance and results to our clients.





Internet Delivery. Technology utilizing the Internet has significantly improved the flow of information across borders globally, and in the Asia-Pacific region in particular. The Internet has enabled
us to build our business process outsourcing solutions and to deliver a service that is cost competitive and transparent to our clients. Each of our business process outsourcing solutions employs robust on-line functionality to facilitate customer
service and transparent operating performance to our clients.





Experienced, Highly Motivated Workforce and
Management Team. We believe that our highly skilled, diverse and well-trained workforce is one of our greatest assets. Our management has extensive and distinguished operating experience in the Asia-Pacific region generally, and in the operation of
shared service operating models, in particular. We strive to develop leadership and client service excellence at all levels of our organization. We seek to hire individuals with significant industry experience, exposure to best practices demanded by
Fortune 500 and Global 500 clients, and an extensive understanding of operating within and across geographic borders within the Asia-Pacific region. Our executive officers maintain a significant ownership stake in our company that, as of January 31,
2002, represented over 29% of our total issued and outstanding common stock on a fully-diluted basis, including convertible securities but excluding stock options issued under our stock option plan. In addition, all of our full-time employees have
an ownership interest in Vsource via option grants and participation in our employee stock purchase plan. We believe that these equity stakes significantly help in motivating our team to provide what we believe to be world class levels of client
service.





SERVICE DELIVERY





We deliver our business process outsourcing solutions through an infrastructure of shared service centers based in Malaysia and Japan utilizing online, web-enabled technology systems, best in class
enterprise-grade software applications, and third party service providers. Our model is based on leveraging shared resources to provide best practices while achieving economies of scale, which we believe permits us to provide our clients with
business process outsourcing solutions of equal or better quality at significantly lower costs.




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Shared Service Centers.    We operate two shared
service centers: one in Kuala Lumpur, Malaysia and one in Osaka, Japan. The personnel, systems and technology we use to manage our clients transactions or customer support functions are based in these locales. From these two locations, we are
able to provide language support in all of the major languages and dialects in the Asia-Pacific region, including all key Chinese dialects, Japanese, Korean, Bahasa Malaysia, Bahasa Indonesia, Thai and English.





Technology.    Our technology and network infrastructure uses a multi-level, modular architecture, which
emphasizes scalability, flexibility, adaptability, reliability and availability. Our systems and applications utilize industry standard programming languages, protocols and components, such as XML, CORBA, Java, JSP, C++ and VB. We connect to our
clients and vendors systems through standard interfaces using a middleware product from Vitria. Our core engines are based on widely used platforms such as Oracle8i, MSQL 7, Oracle9i, IIS, and IPlanet. The applications and software are
powered by IBM AIX, Sun Solaris and Windows NT based systems, and in addition, we utilize EMCs Symmetrix System for storage and Cisco products for networking. Our customer relationship management facilities in Malaysia and Japan use Lucent
Technologies computer telephony integration call center technologies, together with customer relationship management software applications such as Siebel and Oracle 11i enterprise resource planning system.





Customer Relationship Management.    Our comprehensive business process outsourcing solutions, including
integrated technical service solutions and sales solutions, utilize our comprehensive online customer relationship management capabilities for customer support and contact. Customer relationship management is also provided as a stand-alone service
as one of our Vsource Foundation Solutions. Customer relationship management services are delivered from shared service centers in Malaysia and Japan and include:





| |  |  | 24x7 telephone, fax and email support;
| | - |  | --------------------------------------




| |  |  | Fully integrated, real-time online order entry and support systems for online users who want assisted browsing and online ordering assistance;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Internet and inbound and outbound telephone sales (including sales of other products or upgrades of a purchased product);
| | - |  | -------------------------------------------------------------------------------------------------------------------------




| |  |  | Product configuration and validation;
| | - |  | -------------------------------------




| |  |  | Multi-level technical support;
| | - |  | ------------------------------




| |  |  | Customer service;
| | - |  | -----------------




| |  |  | Multi-language support; and
| | - |  | ---------------------------




| |  |  | Field service dispatch.
| | - |  | -----------------------




Financial Administration.    We provide financial administration functions to support the delivery of our comprehensive business process outsourcing solutions, including payroll and claims
solutions and sales solutions. We also provide financial administration as a stand-alone service as one of our Vsource Foundation Solutions. These functions can be delivered in multiple countries and multiple currencies across most major countries
in the Asia-Pacific region. Certain payments functions are provided with support from internationally recognized financial institutions and accounting firms. The functions include:





| |  |  | Payment and payment processing;
| | - |  | -------------------------------




| |  |  | Financial reporting;
| | - |  | --------------------




| |  |  | Credit, collections and general accounting;
| | - |  | -------------------------------------------




| |  |  | Accounts payable;
| | - |  | -----------------




| |  |  | Fixed assets; and
| | - |  | -----------------




| |  |  | Billing.
| | - |  | --------



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Supply Chain Management.    Our comprehensive
business process outsourcing solutions, including integrated technical service solutions and sales solutions, utilize our supply chain management capabilities to support the logistics, fulfillment and supply chain management needs of our clients and
coordinate their logistics activities across the Asia-Pacific region. We also provide supply chain management as a stand-alone service as one of our Vsource Foundation Solutions.





Sales Management.    We provide sales management functions to support the delivery of our sales solutions. These functions include:





| |  |  | Order processing;
| | - |  | -----------------




| |  |  | Lead generation and qualification;
| | - |  | ----------------------------------




| |  |  | Sales force management and administration; and
| | - |  | ----------------------------------------------




| |  |  | Sales channel development.
| | - |  | --------------------------




CLIENTS AND CONTRACTS





The table below lists our key clients and shows for each the
contract date, the anticipated base term and the solution provided:





Client

Contract Date

Anticipated Term Years

Solution ProvidedGateway(1)

Oct. 2001

3

Integrated technical service solutions for Gateways installed base of 1.3 million users in the Asia-Pacific regionAgilent Technologies

Nov. 2001

4

Payroll and claims solutions for over 10,000 Agilent employees across 12 countriesNetwork Appliance(2)

Jan. 2001

2

Vsource Foundation Solutionscustomer relationship management


---

|(1) |  | In the year ended January 31, 2002, over 67% of our total revenues were derived from this contract with Gateway.
|--- |  | ----------------------------------------------------------------------------------------------------------------

|(2) |  | The relationship with Network Appliance is reflected in a statement of work signed in January 2001, which is governed by a three-year master services agreement
that the parties entered into in December 2000. We provide other Vsource Foundation Solutions, such as supply chain management and general financial administration, to Network Appliance under this master services agreement pursuant to additional
statements of work that have been entered into from time to time.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Clients generally
sign a master services contract that governs the basic terms and conditions applicable to all of our solutions, pursuant to which a client can then purchase specific solutions from time to time under separate statements of work which may contain
additional terms and conditions applicable to that particular solution. Our contracts with Gateway and Agilent Technologies, however, are specific to the solution being purchased.





Most of our contracts, and statements of work, have minimum terms of two years. Some contracts automatically renew for subsequent one-year terms, while other contracts will
be renewed only upon mutual agreement of the parties. Generally, our clients may terminate their contracts for convenience upon specified periods of notice, but they will usually be required to pay us an amount equal to the recurring fees that would
have been payable throughout the remainder of the term. Gateway may not terminate its contract for convenience. Our client contracts are all terminable for our excessive performance failure, material uncured breach or insolvency.





Our client contracts all contain specified performance standards applicable to key elements of our services. If our performance
falls below the applicable standards, the client is entitled to terminate the contract, and in some cases a client may deduct amounts from our fees.




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REVENUES AND OPERATING LOSSES





Our revenues are generated from fees paid pursuant to client contracts. We typically receive two types of fees under our contracts: set-up fees, which are charged during
the implementation period when we perform set-up and implementation procedures to facilitate delivery of our services, and subsequent recurring charges for delivery of these services. The set-up fees are generally fixed, although in some cases they
may be charged on a time and materials basis. The recurring fees are variable, being based on the numbers of transactions, customer representatives provided or products sold. Most of our contracts provide for guaranteed minimum recurring fees, which
then increase as certain thresholds of transactions are performed.





We had an accumulated deficit of
approximately $74.4 million as of January 31, 2002 that has been funded primarily through issuances of debt and equity securities. In the year ended January 31, 2002, we used net cash of $5.8 million in operating activities and $0.8 million in
investing activities and obtained net cash from financing activities of $5.9 million, giving rise to a decrease in cash of $0.6 million. We have also sustained operating and cash losses since inception. While we had positive cash flows for the last
quarter of 2002, there is no assurance that this will continue and we may need to implement cost and cash conservation measures. Our management believes that we have adequate funding to continue in operation through January 31, 2003. We believe that
we may need to raise additional cash funding in order to continue operations during the fiscal year ending January 31, 2004.





SALES AND MARKETING





Our sales cycle begins with a disciplined client screening process. A
key consideration in our client screening process is to focus on Fortune 500 and Global 500 companies who (i) have sizable operations across multiple countries in the Asia-Pacific region and (ii) will generate significant volumes of transactions
through our system.





Due to the need for our clients to have a high degree of trust in our ability to execute
reliably for them on a long-term basis, a large percentage of our sales efforts are driven by relationships built by our executive management. We also have a small staff of dedicated sales professionals whose primary role is to identify potential
clients, assess our compatibility with those clients and negotiate and document our contracts. Members of this sales team are located in San Diego, Hong Kong and Kuala Lumpur.





We have focused our marketing efforts on educating potential clients on the benefits of outsourcing their technical, administrative and sales functions, and on creating
awareness that there is now a regional outsourcing solution available to Fortune 500 and Global 500 companies operating in the Asia-Pacific region. We are educating our audience and establishing ourselves as the leader in this new market primarily
through market research, public relations activities, seminars, speaking engagements and direct sales contacts.





INTELLECTUAL
PROPERTY





We currently have trademark registrations in the United States and the European Community
for the mark VSOURCE. We also use our logo, Vsource Versatile Solutions and Vsource Foundation Solutions as trademarks. We have not secured registrations for any of these trademarks in the United States or in any
other country. We cannot guarantee that we will be able to secure registrations of our marks domestically or in any foreign country. Our inability to register and protect marks could require us to stop using them or to share them with others, which
could cause confusion in the marketplace and harm our business.





We currently hold various Internet
domain names, including www.Vsource.com and www.Vsource2U.com. In addition, we have been authorized by Gateway Japan Inc. to use the domain name Gateway2U.com during the term of our support services agreement with Gateway in connection with
providing technical support to Gateways customers in the Asia-Pacific region. The acquisition and maintenance of domain names generally is




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regulated by Internet regulatory bodies. The regulation of domain names in the United States and in foreign countries is subject to change. Governing bodies may establish additional top-level
domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names in all countries in which we conduct business or into which we choose
to expand. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights continues to evolve. Therefore, we may be unable to prevent third parties from acquiring domain names
that are similar to, infringe upon or otherwise decrease the value of our intellectual property and other proprietary rights.





We do not own any material proprietary software, nor do we hold any patents. We rely upon technologies licensed from third parties such as EMC, Oracle, Ramco, Siebel and Vitria to deliver our outsourcing solutions.
Currently, substantially all of these licenses are perpetual licenses absent material breach on our part. We expect to need new licenses in the future as our business grows, the existing products we license become obsolete, and as technology
evolves. We cannot be sure that we will be able to obtain necessary licenses on commercially reasonable terms, or at all, which could result in a material adverse effect on our business, financial condition and results of operations.





Third parties may claim that our technology or services, including those which we have licensed from a third-party
supplier, infringe their proprietary rights. Although in most cases we are indemnified by our licensor in the event of a claim of intellectual property infringement by a third-party, any infringement claims, even if without merit, can be
time-consuming and expensive to defend. They may divert our managements attention and resources and could cause service implementation delays. In the event of a successful claim of infringement and the failure or inability of either us or our
licensor to develop non-infringing technology or license the infringed or similar technology on a timely or commercially favorable basis, our business, financial condition and results of operations could be materially adversely affected.





COMPETITION





We are not aware of any other company that is providing a similar, comprehensive range of business process outsourcing services to our targeted clients across multiple countries in the Asia-Pacific
region. In each country in the Asia-Pacific region, there are a large number of providers who deliver customer relationship management, supply chain management, distribution services or financial services as stand-alone services in that country
only, or in a limited number of countries or regionally. One of our greatest risks is that prospective clients will choose not to outsource their technical, administrative and sales functions and instead elect to continue performing these functions
internally.





EMPLOYEES





We consider our relations with employees to be very good. None of our employees are represented by a labor union or under any collective bargaining agreement. As of March 31, 2002, we had approximately
222 full time employees, 175 of whom were located in Kuala Lumpur.





RISK FACTORS





The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. If any of the
following risks actually occur, our business, operating results and financial condition could be materially negatively affected.





To date, we have realized revenues that are significantly less than our expenses, have had losses since inception and there can be no assurance that we will achieve profitability.





We had an accumulated deficit of approximately $74.4 million as of January 31, 2002 that has been funded primarily through issuances
of debt and equity securities. We have never been profitable and we may not be able




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to become profitable or sustain profitability. In the year ended January 31, 2002, we used net cash of $5.8 million in operating activities and $0.8 million in investing activities and obtained
net cash from financing activities of $5.9 million, giving rise to a decrease in cash of $0.6 million. We have also sustained operating and cash losses since inception. While we had positive cash flows for the last quarter of 2002, there is no
assurance that this will continue.





We are heavily reliant on one customer, and the revenues from such
customer are expected to decline significantly.





We are heavily reliant on one customer, Gateway Japan
Inc. (Gateway) which generated over 67% of our revenues in the year ended January 31, 2002. Our contract with Gateway, which we entered into on October 24, 2001, to provide support services for Gateways warranty obligations to its
installed base of end users, has a term of only three years, beginning on November 1, 2001. Revenues from this customer are set to decline significantly over the remaining term of the contract, as the installed base of end users who will be covered
by Gateways warranties declines over time. Such decline could have a material impact on our revenues and operating results, even if we are successful in reducing costs in line with the fall in the corresponding revenues. In addition, Gateway
has the right on each anniversary of the contract, with our agreement, to revise the minimum volumes of transactions specified in the contract, although it cannot revise our fees per transaction performed unless actual transaction volumes exceed
110% of the minimum volumes specified in the contract. If the actual transaction volumes exceed 110%, then we must negotiate in good faith with Gateway to adjust fees per transactions, hours of operation and performance standards for the following
year. Although Gateway cannot terminate the agreement for convenience during its initial term, Gateway could terminate the agreement for, among other things, material breach, failure to meet specified service levels or if we are unable to reasonably
agree on revisions to minimum volumes of transactions for subsequent years of the contract.





We may not be
able to obtain sufficient funds to meet our operating requirements.





Our management believes that we have
adequate funding to continue in operation through January 31, 2003, although this may require us to implement cost and cash conservation measures. We believe that we may need to raise additional cash funding in order to continue operations during
the year ending January 31, 2004. We are in negotiations with investors for additional cash funding in the amount of $10 to 15 million. We believe that this additional funding will permit us to continue operations during the fiscal year ending
January 31, 2004. There is, however, no assurance that we will be successful in obtaining this additional capital. Numerous factors could affect our operating results including, but not limited to, general economic conditions, competition and
changing technologies. A change in any of these factors could have an adverse effect on our consolidated financial position, results of operations and ability to raise additional capital. We may be required to raise additional capital from time to
time in order to continue our operations. If the current economic slowdown continues, we may not be able to generate revenues, control costs or attract needed additional capital.





We have incurred significant amounts of debt.





We have incurred significant amounts of debt to finance our operations. We have issued $4.56 million in principal amount of Series A convertible promissory notes and $3.0 million in principal amount of Series B-1 exchangeable
promissory notes, which are both repayable on June 30, 2003. There is no assurance that we will have sufficient funds to repay these debts.





The market for business process outsourcing services in the Asia-Pacific region, particularly on a regional basis, is new and unproven.





The market for business process outsourcing services in the Asia-Pacific region, particularly on a regional basis, is new and unproven. We cannot assure you that there will
be a sustainable market for our services. If companies operating in the Asia-Pacific region are not willing to outsource the services that we provide, on a large scale or at all, then we will not be able to generate adequate revenues or achieve
necessary economies of scale. This could have a material and adverse affect on our business, financial condition and results of operations.




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We have limited experience in our business.





Our current business operations consist of businesses developed in 2001 or acquired in June 2001 from NetCel360. Our limited experience in
this business could negatively impact our ability to succeed.





Long sale cycles for our services could cause
delays in revenue growth.





Because we target large contracts and large multinational companies as our
principal customers, our sales cycles for our services often take many months to complete and may vary from contract to contract. Lengthy sales cycles could cause delays in revenue growth, and result in significant fluctuations in our quarterly
operating results. The length of the sales cycle may vary depending on a number of factors over which we may have little or no control, including the internal decision making process of the potential customer and the level of competition that we
encounter in our selling activities. Additionally, since the market for outsourcing services in the Asia-Pacific region is relatively new, we believe that we will have to educate many potential customers about the use and benefits of our products
and services, which can in turn prolong the sales process.





Complex implementation and integration of our
services and products may deter potential clients.





The installation and implementation of some of our
services and products, including set-up across multiple countries in the Asia-Pacific region and integration with a clients systems currently in use, can be a complex, time consuming and expensive process. We anticipate that many of our
clients will be large multinational corporations that will require that our products undergo substantial customization to meet their needs. These clients will also likely require that our products be integrated with existing internal legacy systems.
We estimate that the installation and integration process may take three to six months, or longer in some cases, depending on the size of the client, the number of countries to be implemented, complexity of a clients operations, and the
configurations of its current information technology systems. The time and expense of such installation and implementation may deter potential clients from purchasing our services.





Our revenues and operating results are difficult to predict and may be subject to significant fluctuations.





Revenues derived from our sales solutions are closely tied to the seasonal and economic cycles relating to the products being distributed, as well as the state of the
economy in the countries in which such products are sold. We derive revenues from our outsourcing services in large part from recurring transaction-based fees. The use of each outsourcing service and the number of transactions effected by our
clients will vary in volume, scope and duration. In addition, some of our client contracts can be terminated by our clients on relatively short notice without cause. As a result, it is possible that expected recurring revenues may be terminated more
quickly than anticipated, making them more difficult to predict.





We believe that quarterly revenues, expenses and
operating results may vary significantly in the future, that period-to-period comparisons of results of operations may not necessarily be meaningful and that, as a result, such comparisons should not be relied upon as indications of future
performance. Due to these and other factors, it is possible that our operating results will be below market analysts expectations in some future quarters, which would cause the market price of our stock to decline.





Risks Related to Economic and Infrastuctural Disruptions.





As a provider of business process outsourcing services, our business is dependent upon the underlying businesses of our clients. Events of the magnitude of the terrorist
attacks on September 11, 2001 could significantly slow economic growth in the Asia-Pacific region and adversely affect the businesses of our clients, thereby reducing their need or desire for our services. A significant disruption of
telecommunications, transportation, mail and other infrastructure could make it difficult and more expensive for us to service our customers in a timely fashion or at all, and for our vendors and service providers to render goods and services to us.
As a provider of services that focuses on providing regional solutions, we are particularly vulnerable to disruptions that inhibit travel, communication and commerce between countries. Such a disruption might also




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result in delays in receiving payments from clients. Volatility and uncertainty in the worlds stock markets brought about by terrorist and other disruptive events could also impair our
ability to raise capital.





We are dependent on a small number of vendors and service providers.





We are dependent on a small number of vendors and service providers in delivering our services. In
particular, our warranty support services for Gateway rely on arrangements with independent field service providers, parts manufacturers, warehouse providers and shipping companies. Because we currently purchase replacement parts for Gateway
products in relatively small quantities, our purchasing power is minimized, which may result in higher parts prices and slower delivery times from the parts manufacturers. Although we believe that we could find alternative vendors and service
providers, the transition to such alternative vendors and service providers would take a significant amount of time and resources which could materially affect the delivery of our warranty support services and put us in material breach of our
agreement with Gateway. Moreover, the costs of purchasing parts and services from such alternative vendors and service providers could be significantly higher.





We face risks associated with acquisitions, investments, strategic partnerships or other ventures.





As part of our overall business strategy, we may pursue strategic acquisitions or investments as appropriate opportunities arise. Such acquisitions or investments would be in businesses, products or
technologies that would provide, supplement or complement our services, and/or provide additional industry expertise, a broader client base or an expanded geographic presence. We may not be successful in identifying suitable acquisition, investment
or strategic partnership candidates. Even if we do identify suitable candidates, we may not complete those transactions on commercially acceptable terms or on a timely basis, or at all. We may incur indebtedness or issue equity securities to pay for
any acquisition or investment, which could have a dilutive effect on existing shareholders. Such acquisitions and investments involve other risks, such as:





| |  |  | the diversion of our managements attention and other resources from other business concerns;
| | - |  | ---------------------------------------------------------------------------------------------




| |  |  | expenses, delays and difficulties in assimilating and integrating the operations, technologies, products and personnel of the acquired company;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | not realizing the anticipated benefits of any acquisition or investment;
| | - |  | ------------------------------------------------------------------------




| |  |  | paying more than the acquired company or investment is worth;
| | - |  | -------------------------------------------------------------




| |  |  | the impact on our financial condition due to the timing of the acquisition or investment;
| | - |  | -----------------------------------------------------------------------------------------




| |  |  | the expenses of amortizing the acquired companys intangible assets and goodwill; and
| | - |  | -------------------------------------------------------------------------------------




| |  |  | the potential for claims asserted against the acquired business.
| | - |  | ----------------------------------------------------------------




If any of these risks are realized, our business, financial condition and results of operations could be materially adversely affected. In July 2001, we decided to
discontinue marketing, sales and research of the Liquid Marketplace(TM) line of software applications acquired when we acquired Online Transaction Technologies, Inc. (OTT), due to uncertainty as to whether we would be able to develop a
commercially viable product and whether there would be market acceptance of such product, and we subsequently wrote off approximately $4.1 million of goodwill resulting from the acquisition.





We may not be able to compete effectively against our competitors.





We operate in a highly competitive environment. In particular, increasing numbers of companies are entering the business process outsourcing industry in the Asia-Pacific region. This industry is
relatively new in




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the region and, as it develops, our competitors may better position themselves to compete in our lines of business and markets. We face competition from local, regional and global companies that:





| |  |  | may be focused on only one or a few of the services that we offer;
| | - |  | ------------------------------------------------------------------




| |  |  | are expanding their services beyond those they have traditionally offered; and
| | - |  | ------------------------------------------------------------------------------




| |  |  | are increasing their activities in our markets.
| | - |  | -----------------------------------------------




These competitors may have greater resources or more advanced technology than we do. Other competitors may emerge in the future with significantly greater financial, technical and marketing resources
than we have. These competitors may be in a better position than us to develop current and future services, expand market share and to offer services and products that provide significant performance, price, creative or other advantages over those
offered by us.





In addition to competitor companies, one of our greatest risks is that prospective clients will
choose not to outsource their technical, administrative and sales functions and instead elect to continue performing these functions internally.





The barriers to enter our business are low.





There are
relatively low barriers to entry into our line of business. We do not own any technologies that preclude or inhibit competitors from entering our markets. Our competitors may independently develop and patent or copyright proprietary technologies
that are superior or substantially similar to our technologies. The costs to develop and provide outsourcing services can be relatively low.





We depend on our key senior management and executive officers to execute our business strategy and could be harmed by the loss of their services.





We believe that successful management and the ability to execute our services will be critical in the success of our business. Therefore,
our success depends in large part upon the continued efforts, service and performance of our senior management team and executive officers, and in particular of the following key management executives:





| |  |  | Phillip Kelly, our Co-Chairman and Chief Executive Officer;
| | - |  | -----------------------------------------------------------




| |  |  | Dennis Smith, our Vice Chairman, Chief Financial Officer and Chief Strategy Officer; and
| | - |  | ----------------------------------------------------------------------------------------




| |  |  | Jack Cantillon, our Chief Operating Officer.
| | - |  | --------------------------------------------




We depend on their services because each one of these executives has experience and in-depth knowledge regarding the development, needs, special opportunities, and challenges of our business, and
environment and activities in our targeted markets. We have employment agreements with these key executives as well as with all of our other officers and employees. The loss of the services of any of these executive officers or any of our key
management, sales or technical personnel could have a material adverse effect on our business, financial condition and results of operations.





Our failure to maintain our rights to use third party intellectual property could adversely affect business.





Portions of our business are substantially dependent upon technology that we license from third parties. In particular, we rely upon third-party technologies and software
for our outsourcing services, such as payroll services, customer relationship management and supply chain management. Currently, substantially all of these licenses are perpetual licenses absent material breach on our part. We also expect to need
new licenses in the future as our business grows, the existing products we license become obsolete, and as technology evolves. We




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cannot be sure that we will be able to obtain necessary licenses on commercially reasonable terms, or at all, which could result in a material adverse effect on our business, financial condition
and results of operations.





Third parties may claim that our technology or services, including those, which we
have licensed from a third-party supplier, infringe their proprietary rights. Although in most cases we are indemnified by our licensor in the event of a claim of intellectual property infringement by a third-party, any infringement claims, even if
without merit, can be time-consuming and expensive to defend. They may divert our managements attention and resources and could cause service implementation delays. In the event of a successful claim of infringement and the failure or
inability of either us or our licensor to develop non-infringing technology or license the infringed or similar technology on a timely or commercially favorable basis, our business, financial condition and results of operations could be materially
adversely affected.





System failures and capacity constraints could result in a reduction of demand for our
services.





Our ability to provide acceptable levels of customer service largely depends on the efficient and
uninterrupted operation of our hardware, software and network infrastructure. Inadequacies in the performance and reliability of our information systems, or in the external power or communications infrastructure, could result in interruptions in the
availability of some or all of our services, lower the volume of transactions or increase response times for effecting a transaction. As the majority of our operations are located in regions of Asia-Pacific where the infrastructure may not be as
robust as in the United States, we are particularly vulnerable to such disruptions. This could lead to client dissatisfaction, loss of clients and damage to our reputation, which could materially adversely affect our business, financial condition
and results of operations.





Although we have not experienced these problems in the past to a material extent, our
systems and operations may be vulnerable to damage or interruption from:





| |  |  | power loss, telecommunications or network failures, operator negligence, improper operation by employees, physical break-ins and other similar events;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | unauthorized access or electronic break-ins, or hacking; and
| | - |  | --------------------------------------------------------------




| |  |  | computer viruses.
| | - |  | -----------------




Breaches of our security systems could have a materially adverse impact on our business and operations.





A significant barrier to electronic commerce and communications is the secure transmission of confidential information over public networks. Advances in computer capabilities, new discoveries in the field of cryptography or other
events or developments could result in compromises or breaches of our security systems and client data stored in our information systems. If any well-publicized compromises of security were to occur, it could have the effect of substantially
reducing the willingness of clients to entrust their data to a third party outsourced service provider. Anyone who circumvents our security measures could misappropriate our exclusive information or cause interruptions in services or operations. The
Internet is a public network, and data is sent over this network from many sources. In the past, computer viruses, software programs that disable or impair computers, have been distributed and have rapidly spread over the Internet. Computer viruses
could theoretically be introduced into our systems, or those of our clients or vendors, which could disrupt our products or services, or make our systems inaccessible to clients or vendors. We may be required to expend significant capital and other
resources to protect against the threat of security breaches or to alleviate problems caused by breaches. To the extent that our activities may involve the storage and transmission of exclusive information, such as personal data and credit card
numbers, security breaches could expose us to a risk of loss or litigation and possible liability. Our security measures may be inadequate to prevent security breaches, and our business could be seriously impacted if they are not prevented.




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We have an incomplete disaster recovery plan.





A significant portion of our information systems are located in our shared services center in Kuala Lumpur, Malaysia. We maintain a small
back-up site, but it currently would not support our entire operations if our primary facilities went down, and it could take a significant amount of time to get it fully operational. We are currently assessing a more extensive disaster recovery
plan. Until the plan is completed, there are risks of localized telecommunications, Internet and systems failure.





Volatility in social, political and economic conditions in the Asia-Pacific region may adversely affect our business.





We derive and expect to continue to derive substantially all of our revenues from services conducted in or relating to the Asia-Pacific region. Volatility in social, political and economic conditions
in the region may interrupt, limit or otherwise affect our operations and services by affecting our physical operations, creating uncertainty regarding our operating climate and adversely affecting our ability to provide services.





A downturn in general economic conditions in the Asia-Pacific region could materially adversely affect our business, financial
condition and results of operations. Beginning in mid-1997, many countries in the region experienced significant economic problems. Following varying degrees of recovery in the region in 1999 and 2000, the economies in many of those countries have
recently experienced declining or negative growth rates. We cannot assure you that the current economic conditions in any of these countries will improve or not deteriorate further.





We may become subject to burdensome government regulations and legal uncertainties, and to claims involving foreign laws and regulations.





We currently have employees, facilities and business operations established in Hong Kong, Japan, Malaysia, Singapore and the United
States. We also anticipate having employees, facilities and operations in other countries and territories in the Asia-Pacific region, and offering services in numerous countries in the region regardless of whether we have a physical presence in such
countries. As a result we are subject to the laws and the court systems of many jurisdictions. We may become subject to claims from private parties or foreign government agencies based in foreign jurisdictions for violations of their laws.
International litigation is often expensive, time consuming and distracting. These claims could be particularly disruptive to our business.





In addition, laws in these jurisdictions may be changed or new laws may be enacted in the future. Uncertainty and new laws and regulations in these jurisdictions could prevent or limit our ability to
operate in certain countries, increase our costs of doing business and prevent us from providing our e-business services. Any restrictions could have a material adverse effect on our business, financial condition and results of operations.





Furthermore, there are risks inherent in conducting business in multiple jurisdictions and internationally. These
include:





| |  |  | challenges in staffing and managing foreign operations;
| | - |  | -------------------------------------------------------




| |  |  | differing technological standards;
| | - |  | ----------------------------------




| |  |  | employment laws and practices in different countries; and
| | - |  | ---------------------------------------------------------




| |  |  | potentially adverse tax consequences.
| | - |  | -------------------------------------




In addition, there can be no assurance that new laws and regulations, or interpretations of existing laws and regulations, will not restrict our ability to provide our services in the countries in
which we operate or into which we intend to offer our services. Any such restrictions could have a material adverse effect on our business, financial condition and results of operations.




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Currency fluctuations could decrease our revenue or increase costs relative to
our revenue.





Historically, most of our revenue has been earned in U.S. dollars and significant portions of
our expenses and liabilities have been denominated in local currencies, primarily Japanese Yen, Malaysian Ringgit, Hong Kong Dollars and Singapore Dollars. As a result, we will be subject to the effects of exchange rate fluctuations with respect to
any of these currencies. We do not currently engage in currency hedging activities. Some of the countries or territories in which we currently operate or may operate in the future impose exchange controls. As a





result, we may not be able to freely convert the relevant local currencies in the countries and territories in the Asia-Pacific region into U.S. dollars or
freely convert U.S. dollars into the relevant local currencies in the countries and territories in the Asia-Pacific region. Any substantial currency fluctuation could adversely affect our business, financial condition and results of operations.





The market for our common stock may be illiquid.





The average daily volume of our registered common stock on the OTC Bulletin Board is currently less than 100,000 shares, and we have had some days with very little or
no trading volume. There can be no assurance that volumes will increase to a consistently higher level or that holders of the shares will be able to sell their shares in a timely manner or at all.





Our stock is not listed on a major stock market.





Our common stock was delisted from the Nasdaq National Market System on December 21, 2001 following Nasdaqs determination that our acquisition of substantially all of
the assets of NetCel360 constituted a reverse merger. In order to regain our Nasdaq listing, we will be required to submit a new listing application and meet all initial Nasdaq national market listing criteria, subject to Nasdaqs approval. We
do not currently meet all of these listing requirements. Our common stock currently trades only on Nasdaqs OTC Bulletin Board. While the listing of our stock does not have a direct effect on our operations, it has an effect on the perception
of us among potential investors, may adversely affect the liquidity of our shares and can have an effect on our ability to raise additional funds.





Outstanding convertible preferred stock, convertible debt securities, warrants and options could result in potential dilution and an adverse impact on additional financing.





As of January 31, 2002, if all of our outstanding convertible debt, warrants and options were converted into common stock, and
if all currently outstanding convertible preferred stock were converted in accordance with the anti-dilution features of those securities, we estimate that approximately 156 million shares of common stock would be outstanding. In addition, our stock
option/stock issuance plan permits us to issue a number of shares of common stock equal to 20% of the total shares of common stock outstanding at the time the calculation is made (including, on an as-converted basis, all convertible preferred stock,
convertible debt securities, warrants, options and other convertible securities that are exercisable).





To the
extent that such convertible preferred stock, convertible debt, options and warrants are exercised, substantial dilution of the interests of our stockholders could result and the market price of the common stock may be materially adversely affected.
For the life of the convertible preferred stock, convertible debt, warrants and options, the holders will have the opportunity to profit from a rise in the price of the common stock. The existence of the convertible preferred stock, convertible
debt, warrants and options is likely to affect materially and adversely the terms on which we can obtain additional financing and the holders of the convertible preferred stock, convertible debt, warrants and options can be expected to exercise them
at a time when we would otherwise, in all likelihood, be able to obtain additional capital by an offering of our unissued capital stock on terms more favorable to us than those provided by the convertible preferred stock, convertible debt, warrants
and options.




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Item 2.    
PROPERTIES





Our principal sales office is located in 1,735 square feet of space in San
Diego, California and is leased through November 30, 2004. Our principal shared customer service centers are located in Kuala Lumpur, Malaysia and Osaka, Japan. The Malaysia facility occupies 39,015 square feet of office space and the lease expires
on March 9, 2003. The Japan facility occupies 8,680 square feet of office space and the lease expires on March 31, 2003. We also have offices in Hong Kong, occupying 7,008 square feet with the lease expiring on August 31, 2002 and in Singapore,
which is on a month-to-month lease term. We also rent approximately 6,700 square feet of standard office in Bothell, Washington. The lease expires on October 31, 2002 but we vacated this office in March 2001 and are presently seeking to sub-let the
premises for the remainder of the lease. Subsequent to the end of our fiscal year, our leases in Los Angeles and Ventura, California expired on March 6, 2002 and March 31, 2002, respectively.





Item 3.    
LEGAL PROCEEDINGS





In October 2001, two lawsuits were filed against Vsource by
purported holders of Series 2-A Convertible Preferred Stock before the United States District Court for the Northern District of Illinois entitled Crestview Capital Fund, LLP v. Vsource, Inc., Case No. 01 C 7833, and Abrahams v. Vsource,
Inc., Case No. 01 C 7831. On January 3, 2002, our motion to transfer these cases to the Central District of California was granted. Both lawsuits allege that we failed to register the underlying common stock under the Securities Act of 1933, an
obligation allegedly undertaken in connection with the original sale of those securities. Plaintiffs seek to recover at least $850,000 and $200,000, plus interest, respectively, plus attorneys fees and costs. At this early stage of the
proceedings, it is difficult to determine the outcome of this litigation or the range of a potential loss with any degree of certainty; however, we deny any and all liability and intend to vigorously defend against these charges.





Item 4.    
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





Our annual meeting of stockholders
was held on November 20, 2001 in San Diego, California. Seven incumbent directors were re-elected without opposition to serve another one-year term in office. The results of this election were as follows:





Name of Director

Votes For

Votes WithheldPhillip E. Kelly

18,204,812

210,044I. Steven Edelson

18,176,002

238,854Dennis M. Smith

18,204,812

210,044Robert N. Schwartz

18,120,239

294,617Scott T. Behan

18,120,242

294,614Ramin Kamfar

18,120,242

294,614Nathaniel C.A. Kramer

18,204,829

210,027




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The following proposals were approved by the following votes:





Proposal

Votes For

Votes Against

Votes Abstained

Broker Non-VotesAmend Vsources Certificate of Incorporation to either effect a reverse split of outstanding common stock or
increase the number of authorized shares of common stock

17,678,902

503,218

232,736

5,894,948Approve issuance of common stock to discharge Vsources bridge loan obligations

6,701,808

343,703

266,673

16,997,620Approve issuance of common stock upon conversion of Vsources Series 3-A Convertible Preferred Stock

6,540,258

447,534

324,392

16,997,620Approve issuance of common stock upon exercise ofwarrants

6,529,447

463,382

319,355

16,997,620Adopt Vsources 2001 Stock Option/Stock Issuance Plan

6,753,006

263,329

295,849

16,997,620Adopt Vsources Employee Stock Purchase Plan

6,894,414

122,315

295,455

16,997,620





Item 4A.    
CHANGE OF DATE OF ANNUAL STOCKHOLDER MEETING





In our Form 10-K for the year ended
January 31, 2002, which was filed on April 30, 2002, we stated that we intended to hold our 2002 annual meeting of stockholders in June 2002 and that proposals of stockholders intended to be presented at the annual meeting and included in the proxy
statement and form of proxy relating to that meeting must be received by us by May 15, 2002.





Our
intention is now to hold our 2002 annual meeting of stockholders in August 2002 and to mail proxy statements relating to the meeting in July 2002. Proposals of stockholders intended to be presented at the annual meeting and included in the proxy
statement and form of proxy relating to that meeting must be received by us by June 30, 2002.





After the
June 30, 2002 deadline, a stockholder may present a proposal at the annual meeting if it is submitted to our Secretary no later than July 15, 2002. If timely submitted, the stockholder may present the proposal at the annual meeting, but we are not
obligated to present the matter in our proxy materials.




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PART II





Item 5.MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS





MARKET INFORMATION





Prior to October 30, 2000, our common stock traded under the symbol VSRC in the over-the-counter securities market.
On October 30, 2000, our common stock began trading on the Nasdaq National Market system under the symbol VSRC. On December 21, 2001, we were de-listed from the Nasdaq Stock Market based upon Nasdaqs determination under its
Marketplace Rules that our acquisition of NetCel360 resulted in a change of control and allowed a non-Nasdaq entity to effectively obtain a Nasdaq listing. Subsequent to such de-listing, our common stock resumed trading in the over-the-counter
securities market. The over-the-counter quotations reflect interdealer bid prices, without retail mark-up, markdown or commissions, and may not represent actual transactions. The over-the-counter market does not constitute active trading and trading
in our common stock is limited and sporadic. The following table sets forth the range of high bid and low bid quotations and the closing price for the fiscal quarters within the last two years. Prior to October 30, 2000, and from December 21, 2001,
the source for this information is the Nasdaq OTC Bulletin Board. From October 30, 2000 to December 20, 2001, the source for this information is the Nasdaq National Market System.





Fiscal Year Ended January 31, 2002

High

LowFirst Quarter

$
2.28

$
0.13Second Quarter


0.60


0.17Third Quarter


0.58


0.08Fourth Quarter


0.44


0.10


Fiscal Year Ended January 31, 2001

High

LowFirst Quarter

$
85.00

$
14.50Second Quarter


28.13


9.13Third Quarter


16.25


6.38Fourth Quarter


15.81


1.47





SHAREHOLDERS





As of March 31, 2002, there were 1,054 stockholders of record of our common stock, 45 holders of our Series 1-A convertible preferred stock, 16 holders of our Series 2-A
convertible preferred stock and 0 holders of our Series 3-A convertible preferred stock.





DIVIDENDS





We have never declared or paid cash dividends on our common stock or preferred stock. Holders of our Series 1-A convertible preferred
stock are entitled to noncumulative dividends, if declared by the Board of Directors, of $0.20 per share annually. Holders of our Series 2-A convertible preferred stock are entitled to noncumulative dividends, if declared by the Board of Directors,
in an amount equal to 8% of the price originally paid to Vsource for each share of Series 2-A convertible preferred stock ($0.51 per share as of March 31, 2002 based on the original purchase price of $6.41 per share, as may be adjusted for stock
splits, stock dividends, combinations and the like). Holders of our Series 3-A convertible preferred stock are entitled to cumulative dividends, if declared by the Board of Directors, in an amount equal to 10% of the price originally paid to Vsource
for each share of Series 3-A convertible preferred stock ($6.00 per share as of March 31, 2002 based on the original purchase price of $60 per share, as may be adjusted for stock splits, stock dividends, combinations and the like). No dividend may
be declared and paid upon shares of our common stock in any fiscal year unless dividends on all such preferred stock have been paid or declared and set aside for payment to holders of our preferred stock for such fiscal year. The Company currently
intends to retain all future earnings to finance future growth and, therefore, does not anticipate declaring or paying any cash dividends in the foreseeable future.




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RECENT SALE OF UNREGISTERED SECURITIES





The following are all securities sold by the Company or issued as warrants within year ended January 31, 2002 which were not registered under the Securities Act:





On June 22, 2001, we issued 2,774,213 shares of common stock to NetCel360 Holdings Limited as part of the consideration for the
acquisition of substantially all of the assets of NetCel360.





On June 25, 2001, we issued convertible
promissory notes (the Series A Convertible Notes) in the principal amount of $4.56 million to purchasers under a convertible note purchase agreement. The following persons were the purchasers of the Series A Convertible Notes: Asia
Internet Investment Group I, LLC, BAPEF Investments XII, Ltd., John Gerard Cantillon, Phillip E. Kelly, Mercantile Capital Partners I, L.P. and Dennis Smith. The Series A Convertible Notes have a maturity date of June 30, 2003.
Approximately $1.26 million in principal amount of the Series A Convertible Notes were issued to lenders of our bridge loan facility in exchange for $1.26 million in principal and accrued interest of their outstanding bridge loans, and the remaining
$3.3 million of the principal amount of the Series A Convertible Notes was issued for $3.3 million in cash. The Series A Convertible Notes are convertible into shares of our Series 3-A convertible preferred stock at a conversion price of $60 per
share. The Series 3-A convertible preferred stock became convertible into shares of our common stock on January 16, 2002. The number of shares of common stock to be issued upon conversion of each share of Series 3-A convertible preferred stock is
determined by dividing the sum of $60 (as adjusted for stock splits, stock dividends and similar transactions) and all accrued and unpaid dividends on each shares of Series 3-A convertible preferred stock to be converted, by $0.10.





On July 6, 2001, we issued warrants to purchase 150,000 shares of common stock to Roberta Babitz in consideration of
due diligence advisory services provided by her in connection with our acquisition of NetCel360. The warrants have an exercise price of $0.10 per share and became exercisable on January 16, 2002.





On July 6, 2001, we issued warrants to purchase 200,000 shares of common stock to Jefferies and Company, Inc. (Jefferies)
in consideration of investment banking services provided by Jefferies in connection with our acquisition of NetCel360. The warrants have an exercise price of $0.10 per share and became exercisable on January 16, 2002.





On July 12, 2001, we issued exchangeable promissory notes (the Series B Exchangeable Notes) in the principal amount of
$4.25 million and warrants (the Series B Warrants) to purchase approximately 21.3 million shares of common stock to purchasers under an exchangeable note purchase agreement for $4.25 million in cash. The following persons were the
purchasers of the Series B Exchangeable Notes: Richard Abrahams, Anglo East Trust, BAPEF Investments XII, Ltd., John Gerard Cantillon, Crestview Capital Fund LP, G5 Partners, LP, Kumi Hui, Phillip E. Kelly and Jack Tai-On Poon. The Series B
Exchangeable Notes had a maturity date of June 30, 2003 and were exchangeable for Series A Convertible Notes if they were not repaid in full on or prior to February 12, 2002. No Series B Exchangeable Notes were exchanged for Series A
Convertible Notes because we repaid the Series B Exchangeable Notes in full on December 28, 2001. The Series B Warrants have an exercise price of $0.10 per share and became exercisable on January 16, 2002.





On August 16, 2001, we issued 15,000 shares of common stock to QCC Communications Corporation as part of the consideration for the
purchase of the domain name Vsource.com.





On December 18, 2001, we issued 11,620,310 shares of
common stock to lenders under a bridge loan in the principal amount of $2.25 million to discharge our obligations under such bridge loan. The following persons were the lenders under the bridge loan: Asia Internet Investment Group I, LLC, Bainlab,
Inc., BAPEF Investments XII, Ltd., G5 Partners, LP, Phillip E. Kelly, Charles Longley, New Media Investors VI, L.L.C., Dennis Smith, Stephen Stonefield and Morton Topfer. Under the terms of the bridge loan, we were entitled to discharge all
principal and accrued interest due under the bridge loan by delivering shares of our common stock at a conversion price of $0.20 per share.




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On January 31, 2002, we issued exchangeable promissory notes (the
Series B-1 Exchangeable Notes) in the principal amount of $2.94 million and warrants (the Series B-1 Warrants) to purchase approximately 14.7 million shares of common stock to purchasers under an exchangeable note
purchase agreement. The following persons were the purchasers of the Series B-1 Exchangeable Notes: BAPEF Investments XII, Ltd., John Gerard Cantillon, G5 Partners, LP, Kumi Hui, Phillip E. Kelly and Jack Tai-On Poon. All of these Series B-1
Exchangeable Notes were paid for through an exchange of Series B Exchangeable Notes with principal and accrued interest in an amount equal to $2.94 million. The Series B-1 Exchangeable Notes have a maturity date of June 30, 2003 and are exchangeable
for Series A Convertible Notes if they are not repaid in full on or prior to August 15, 2002. The Series B-1 Warrants have an exercise price of $0.10 per share.





Exemption from the registration requirements of the Securities Act for the sales of the securities described above was claimed under (i) Section 4(2) of the Securities Act,
among others, on the basis that such transactions did not involve any public offering and the purchasers were sophisticated with access to the kind of information registration would provide, or (ii) Regulation S under the Securities Act, on the
basis that such transactions were offshore transactions made to persons that are not U.S. persons and not for the account or benefit of U.S. persons, and otherwise in accordance with the terms of Regulation S. No underwriting or brokers
commissions were paid in connection with the foregoing transactions.





Item 6.SELECTED CONSOLIDATED FINANCIAL DATA





Five Year Summary





January 31,2002


2001


2000


1999


1998(in thousands, except per share amounts)Revenue

$
12,712


$
35


$
4


$
61


$
72Operating expenses


29,425



27,778



5,153



1,562



1,034Loss from operations


(16,713
)


(27,743
)


(5,149
)


(1,502
)


(962
)Net loss


(20,444
)


(27,599
)


(5,523
)


(1,762
)


(990
)Basic and diluted net loss per share available to common shareholders


(1.04
)


(2.63
)


(0.40
)


(0.17
)


(0.11
)Cash and cash equivalents


4,753



5,360



5,124



60



438Property and Equipment, net


7,232



932



223



23



92Total assets


16,439



11,261



5,540



1,116



1,375Current liabilities


6,222



911



6,501



984



986Long term liabilities


2,365











3



1Preferred Stock


11,223



14,229











Shareholders deficit


(3,371
)


(3,879
)


(961
)


129



388





Note:    The above table was extracted from our
audited financial statements for the relevant years. PricewaterhouseCoopers audited the financial statements for the year ended January 31, 2002, Grant Thornton, LLP audited the financial statements for the years ended January 31, 2001 and 2000 and
Horsfall, Murphy & Pindroh, LLP audited the financial statements for the years ended January 31, 1999 and 1998.





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





The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto appearing elsewhere in this Form 10-K.




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FORWARD LOOKING STATEMENTS





The discussion in this Form 10-K contains forward-looking statements that involve risks and uncertainties. The statements contained in this Form 10-K that are not purely
historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements on our expectations, beliefs, intentions
or strategies regarding the future, including without limitation, our financial outlook, successful introduction of services and expansion of operation. All forward-looking statements included in this document are based on information available to
us on the date hereof. We assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those indicated in such forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, inability to raise sufficient funds to meet our operating requirements, inability to repay the debt that we have incurred, the new and unproven market for outsourced services in the Asia-Pacific region,
our limited experience in the business process outsourcing business, long cycles for sales of our solutions, reliance on one client, fluctuations in revenues and operating results, economic and infrastructural disruptions, management of acquisitions
and investments, litigation, competition, significant exposure to the Asia-Pacific region and other risks discussed in this Form 10-K under the heading Risk Factors and the risks discussed in our other Securities and Exchange Commission
filings. Readers should carefully review the risk factors described in this document as well as in our other documents that we file from time to time with the Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K.





OVERVIEW





Our primary source of revenues is fees earned from delivering business process outsourcing solutions such as integrated technical service solutions, payroll and claims
solutions and Vsource Foundation Solutions. We also derive revenues from the sales of products through our sales solutions. Our revenues in the fiscal year ended January 31, 2002 increased to $12.71 million from $35,000 in the year ended January 31,
2001. On June 22, 2001, we acquired substantially all of the assets of NetCel360 Holdings Limited, a provider of business process outsourcing and distribution services in the Asia-Pacific region. Following this acquisition, we elected to stop the
development and marketing of transaction solutions for public and private exchanges, due to uncertainty as to whether we would be able to develop a commercially viable product and whether there would be market acceptance of such product, in order to
devote our resources towards developing business process outsourcing and distribution services built upon NetCel360s infrastructure.





We began to provide reseller services to Gateway Manufacturing Inc. (Gateway Manufacturing) in July 2001, generating total revenues of $2.7 million. These services were terminated effective
November 1, 2001 when Gateway Manufacturing terminated its operations in the Asia-Pacific region, at which time we began providing integrated technical service solutions to Gateway under a three-year support services agreement to support
Gateways warranty obligations with respect to its installed base of end users in the Asia-Pacific region. Approximately $9.2 million of our total revenues in the fiscal year ended January 31, 2002 were generated in the final quarter as we
began to acquire clients for business process outsourcing services developed after the acquisition of NetCel360. All revenues generated since completion of the acquisition have been derived from lines of business developed after the acquisition or
from lines of business developed by NetCel360.





Our operating loss decreased to $16.7 million in 2002
from $27.7 million in 2001, primarily as the result of a decrease in non-cash stock-based compensation, from $17.7 million in 2001 to $3.1 million in 2002, and a decrease in research and development expenses from $6.2 million in 2001 to $2.3 million
in 2002. Most of the research development expenses incurred in 2002 were incurred prior to the acquisition of NetCel360. The decline in research and development expenses reflects the change in our business model following the acquisition of
NetCel360 from a developer of software products to a business process outsourcing service provider that relies primarily on technology licensed from third-parties. These decreases were offset in part by an increase in our cost




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of revenues, from $0 in 2001 to $8.8 million in 2002, an increase in our selling, general and administrative expenses, from $3.8 million in 2001 to $11.2 million in 2002, and an increase in loss
on impairment of goodwill, from $0 in 2001 to $4.1 million in 2002. The loss on impairment of goodwill stemmed from charges relating to the acquisition of OTT, which took place during the first quarter of 2002. The increases in cost of revenues and
selling, general and administrative expenses reflects the change in our business model following the acquisition of NetCel360 from a developer of software products to a business process outsourcing service provider with significantly higher staffing
and more extensive operating infrastructure.





FUTURE FUNDING





We had an accumulated deficit of approximately $74.4 million as of January 31, 2002 that has been funded primarily through issuances of debt and equity securities.
In 2002, we used net cash of $5.8 million in operating activities and $0.8 million in investing activities and obtained net cash from financing activities of $5.9 million, giving rise to a decrease in cash of $0.6 million. We have also sustained
operating and cash losses since inception. While we had positive cash flows for the last quarter of 2002, there is no assurance that this will continue and we may need to implement cost and cash conservation measures. Our management believes that we
have adequate funding to continue in operation through January 31, 2003. We believe that we may need to raise additional cash funding in order to continue operations during the fiscal year ending January 31, 2004. We are in negotiations with
investors for additional cash funding. There is, however, no assurance that we will be successful in obtaining this additional capital. Numerous factors could affect our operating results including, but not limited to, general economic conditions,
competition and changing technologies. A change in any of these factors could have an adverse effect on our consolidated financial position, results of operations, anticipated cash flows and ability to raise additional capital.





CRITICAL ACCOUNTING POLICIES AND ESTIMATES





We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates,
judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:





Revenue and Costs Recognition





Gateway Support Services Agreement





Revenue





Revenue under our Support Services Agreements with Gateway (the Support Services
Agreement) is recognized on an accruals basis as it is billed, as management considers that this appropriately matches the level of effort and costs incurred to the related revenue. Under the Support Services Agreement, there are variable and
fixed components to our fees. The fixed component of the fee is based upon predetermined monthly transaction volumes. If the predetermined monthly transaction volume is exceeded, incremental transactions are charged on a monthly basis at the agreed
rates per transaction specified in the Support Services Agreement. Fees are payable by Gateway on a monthly basis.





Costs





Major costs incurred in relation to the Support Services Agreement are
payroll, third-party vendor and facility rental costs, which are recognized as incurred in order to match the related effort in serving the Gateway Support Services Agreement. In addition, we incur inventory costs in repairing or replacing
components in




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Gateways customers computers. We obtained a significant amount of inventory from Gateway at nominal value in order to support our obligations under the Support Services Agreement but
such inventory was insufficient to meet all of our repair and replacement needs and so we also purchase additional inventory as required. We recognize such additional inventory costs on a LIFO basis in each accounting period.





Impairment of long lived assets





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





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




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




| |  |  | Technical obsolescence;
| | - |  | -----------------------




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




| |  |  | Significant decline in our market capitalization relative to net book value for a sustained period.
| | - |  | ---------------------------------------------------------------------------------------------------




When we determine that the carrying value of an asset may not be recoverable based upon the existence of one or more of the above or other
indicators, we assess recoverability of its carrying value by comparison to the future undiscounted cash flows it is expected to generate. If an asset is impaired, we measure any impairment based on a projected discounted cash flow method using a
discount rate determined by our management to be commensurate with the risk inherent in our current business model.





We have significant amounts of computer equipment and software assets, which are more prone to impairment due to technical obsolescence or business changes. However, our management is of the opinion that there are no indicators that
these assets are impaired.





During 2002, as a result of an impairment review of OTT, we recognized an impairment
charge of $4.1 million due to deterioration in the market for OTTs products and changes in the estimates of the costs of development and marketing of these products. This was based on future undiscounted cash flows expected to arise from
the continued use of these acquired assets which was expected to be negative.





RESULTS OF OPERATIONS (All amounts in thousands, except
share and per share data)





FISCAL YEAR





OUR FISCAL YEAR ENDS ON JANUARY 31 OF THE FOLLOWING CALENDAR YEAR. UNLESS OTHERWISE INDICATED, REFERENCES TO 2000, 2001 AND 2002 RELATE TO THE FISCAL YEARS ENDED
JANUARY 31, 2000, 2001 AND 2002, RESPECTIVELY, RATHER THAN CALENDAR YEARS.





We have not discussed our results
of operations below on the basis of segment data because we did not prepare segment reporting in 2001, and therefore did not believe that such discussion would be meaningful.





Revenue





Revenue in 2002 was
derived primarily from two sources: (i) distribution services revenue, derived primarily from the distribution of Gateway Manufacturing products in Hong Kong and Singapore, and (ii) business process outsourcing revenue, derived primarily from our
integrated technical solutions for Gateway, payroll and claims solutions and foundation solutions. Revenues are recognized in accordance with the policies set forth in Critical Accounting Policies and Estimates above.




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In 2002, revenues increased to $12.71 million from $35,000 in 2001, an
increase of $12.67 million, primarily due to two new contracts, a reseller agreement (the Reseller Agreement) with Gateway Manufacturing and the Support Services Agreement with Gateway. The Reseller Agreement was in effect from July 1,
2001 to November 1, 2001, when it was terminated as part of Gateway Manufacturings termination of its operations in the Asia-Pacific region. We generated total revenues of $2.7 million under the Reseller Agreement.





Effective November 1, 2001, we began to provide integrated technical service solutions under the Support Services Agreement to
support Gateways warranty obligations with respect to its installed base of customers in the Asia-Pacific region. Revenues of $35,000 in 2001 and $4,000 in 2000 were derived from the sale of procurement software and our application service
provider business. Both of these lines of business were discontinued in 2002.





Cost of Revenue





Cost of revenue includes costs associated with providing customers with goods and services, such as cost of
products, freight, telephonic and onsite support, as well as direct costs from personnel that deliver the goods and services. Costs include primarily salaries, subcontractors, parts and repairs.





In accordance with our deferred revenue treatment on set-up revenues generated from implementation of our solutions, we also defer the costs relating to such set-ups
and amortize those costs for a period identical to the period for which revenue is deferred. Therefore, there can be a timing difference between when the costs are actually incurred, from when they are recognized.





Cost of revenue increased to $8.8 million for 2002 from no cost of revenue in 2001 and 2000. The costs of goods for 2002 were derived from
the distribution of Gateway Manufacturing products, personnel and rental costs for distribution of Gateway Manufacturing products, personnel costs from providing integrated technical solutions under the Support Services Agreement and other expenses
that were directly related to our business process outsourcing services, inclusive of personnel, technology and outside vendor agreements. In 2001 and 2000, we were primarily focused on selling procurement software and being an application service
provider but we never achieved meaningful sales of the products that were under development. Therefore there was no cost of revenue associated with such products.








Selling, General and Administrative Expenses





Selling, general and administrative expenses consist primarily of employee-related costs, such as salaries of administrative and support personnel, benefits and
commissions, promotional and advertising expenses, insurance premiums and costs relating to certain other outside services.





The increase in selling, general and administrative expenses to $11.2 million for 2002 from $3.8 million in 2001 was due primarily to the significant increase in headcount arising from our change in business model following the
acquisition of substantially all of the assets of NetCel360 and significant growth of our business following such acquisition. Being a business process outsource services provider, supporting significantly higher revenues, had significantly higher
staffing requirements than software development. We also incurred higher costs associated with being a public company after losing our small business issuer designation. Furthermore, there were increased costs resulting from our contesting the
delisting of our common stock from the Nasdaq National Market. The increase in selling, general and administration expenses from $0.7 million in 2000 to $3.8 million in 2001 was attributable to our growth that year and the acquisition costs related
to the acquisition of OTT, which was acquired in 2001.





Research and Development Expenses





Research and development expenses consist primarily of employee-related costs and operating expenses associated with the
operation of our research and development facility in Los Angeles. During 2002, we incurred




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research and development expenses of $2.3 million in connection with the development of our procurement software and the technologies acquired from OTT. A significant majority of these expenses
were incurred in the first half of 2002, before we decided to discontinue the development of such procurement software and OTT technologies due to the slow rate of customer acceptance, the need for additional functionalities, uncertainty as to
whether we would be able to develop a commercially viable product and uncertainty as to whether there would be market acceptance of such product. As a result of the termination of these lines of business, our research and development expenses were
significantly less than in 2001 and 2000, when they were $6.2 million and $3.5 million, respectively. As technical feasibility of products under development was unproven, costs could not be capitalized and were expensed as incurred in 2002, 2001 and
2000.





Non-cash Stock-based Compensation





Non-cash stock-based compensation is related to the issuance of stock options to employees with an exercise price below the fair market value of the underlying stock at the
date of measurement. The decrease to $3.1 million in 2002 from $17.7 million in 2001, a difference of $14.6 million (82%), was due to the cancellation of 1,981,968 stock options of employees that left the employment of Vsource before their vesting
period had fully expired, which was partially offset by the issuance of 19,700,499 new options at an exercise price below fair market value at the date of grant, which had a corresponding charge of $2.2 million in 2002. The increase to $17.7 million
in 2001 from $0.4 million in 2000 was due to the employment of a substantial number of new employees during 2001, most of whom were granted options with exercise prices below the fair market value on the date of measurement.





Impairment of Long-lived Assets





We incurred a loss on impairment of goodwill of $4.1 million pertaining to the acquisition of OTT in 2002. No impairment of goodwill was incurred for 2001. After our management elected in 2002 to slow
down the development of technologies acquired from OTT, we evaluated the long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with these assets. We determined that goodwill
did not continue to represent the value originally attributed to these assets. As a result, the assets were reduced to their net realizable value of $0. We took a $2.2 million charge in the first quarter of 2002 in connection with the decision to
slow down the development of the technologies acquired from OTT. In the second quarter of 2002, we took another charge of $1.9 million for the remaining balance, as management then decided to completely discontinue the development of the
technologies due to uncertainty as to whether we would be able to develop a commercially viable product and uncertainty as to whether there would be market acceptance of such product.





Interest Expense





Interest
expense increased to $694,000 in 2002 from $12,000 in 2001. This was primarily due to the interest accruing on the convertible debt instruments in the principal amount of $15.4 million issued or assumed during 2002, which carried interest rates
ranging between 5% and 10% per annum.





Non-cash Beneficial Conversion Feature Expense





We recognized a $2.8 million non-cash expense relating to our bridge loan, Series A convertible notes, Series B exchangeable
notes and warrants issued in conjunction with the Series B exchangeable notes, upon issuance. The expense, which arose from a beneficial conversion feature resulting from the fact that such convertible securities could be converted into our common
stock at an amount below its market price on the commitment date of the securities, was recognized in accordance with Emerging Issues Task Force (EITF) 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios to Certain Convertible Instruments and EITF 00-27 Application of EITF Issue 98-5.




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Extraordinary ItemLoss on Extinguishment of Debt





We recognized a loss on extinguishment of debt of $0.3 million, which resulted from the repayment of our Series B exchangeable
notes on December 28, 2001. The resulting loss was accounted for as an extraordinary item in accordance with Statement of Financial Accounting Standards No. 4, Reporting Gains and Losses from Extinguishment of Debt.





LIQUIDITY AND CAPITAL RESOURCES





Our cash and cash equivalents totaled $4.8 million as of January 31, 2002, as compared to $5.4 million as of January 31, 2001 and $60,000 as of January 31, 2000. As of January 31, 2002, we had working capital of $3.0
million, long-term debt of $7.5 million and shareholders deficit of $3.4 million. To date, we have financed our operations primarily through preferred stock financings and issuances of debt, and beginning in the fourth quarter of 2002, we
generated cash from operating activities. During 2002, we also received a $3 million advance from Gateway under the Support Services Agreement, which will be used to offset outstanding accounts receivable from Gateway at a monthly rate from May 2002
through October 2004.





Net cash used in operating activities was $5.8 million in 2002, $9.6 million in 2001 and
$2.9 million in 2000. Net cash used in operating activities in 2002 consisted primarily of $20.4 million net loss, offset by non-cash charges of $14.1 million primarily related to depreciation and amortization, the write-off of goodwill and stock
based compensation and beneficial conversion feature charges. Net cash used in 2001 consisted primarily of $27.6 million net loss, offset by non-cash charges of $17.9 million primarily related to stock based compensation and beneficial conversation
feature charges. Net cash used in operating activities in 2000 consisted primarily of $5.5 million net loss, offset by a non-cash charge of $2.4 million.





Net cash used in investing activities was $0.8 million in 2002, $1.2 million in 2001 and $0.3 million in 2000. Net cash used in investing activities for 2002 was primarily related to the acquisition of
property and equipment and the acquisition of the assets of NetCel360, net of cash acquired. In 2001, net cash used in investing activities was related to the acquisition of fixed assets and the acquisition of OTT, less cash acquired. In 2000, net
cash used in investing activities was primarily related to the acquisition of fixed assets.





Net cash provided by
financing activities was $5.9 million in 2002, $11.0 million in 2001 and $8.3 million in 2000. Net cash provided by financing activities in 2002 came from the sale of $3.3 million in principal amount of Series A convertible notes for cash, the sale
of $4.3 million in principal amount of Series B exchangeable notes for cash, and the sale of $2.9 million in principal amount of Series B-1 exchangeable notes, offset by repayment of $4.5 million in principal and accrued interest of the Series B
exchangeable notes.





As of January 31, 2002, the only significant contractual obligations or commercial
commitments outstanding consisted of:





| |  |  | our facility future minimum lease commitments totaling $1.2 million, of which $978,000 will be paid out in 2003, $143,000 in 2004 and $37,000 thereafter. (See
Note 8 to the Notes to the Consolidated Financial Statements for further details.); and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | two vendor contracts to service our obligation under the Support Services Agreement, which require us to pay minimum aggregate fees of $1.24 million during the
period from November 1, 2001 to October 31, 2002 for services rendered under such contracts.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




We have no other off-balance sheet arrangement that could significantly reduce our liquidity. Beginning in the fourth quarter of 2002, we generated cash from operating activities, but because our operating results may fluctuate
significantly as a result of decrease in customer demand, we may not be able to sustain positive cash flow from operations and we may need to implement cost and cash conservation measures. Our management believes that we have adequate funding to
continue in operation through January 31, 2003. We believe that we may need to raise additional cash funding in order to continue operations during the fiscal year ending January 31, 2004.




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Debt outstanding as of January 31, 2002 that is due within the next two years
amounted to US$7.5 million in principal amount. This debt was comprised of $4.56 million in principal amount of Series A convertible notes and $2.94 million in principal amount of Series B-1 exchangeable notes that we issued during 2002. These
convertible notes are repayable in full on June 30, 2003. We believe that we may need to raise additional cash funding in order to repay those convertible notes that remain outstanding as of June 30, 2003 and continue operations during the next
fiscal year ending January 31, 2004. Prior to June 30, 2003, these convertible notes may be converted at the option of their holders into Series 3-A Preferred Stock at a price of $60 per share which are, in turn, convertible into our common stock at
$0.10 per share. The closing price for our common stock on June 3, 2002 was $0.27 per share. In the event that our common stock continues to trade at a premium to the conversion price of $0.10 per share, we believe that the holders of our
convertible notes will elect to convert amounts due into common stock rather than be repaid. There can, however, be no assurance that the price of our common stock will be above the conversion price on or before June 30, 2003, or that even if the
price is higher than the conversion price that the holders of the convertible notes will choose to convert their notes into our common stock. In addition, we are endeavoring to raise additional financing to support operations and repayment of debt
outstanding, if necessary. We are currently in negotiations with investors for additional cash funding. There is, however, no assurance that we will be successful in obtaining this additional capital. Numerous factors could affect our operating
results including, but not limited to, general economic conditions, competition and changing technologies. A change in any of these factors could have an adverse effect on our consolidated financial position, results of operations, anticipated cash
flows and ability to raise additional capital.





RECENT ACCOUNTING PRONOUNCEMENTS





In July 2001, the Financial Accounting Standards Board (FASB) issued FASB Statements Nos. 141 and 142 (SFAS 141
and SFAS 142), Business Combinations and Goodwill and Other Intangible Assets. SFAS 141 replaces APB 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase
accounting related to the recognition of intangible assets and accounting for negative goodwill. Adoption of SFAS No. 141 did not have an impact on our financial position and results of operations.





SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under SFAS 142, goodwill and
indefinite-lived intangibles will be tested annually and whenever events or circumstances occur indicating that they might be impaired. Goodwill is tested for impairment employing a two-step method. First the fair value of the reporting unit is
compared to its carrying amount. If the fair value is less than the carrying amount, the impairment is measured as the excess of recorded goodwill over its implied fair value. Indefinite-lived intangibles are tested for impairment by comparing the
carrying amount to the fair value. SFAS 141 and SFAS 142 are effective for all business combinations completed after June 30, 2001. Upon adoption of SFAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1,
2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under SFAS 141 will be reclassified to goodwill. We adopted SFAS 142 on February 1, 2002, the beginning of 2003.





In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. SFAS No. 144 applies to all long-lived assets (including discontinued operations) and consequently amends
APB No. 30, Reporting the Results of Operations Reporting the Effects of Disposal of a Division of a Business. SFAS No. 144 develops an accounting model for long-lived assets that are to be disposed of by sale and requires the
measurement to be at the lower of book value or fair value, less the cost to sell the assets. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. We do not expect the provisions of SFAS No. 144 to have a significant impact on our financial position or
operating results following its adoption on February 1, 2002.




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ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





DISCLOSURES ABOUT MARKET RISK





Interest Rate Risk





Our exposure to market risk for changes in interest rates relates primarily to our cash on deposit with high quality financial institutions. While we are exposed with
respect to interest rate fluctuations in many countries, our interest income is most sensitive to fluctuations in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on our cash and
cash equivalents. However, changes in interest income will not have a material impact on our financial results, as we derived only $100,000 from interest income in 2002.





As of January 31, 2002, all of our debt had fixed rates of interest and therefore did not expose us to interest rate fluctuations.





Foreign Currency Risk





As a business that derives all of its revenues from operations in the Asia-Pacific region, we face exposure to adverse movements in foreign currency exchange rates. This exposure may change over time
as business practices evolve and could seriously harm our financial results. Substantially all of our revenues are currently denominated in U.S. dollars. An increase in the value of the U.S. dollar relative to foreign currencies could make our
services more expensive and therefore reduce the demand for our services. Reduced demand for our services could seriously harm our financial results. Currently, we do not hedge against any foreign currencies and, as a result, could incur
unanticipated gains or losses.





We incur expenses in foreign currencies, principally Malaysian Ringgit and
Japanese Yen. Our Japanese Yen- and Malaysian Ringgit-denominated expenses represented approximately 32% and 21%, respectively, of our total cash expenses in the fourth quarter of 2002. The Malaysian Ringgit currently has a fixed exchange rate to
the U.S. dollar and there is no exchange exposure at present although there is no assurance that such fixed exchange rate will be maintained in the future.





As of January 31, 2002, all of our debt was denominated in US Dollars and therefore was not subject to fluctuations in foreign exchange rates.




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Item 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





Report of Independent
Accountants





The Board of Directors and Shareholders of


Vsource, Inc.





In
our opinion, the accompanying consolidated balance sheet as of January 31, 2002 and the consolidated statements of operations and shareholders deficit and of cash flows present fairly, in all material respects, the financial position of
Vsource, Inc. and it subsidiaries at January 31, 2002, and the results of its operations and cash flows for the year ended January 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial
statements are the responsibility of the Companys management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.





/S/    PRICEWATERHOUSECOOPERS


PricewaterhouseCoopers


Hong Kong


April 1, 2002




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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS





Board of Directors


Vsource, Inc.





We have audited the accompanying consolidated balance sheet of Vsource, Inc. (a
Delaware corporation) and subsidiaries as of January 31, 2001, and the related consolidated statements of operations, shareholders equity (deficit) and cash flows for each of the two years in the period ended January 31, 2001. The consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.





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





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Vsource, Inc. and subsidiaries as of January 31, 2001, and the results of their operations and cash flows for each of the two years in the period ended January 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.





The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note 2 of the 2001 financial statements (not presented herein), the Company  has sustained substantial losses from operations since inception, has used, rather than
provided, cash from operations and has an accumulated deficit of approximately $52 million. Continued losses are projected for the next fiscal year. At present, the Company has no proven plan for generation of material revenue. These factors, and
others, raise substantial doubt about the Companys ability to continue as a going concern. The ability of the Company to continue operations is subject to its ability to secure additional capital to meet its obligations and to fund operations.
Managements plans in regard to these matters are also described in Note 2 of the 2001 financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.





/S/    GRANT THORNTON LLP


Los Angeles, California


April 13, 2001




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##### Table of Contents




VSOURCE, INC.





CONSOLIDATED BALANCE SHEETS





January 31,2002


2001(in thousands, except per share data)ASSETSCurrent assets:Cash and cash equivalents

$
4,753


$
5,360Restricted cash


61



48Accounts receivable, net


2,886



4Notes receivable-related parties






150Prepaid expenses


597



104Other current assets


910



Total current assets


9,207



5,666Property and equipment, net


7,232



932Goodwill, net






4,593Notes receivable-related parties






50Other assets






20Total Assets

$
16,439


$
11,261LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS DEFICITCurrent liabilities:Accounts payable

$
1,706


$
599Accrued expenses


3,610



312Advance from customerscurrent


906



Total current liabilities


6,222



911Convertible Notes Payable


7,497



Discount on convertible notes


(7,232
)


Advances from customernon current


2,100



Total long term liabilities


2,365



Commitments and contingencies (Note 8)








The accompanying notes are an
integral part of these Consolidated Financial Statements.




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VSOURCE, INC.





CONSOLIDATED BALANCE SHEETS





January 31,2002


2001(in thousands, except per share data)Preferred Stock:Preferred stock Series 1-A ($0.01 par value, 2,900,000 shares authorized; 1,703,741 and 2,437,354 shares issued and
outstanding as of January 31, 2002 and 2001, respectively)(Aggregate liquidation value is $4,259 and $6,093 as of January 31, 2002 and 2001, respectively)


4,151



5,985Preferred stock Series 2-A ($0.01 par value, 2,100,000 shares authorized; 1,174,669 and 1,375,917 shares issued and
outstanding as of January 31, 2002 and 2001, respectively)(Aggregate liquidation value is $7,530 and $8,820 as of January 31, 2002 and 2001, respectively)


7,072



8,244Total preferred stock


11,223



14,229Shareholders Deficit:Common stock ($0.01 par value, 500,000,000 shares authorized; 33,051,704 and 17,938,912 shares issued and outstanding as
of January 31, 2002 and 2001, respectively)


330



179Additional paid-in-capital


71,392



54,074Deferred stock based compensation


(831
)


(5,805
)Accumulated deficit


(74,439
)


(51,900
)Other comprehensive income


177



Less: Notes receivable from sale of stock






(427
)Total shareholders deficit


(3,371
)


(3,879
)Total liabilities, preferred stock and shareholders deficit

$
16,439


$
11,261








The accompanying notes are an
integral part of these Consolidated Financial Statements.




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VSOURCE, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS





Year Ended January 31,2002


2001


2000(in thousands, except per share data)Revenue fromServices

$
9,940


$
35


$
4Products


2,772







Cost and Expenses:


12,712



35



4Cost of revenue fromServices


6,159







Products


2,631







Selling, general and administrative expenses


11,171



3,853



743Research and development expenses


2,269



6,222



3,459Amortization of stock-based compensation (Note 2)


3,116



17,703



424Impairment of long-lived assets


4,079







527Total costs and expenses


29,425



27,778



5,153Operating loss


(16,713
)


(27,743
)


(5,149
)Interest income


127



156



15Interest expense


(694
)


(12
)


(39
)Non-cash beneficial conversion feature expense


(2,824
)






(350
)Loss before extraordinary item


(20,104
)


(27,599
)


(5,523
)Extraordinary itemloss on extinguishment of debt


(340
)






Net loss

$
(20,444
)

$
(27,599
)

$
(5,523
)Net loss available to common shareholders (Note 2)

$
(22,539
)

$
(42,095
)

$
(5,523
)Basic and diluted weighted average number of common shares outstanding


21,599



16,021



13,932Basic and diluted net loss per share available to common shareholders:Loss before extraordinary item

$
(1.03
)

$
(2.63
)

$
(0.40
)Extraordinary item


(0.01
)






Net Loss

$
(1.04
)

$
(2.63
)

$
(0.40
)








The accompanying notes are an
integral part of these Consolidated Financial Statements.




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##### Table of Contents




VSOURCE, INC.





CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIT





Common Shares


Additional Paid-in-Capital


Deferred Stock Based Compensation


Notes Receivable


Accumulated Deficit


Other Comprehensive Income

Total Shareholders DeficitStock


Amount(in thousands, except for shares data)Balance at January 31, 1999

11,401,492


$
114


$
4,297










$
(4,282
)




$
129Issuance of common stock, net of issuance costs

1,495,213



15



2,125


















2,140Issuance of common stock upon conversion of demand notes

2,210,201



22



949


















971Issuance of common stock for services

64,165



1



112


















113Granting of common stock options for services









2,124



(1,781
)













343Issuance of warrantsrelated party









435


















435Beneficial conversion feature









350


















350Modification in terms of stock options









81


















81Exercise of stock options

636,100



6



173







(179
)









Net loss





















(5,523
)





(5,523
)Balance at January 31, 2000

15,807,171


$
158


$
10,646


$
(1,781
)

$
(179
)

$
(9,805
)




$
(961
)Issuance of notes related to issuance of stock

















(248
)









(248
)Conversion of preferred stock

661,057



7



2,805


















2,812Acquisition of OTT

1,089,389



11



4,047


















4,058Issuance of common stock upon conversion of demand notes

65,654







164


















164Deemed non-cash dividend and beneficial conversion feature









14,496











(14,496
)





Compensation related to:options granted for services









11,943



(6,684
)













5,259warrants issued for services









10,966


















10,966Issuance of stock for services

8,250







319


















319Expired and forfeited options









(2,660
)


2,660














Exercise of stock options

209,334



2



1,349


















1,351Exercise of warrants

98,057



1



(1
)

















Net loss





















(27,599
)





(27,599
)Balance at January 31, 2001

17,938,912


$
179


$
54,074


$
(5,805
)

$
(427
)

$
(51,900
)




$
(3,879
)Net loss





















(20,444
)





(20,444
)Comprehensive loss

























177


177(20,267
)Deemed non-cash dividend and beneficial conversion feature









2,095











(2,095
)





Conversion of preferred stock

915,360



9



2,990


















2,999Issuance of common stock on:Acquisition of NetCel360

2,774,213



28



984


















1,012Acquisition of Domain name

15,000







4


















4Bridge loan conversion

11,620,310



116



2,208


















2,324Compensation related to:Options granted for services









2,879



202














3,081Options granted under Restricted Stock Purchase Plan









666



(35
)













631Expired and forfeited options









(4,807
)


4,807














Exercise of warrants

87,909



1



(1
)

















Return of shares related to notes receivable-shareholder

(300,000
)


(3
)


(96
)






427










328Beneficial conversion feature on convertible debt









11,408


















11,408Issuance of warrants with convertible notes









1,964


















1,964Beneficial conversion feature on extinguishment of convertible debt









(2,976
)

















(2,976
)Balance at January 31, 2002

33,051,704


$
330


$
71,392


$
(831
)

$



$
(74,439
)

$
177

$
(3,371
)





The accompanying notes are an integral part of these Consolidated Financial
Statements.




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##### Table of Contents




VSOURCE, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS





Year Ended January 31,2002


2001


2000(in thousands)Cash flows from operating activities:Net loss

$
(20,444
)

$
(27,599
)

$
(5,523
)Adjustments to reconcile net loss to net cash used byoperating activities:Depreciation and amortization


2,379



150



437Loss on disposal of property and equipment


768







Impairment of long-lived assets


4,079







527Compensation expense on stock options granted


3,116



4,644



424Compensation expense on warrants issued






10,966



Services paid with equity






2,093



548Amortization of beneficial conversion feature on convertible debt


2,824







350Loss on extinguishment of debt


340







Write-off of notes receivable


579







Others


(26
)






75Changes in assets and liabilities:Restricted cash


(14
)


36



(83
)Accounts receivable


(2,364
)






3Prepaid expenses


(446
)


(103
)


Other current assets


(483
)






Accounts payable


(306
)


140



198Accrued expenses


1,153



116



98Advance from customers


3,006







Net cash used in operating activities


(5,839
)


(9,557
)


(2,946
)Cash flows from investing activities:Purchase of property and equipment


(777
)


(690
)


(240
)Proceeds from sale of property and equipment


44







Advances to related parties






(91
)


(42
)Costs relating to purchase of acquired companies, net of cash amounts acquired


(106
)


(407
)


Net cash used in investing activities


(839
)


(1,188
)


(282
)Cash flows from financing activities:Proceeds from issuance of common stock






191



2,140Proceeds from issuance of preferred stock






10,790



6,002Proceeds from convertible notes


10,387







150Repayment of convertible notes


(4,251
)






Repayment of borrowings


(200
)






Net cash provided by financing activities


5,936



10,981



8,292Effect of exchange rates


135







Net (decrease) increase in cash and cash equivalents


(607
)


236



5,064Cash at beginning of period


5,360



5,124



60Cash at end of period

$
4,753


$
5,360


$
5,124Supplemental cash flow informationCash paid for interest

$
304


$



$
Cash paid for income taxes


6



2



2Non-cash financing and investing activitiesConversion of debt to equity


2,324



6,002



997Common stock issued to purchase of acquired companies


1,012



4,058



Beneficial conversion feature ofBridge loan


1,913







Convertible notes


9,496







Issuance of warrants with the convertible notes


1,964













The accompanying notes are an integral part of these Consolidated Financial
Statements.




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##### Table of Contents



VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS







1.    THE COMPANY





Vsource, Inc. (Vsource or the Company) was incorporated in Nevada in October 1980 and was reincorporated in the
state of Delaware in November 2000. The Company is a provider of business process outsourcing services to companies operating in and across the Asia-Pacific region. The Company offers sophisticated outsourcing systems and solutions, along with
supporting professional services and technologies, to enable its clients to outsource technical, administrative and sales functions.





The Companys service offerings include:





| |  |  | Integrated technical service solutions, including comprehensive warranty and after-sales service and support;
| | - |  | -------------------------------------------------------------------------------------------------------------




| |  |  | Payroll and claims solutions;
| | - |  | -----------------------------




| |  |  | Sales solutions; and
| | - |  | --------------------




| |  |  | Stand-alone outsourcing solutions including customer relationship management, supply chain management and general financial administration.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------




The Company supports clients operations in most major countries across the Asia-Pacific region,
including Australia, China, Japan, Hong Kong, Korea, Malaysia, New Zealand, Singapore, Thailand and the Philippines, from shared service centers located in Kuala Lumpur, Malaysia and Osaka, Japan.





Future Funding





The Company had an accumulated deficit of approximately $74.4 million as of January 31, 2002 that has been funded primarily through issuances of debt and equity securities. In 2002, the Company used net cash of $5.8 million
in operating activities and $0.8 million in investing activities and obtained net cash from financing activities of $5.9 million giving rise to a decrease in cash of $0.6 million. The Company has also sustained operating and cash losses since
inception. While the Company had positive cash flows for the last quarter of 2002, there is no assurance that this will continue.





As of January 31, 2002, the Company had cash and cash equivalents of $4.7 million. The Company had convertible notes of $7.5 million due June 30, 2002 and had a customer advance of $3.0 million from Gateway. The Company is in
negotiations with investors for additional cash funding. There is, however, no assurance that the Company will be successful in obtaining this additional funding.





Management believes that the Company has adequate funding for it to continue in operation through January 31, 2003. Therefore, the Company has prepared its accounts on a
going concern basis. In order to continue operations through January 31, 2003 on the basis of current funding, the Company may need to implement cost and cash conservation measures. Management believes that the Company may need to raise additional
cash funding, as discussed above, in order to continue operations during the fiscal year ending January 31, 2004.





Risks and Uncertainties





The Company is heavily reliant on one customer, Gateway. Revenues
from its support services agreement with Gateway accounted for approximately 67% of the Companys total revenues for 2002. The Company has contracted with Gateway to provide support services for Gateways warranty obligations to its
installed base of end users. Revenues from this agreement are set to decline significantly over the next two years in accordance with its terms, as the installed base of end users who will be covered by Gateways warranties drops over time. The
Company expects that such drop will be significant and can have a material impact on its revenue. The Company believes that it can successfully reduce costs related to the services provided to Gateway in line with




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##### Table of Contents



VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




the fall in the corresponding revenues over the next two years. In connection with providing services to Gateway, the Company acquired significant inventory of spare parts from Gateway, to be
used to fulfill the Companys service obligations, for a nominal amount.





2.    SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES





Fiscal Year





The Companys fiscal year ends on January 31. Unless otherwise indicated, all references to years relate to fiscal years rather than calendar years.





Principles of Consolidation and Basis of Presentation





The consolidated financial statements include the Companys accounts and the accounts of its subsidiaries. All significant intercompany balances and transactions have
been eliminated. Certain prior year consolidated financial statement balances have been reclassified to conform to the 2002 presentation.





Use of Estimates





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





Concentration of Credit Risk





Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. The Company believes that the concentration of credit risk in accounts receivable is
substantially mitigated by the Companys credit evaluation process and the high level of creditworthiness of its customers. The Company performs ongoing credit evaluations of its customers and sets conditions and limits the amount of credit
extended when deemed necessary. The Company generally does not require collateral from its customers. As of January 31, 2002, one customer, Gateway, accounted for 84% of accounts receivable. As of January 31, 2001, one customer accounted for more
than 76% of accounts receivable. In addition, as of January 31, 2002, the Company had received a customer advance of $3.0 million from Gateway.





Foreign Currency Translation





Assets and liabilities of
foreign subsidiaries, where the functional currency is the local currency, are translated using exchange rates in effect at the end of the period, and revenue and costs are translated using average exchange rates for the period. Gains and losses on
the translation into U.S. dollars of amounts denominated in foreign currencies are included in the results of operations for those operations whose functional currency is the U.S. dollar, and as a separate component of stockholders equity for
those operations whose functional currency is the local currency.





Cash and Cash Equivalents





Cash consists of cash on hand and amounts deposited with high quality financial institutions. Cash equivalents are highly
liquid debt instruments with maturities of three months or less as of the date of purchase.




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##### Table of Contents



VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Inventory





Inventories are valued at the lower of cost or market value. Cost is determined using LIFO (last-in, first-out) method.





Property and Equipment





Property and equipment are stated at cost. Depreciation for property and equipment is provided using the straight-line method over the estimated useful lives of the respective assets as follows:





Computer hardware

2-5 yearsComputer software

5 yearsOffice equipment, furniture and fixtures

5 yearsMotor vehicle

3 years





Depreciation for leasehold improvements is provided using the
straight-line method over the shorter of the estimated useful lives of the respective assets or the remaining lease term. Depreciation expense for 2002, 2001 and 2000 was $1.85 million, $149,575 and $40,275, respectively.





The Company recorded $768,256 for loss on disposal of property and equipment for 2002 when the Company closed its Washington facilities
and disposed of its assets in its Ventura and Los Angeles facilities.





Impairment on Long-lived Assets





The Company reviews long-lived assets, certain identifiable intangible assets and goodwill related to these
assets for impairment. For assets to be held and used, including acquired intangibles, the Company initiates a review whenever events or changes in circumstances indicate that the carrying value of a long-lived asset may not be recoverable.
Recoverability of an asset is measured by comparison of its carrying value to the future undiscounted cash flows that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying value exceeds
the projected discounted future operating cash flows. Assets to be disposed of and for which management has committed a plan to dispose of the assets, whether through sale or abandonment, are reported at the lower of carrying value or fair value
less costs to sell.





Intangible Assets





Intangible assets, principally goodwill, are amortized on the straight-line method over their estimated useful lives of three years. Goodwill represents the excess of the
purchase price paid over the fair value of tangible and identifiable intangible net assets acquired. The Company regularly assesses the carrying amounts of intangible assets for impairment when operating profit (loss) from the related business
indicates the carrying amounts of the assets may not be recoverable. Carrying values are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of intangible assets may not be recoverable. Amortization
for 2002, 2001 and 2000 was $529,846, $881 and $396,396, respectively.





As part of the acquisition of OTT, the
Company recorded goodwill of $4.6 million, and was amortizing it over three years. For the year ended January 31, 2002, the Company determined in accordance with the above, that the goodwill did not continue to carry the value originally
anticipated. As a result, the assets have been fully reduced to $0 and the Company recorded $4.1 million as an impairment of goodwill.




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VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Advance from Customers





Customer prepayments are deferred (classified as a liability) and recognized over future periods based on customer-dictated terms of
settlement against outstanding accounts receivable. The Company received a $3.0 million advance from Gateway under a support services agreement (described above in note 1Risks and Uncertainties), which will be used to offset outstanding
accounts receivable from Gateway at a monthly rate from May 2002 through October 2004.





Revenue Recognition





The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery or performance has
occurred, the sales price is fixed or determinable and collectibility is probable or reasonably assured.





Reseller Agreements





Revenues from reseller agreements are recognized when products are
shipped to customers in accordance with the above criteria. Shipping and handling costs are included in cost of goods sold. The Company has recognized revenue as the amount invoiced to customers under the guidance of EITF 99-19 Reporting
Revenue Gross as a Principal versus net as an Agent, because the Company is responsible for fulfillment, including taking and accepting orders, the Company sets the price of the products to the ultimate customers, and the Company bears
inventory and credit risk.





Support Services Agreements





The Company provides support services throughout the Asia-Pacific region on behalf of customers. These services include call center
operations, repair work for products covered by the manufacturers original warranty and helpdesk functions. Under these contracts, the Company generally receives specified monthly fees (Fixed Revenues) over the terms of the
contracts, which are based on a specified number of support transactions in a specified period of time (Fixed Transactions). For each support transaction performed by the Company (Incremental Transaction) in excess of the
Fixed Transactions for a specified period, additional fees are payable by customers, based on a predetermined fee for each Incremental Transaction (Variable Revenues). Fixed Revenues are recognized on an accruals basis, as payments fall
due. Variable Revenues are recognized as Incremental Transactions are performed.





Other
Business Process Outsourcing Agreements





The Company accounts for revenues under its other business process
outsourcing agreements with its clients under the guidance of SAB No.101 and also EITF 00-3 and 00-21. This type of agreement generally has two main revenue sources: set-up fees during the implementation period when the Company performs set-up
procedures to facilitate delivery of its services and subsequent monthly charges for use of these services.





The
Company defers and recognizes set-up fees from this type of agreement on a straight-line basis over the initial term of the contract or the expected period during which the specified services will be performed, with costs related to implementation
being deferred and recognized on the same basis. Monthly transaction fees under this type of agreement are accounted for separately and are recognized on a monthly basis.





Research and development





Research and development expenditures are charged to operations as incurred, until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to
customers. To date, the Companys software has not been available for general release concurrent with technological feasibility, and accordingly, no development costs have been capitalized.




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VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Advertising Costs





Advertising costs are expensed as incurred. Advertising expenses for 2002, 2001 and 2000 were $99,681, $939,576 and $245,680,
respectively.





Income Taxes





The asset and liability approach is used to account for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized.





Other Comprehensive Income (Loss)





Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under generally accepted accounting principles in the United States are included in
comprehensive income (loss) but are excluded from net income (loss), as these amounts are recorded directly as an adjustment to stockholders equity, net of tax. The Companys other comprehensive income (loss) is composed of unrealized
gains and losses on foreign currency translation adjustments.





Stock-Based Compensation





The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, (SFAS 123), which allows companies to continue to recognize compensation expense pursuant to Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock
Issued to Employees, but requires companies to disclose the effect on earnings of compensation expense for stock options based on the fair value of the options at the grant date. Accordingly, employee compensation cost for stock options is
measured as the excess of the fair market value over the exercise price at the measurement date.





Stock-based
compensation charges were recorded as follows:





For the Year Ended January 31,2002

2001

2000Selling, general and administrative expenses

$
2,287

$
12,271

$
424Research and development expenses


829


5,432


$
3,116

$
17,703

$
424





Loss Per Share





Basic net loss per share is computed by dividing net loss by the weighted average shares of common stock outstanding during the year.
Diluted net income per share is computed by dividing net income by the weighted average shares of common stock and potential common shares outstanding during the year. Potential common shares outstanding consist of dilutive shares issuable upon the
exercise of outstanding options and warrant to purchase common stock as computed using the treasury stock method. Because the Company had a net loss in each of 2002, 2001 and 2000, potential common shares outstanding are excluded from the
computation of diluted net loss per share as their effect is anti-dilutive.





The following table is a calculation
of basic and diluted loss per share (in thousands):





For the Year Ended January 31,2002


2001


2000Net loss

$
(20,444
)

$
(27,599
)

$
(5,523
)Lessdeemed non-cash dividend to preferred shareholders


(2,095
)


(14,496
)


Basic loss available to common shareholders

$
(22,539
)

$
(42,095
)

$
(5,523
)




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VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







As of January 31, 2002, there were potential shares of common stock
outstanding of 107.2 million shares with a weighted average price of $0.31 per share. These shares were not considered in calculating diluted net loss per share, because their effect was anti-dilutive.





Segment Data





The Company reports segment data based on the management approach which designates the internal reporting that is used by the Company for making operating decisions and assessing performance as the source of the
Companys reportable operating segments.





Recent Pronouncements





In July 2001, the Financial Accounting Standards Board (FASB) issued FASB Statements Nos. 141 and 142 (SFAS 141
and SFAS 142), Business Combinations and Goodwill and Other Intangible Assets. SFAS 141 replaces APB 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase
accounting related to the recognition of intangible assets and accounting for negative goodwill. Adoption of SFAS No. 141 did not have an impact on the Companys financial position and results of operations.





SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under SFAS 142, goodwill and
indefinite-lived intangibles will be tested annually and whenever events or circumstances occur indicating that they might be impaired. Goodwill is tested for impairment employing a two-step method. First the fair value of the reporting unit is
compared to its carrying amount. If the fair value is less than the carrying amount, the impairment is measured as the excess of recorded goodwill over its implied fair value. Indefinite-lived intangibles are tested for impairment by comparing the
carrying amount to the fair value. SFAS 141 and SFAS 142 are effective for all business combinations completed after June 30, 2001. Upon adoption of SFAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1,
2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under SFAS 141 will be reclassified to goodwill. The Company adopted SFAS 142 on February 1, 2002, the beginning of 2003.





In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. SFAS No. 144 applies to all long-lived assets (including discontinued operations) and
consequently amends APB No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of a Division of a Business. SFAS No. 144 develops an accounting model for long-lived assets that are to be disposed of by sale
and requires the measurement to be at the lower of book value or fair value, less the cost to sell the assets. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1)
can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company does not expect the provisions of SFAS No. 144 to have a significant impact on its financial
position or operating results following its adoption on February 1, 2002.





3.    FAIR VALUE OF FINANCIAL
INSTRUMENTS





Carrying amounts of certain of the Companys financial instruments including cash
equivalents, accounts receivable, current notes receivable, accounts payable and current notes payable approximate fair value due to their short maturities.




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VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







4.    CONSOLIDATED BALANCE SHEETS DETAILS





January 31,2002


2001(in thousands)Accounts receivable:Trade accounts receivable

$
2,993


$
4Allowance for doubtful accounts


(107
)


$
2,886


$
4Other current assets:Deferred costs

$
282


$
Deposits


429



Other receivables


199



$
910


$
Property and equipment:Computer hardware

$
3,119


$
778Computer software


3,800



129Office equipment, furniture and fixtures


759



103Leasehold improvements


1,218



89Motor vehicle


15



8,911



1,099Accumulated depreciation


(1,679
)


(167
)$
7,232


$
932Accrued expenses:Staff accruals

$
958


$
280Accrued interest


308



Accrual for subcontract costs


1,144



Accrual for holdback shares


297



Deferred revenue


308



Other accruals


595



32$
3,610


$
312





5.    NOTES RECEIVABLERELATED PARTY





The Company had unsecured notes receivable from the following former and current executive officers and directors: Robert
McShirley, Richard McShirley, Samuel Bradt, P. Scott Turner, and Sandford T. Waddell as at January 31, 2001.





Certain of these notes, with an aggregate principal amount of $178,798, were issued to the Company in connection with the exercise of 636,100 stock options in May 1999 by Robert McShirley, Richard McShirley and Mr. Bradt, each of
whom resigned from the Company in February or March 2001. These notes, bearing interest at a rate of 6% per annum, were due on demand. During 2002, the unsecured notes of Richard McShirley and Mr. Bradt of $110,634, were written off, and the
unsecured note of Robert McShirley was cancelled by the Company as part of the arrangement described below whereby Robert McShirley transferred 300,000 shares of common stock to the Company.




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VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Additional notes, with an principal amount of $124,000 each, were
issued to the Company in September 2000 in connection with the issuance of 19,501 shares of Series 2-A Convertible Preferred Stock to each of Mr. Waddell, the Companys former Chief Financial Officer, and Mr. Turner, the Companys
former Chief Operating Officer. These notes were secured by the shares of related stock and, when originally issued, bore interest at an annual rate of 8%. The total outstanding principal balance of Mr. Waddells note at January 31, 2001, was
$124,000, and the total outstanding principal balance of Mr. Turners note at January 31, 2001, was $124,000.





On March 8, 2001, in connection with Mr. Turners resignation, the terms of Mr. Turners note were revised to change the maturity date from September 18, 2003 to 90 days from his last day of employment with the Company and
to limit the Companys recourse solely to the shares of Series 2-A Convertible Preferred Stock and related warrants securing Mr. Turners obligations under his note. The average price per share of the Companys common stock on March
8, 2001 was $1.53. The balance of Mr. Turners note on March 8, 2001 was $124,000. In addition, this note was combined with another note in principal amount of $50,000 representing amounts borrowed from the Company in October 2000 and
originally subject to a two-year promissory note due on October 12, 2002, also bearing interest at a rate of 8% per annum. On June 28, 2001, the Company demanded payment in full of the combined note (which then had a balance of $174,000), and
thereafter exercised its rights against the collateral securing Mr. Turners obligations and took possession of the Series 2-A Convertible Preferred Stock and warrants which secured the note. The average price per share of the Companys
common stock on June 28, 2001 was $0.37. The Company believed its only effective recourse was to take the collateral. The Company expensed $177,038 including accrued interest for the loss on taking possession of the collateral and there was no
remaining balance on the combined note of Mr. Turner.





On July 6, 2001, the terms of Mr. Waddells note were
revised to change the maturity date from September 18, 2003, to July 6, 2002, and to limit the Companys recourse solely to the shares of Series 2-A Convertible Preferred Stock securing Mr. Waddells obligations under his note. The average
price per share of the Companys common stock on July 6, 2001 was $0.33. The balance of Mr. Waddells note on July 6, 2001 was $124,000. The outstanding balance of Mr. Waddells note of $124,000 was written off on August 1, 2001
pursuant to an agreement under which the Company waived its right to exercise its rights against the collateral securing Mr. Waddells obligations and instead cancelled Mr. Waddells grant of 125,000 non-qualified employee options as of
August 1, 2001. The average price per share of the Companys common stock on August 1, 2001 was $0.21.





In
October 2000, Robert McShirley borrowed $400,000 from the Company in exchange for a secured 90-day promissory note bearing interest at a rate of 8% per annum and due on January 9, 2001. The note from Mr. McShirley was secured by 300,000 shares of
the Companys common stock held by Mr. McShirley. The Companys sole recourse was to such shares. In October 2000, Mr. McShirley repaid the Company $250,000 of the original balance, leaving an outstanding balance of $150,000. On January
30, 2001, the Board of Directors of the Company approved an extension of this note for 90 days. On March 8, 2001, in connection with Mr. McShirleys resignation, the terms of the note were extended to August 27, 2001, and all notes issued to
the Company by Mr. McShirley were collectively secured by 300,000 shares of common stock held by Mr. McShirley, with the Companys recourse limited solely to such shares. The average price per share of the Companys common stock on March
8, 2001 was $1.53. Effective July 31, 2001, Mr. McShirley transferred such 300,000 shares of common stock to the Company, which cancelled this note and a note in the principal amount of $68,164 and expensed $138,332 including accrued interest on the
loss on cancellation of the note. There was no remaining balance on the notes receivable from Mr. McShirley. The average price per share of the Companys common stock on July 31, 2001 was $0.33.




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VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







6.    CONVERTIBLE NOTES PAYABLE





Bridge Loan Financing





In connection with the acquisition of NetCel360 Holdings Limited (the Acquisition), the Company assumed approximately $3.7 million of bridge financing (the Bridge Loan) of
NetCel360. Phillip Kelly and Dennis Smith, the founders of NetCel360, together held approximately $2.66 million in principal amount of the Bridge Loan. Subsequent to the Acquisition, Mr. Kelly became co-chairman and chief executive officer, and Mr.
Smith, vice-chairman, chief financial officer and chief strategy officer, of the Company. Asia Internet Investment Group I, L.P. (AIIG), an investment fund that held approximately 2.8% of NetCel360, held approximately $294,000 in
principal amount of the Bridge Loan. I. Steven Edelson, the Acting Chairman of the Board of Directors and acting chief executive officer of the Company at the time of the Acquisition, and Nathaniel Kramer, a director of the Company, are two of the
managers of the general partner of AIIG. Prior to the Acquisition, other funds managed by Messrs. Edelson and Kramer beneficially owned in the aggregate approximately 3.5% of the Company, and funds managed by Mr. Edelson but not Mr. Kramer
beneficially owned approximately an additional 0.47% of the Company.





Approximately $1.26 million in principal
(plus accrued interest) under the Bridge Loan held by Mr. Kelly, Mr. Smith and AIIG was converted into Series A convertible promissory notes (the Series A Convertible Notes) of the Company pursuant to a Convertible Note Purchase
Agreement dated June 25, 2001 (the Convertible Note Purchase Agreement) (as described below). In addition, $200,000 in principal (plus accrued interest) under the Bridge Loan held by Mr. Kelly was repaid in cash. The remaining $2.25
million of principal amount under the Bridge Loan became due for repayment on December 31, 2001, bearing interest at the rate of 5% per annum. Under the terms of the Convertible Note Purchase Agreement, the Company was granted the right to repay the
Bridge Loan by delivering shares of the Companys common stock at a conversion price of $0.20 per share.





On
December 18, 2001 the Company repaid the Bridge Loan by delivering 11,620,310 shares of the Companys common stock to the holders of the Bridge Loan. As of January 31, 2002, there was no amount outstanding under the Bridge Loan.





A deemed discount existed at the date of issue of the Bridge Loan, due to the resultant beneficial conversion options. In
accordance with EITF 98-5 and EITF 00-27, the deemed discount of $1.9 million for the fair value assigned to the convertible feature is being amortized over the period from May 24, 2001 to December 18, 2001.





Series A Convertible Notes





Under the Convertible Note Purchase Agreement, the Company issued a total of $4.56 million in principal amount of Series A Convertible Notes, consisting of $3.3 million of new funding and approximately
$1.26 million of principal and accrued interest converted from the Bridge Loan (see above). Of this amount, $2.0 million in principal is held by executive officers of the Company, and the remainder is held by affiliates of the Company. The Series A
Convertible Notes bear interest at 10.0% per annum and mature, unless otherwise paid or discharged, on June 30, 2003. The Series A Convertible Notes are convertible, at the holders option, into a number of shares of the Companys Series
3-A Convertible Preferred Stock equal to the outstanding principal and accrued interest of the Series A Convertible Notes divided by $60. The Series 3-A Convertible Preferred Stock will be junior to the Companys outstanding Series 1-A and
Series 2-A Convertible Preferred Stock in liquidation preference.




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VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







A deemed discount existed at the date of issue of the Series A
Convertible Notes, due to the resultant beneficial conversion options. In accordance with EITF 98-5 and EITF 00-27, the deemed discount of $4.5 million for the fair value assigned to the beneficial conversion option of the Series A Convertible Notes
is being amortized over the period from June 25, 2001 to June 30, 2003.





Series B Exchangeable Notes





On July 12, 2001, the Company issued approximately $4.25 million of principal amount of exchangeable
promissory notes (the Series B Exchangeable Notes) pursuant to an Exchangeable Note and Warrant Purchase Agreement (the Series B Exchangeable Note Agreement). Of this amount, $1.4 million in principal was held by officers of
the Company. The Notes were repaid during the year ended January 31, 2002. The Series B Exchangeable Notes bear interest at 10% per annum and mature, unless otherwise paid or discharged, on June 30, 2003. Proceeds from the Series B Exchangeable
Notes were used for the sole purpose of posting a deposit (the Deposit) with a commercial bank to support a letter of credit (the Letter of Credit) for the benefit of Gateway Manufacturing under the Reseller Agreement, to
otherwise provide certain types of credit support for the benefit of Gateway Manufacturing under the Reseller Agreement or to pay fees and expenses relating to the Series B Exchangeable Notes and warrants, the letter of credit for Gateway
Manufacturing or other credit support. The terms of the Series B Exchangeable Note Agreement required the Company to repay the Notes if among other things the proceeds from the sale of the Series B Exchangeable Notes and warrants were no longer
needed for credit support under the Reseller Agreement (including if the Deposit was no longer required as a result of the termination or expiration of the Reseller Agreement). The Reseller Agreement was terminated as of November 1, 2001. Upon
payment in full of all remaining accounts payable owed by the Company to Gateway Manufacturing under the Reseller Agreement, the Letter of Credit was terminated on December 27, 2001, permitting the release of the Deposit and repayment of principal
and interest to holders of the Notes. As of January 31, 2002, there were no amounts outstanding under the Series B Exchangeable Notes.





A deemed discount existed at the date of issue of Series B Exchangeable Notes, due to both the fair value of attached warrants and the resultant beneficial conversion options. In accordance with EITF 98-5 and EITF 00-27, the
deemed discount of $1.3 million for the fair value assigned to the warrants and the deemed discount due to the beneficial conversion option of $2.7 million are being amortized over the period from July 12, 2001 to June 30, 2003. The fair value of
the warrants was determined using the Black Scholes pricing model using the following assumptions: a 5-year expected life, volatility factor of 160%, risk free rate of 6.15%, and no expected dividend yield.





Series B-1 Exchangeable Notes





On January 31, 2002, the Company issued approximately $2.94 million of principal amount of exchangeable promissory notes (the Series B-1 Exchangeable Note) pursuant to an Exchangeable Note
and Warrant Purchase Agreement dated January 28, 2002 (the Series B-1 Exchangeable Note Agreement). Of this amount, $2.82 million in principal is held by executive officers and affiliates of the Company. The Series B-1 Exchangeable Notes
bear interest at 10% per annum and mature, unless otherwise paid or discharged, on June 30, 2003. These Series B-1 Exchangeable Notes were issued to holders of $2.94 million in principal and accrued interest of Series B Exchangeable Notes that
elected to receive Series B-1 Exchangeable Notes rather than be repaid in cash when the Company repaid the Series B Exchangeable Notes. Interest on Series B-1 Exchangeable Notes issued in exchange for Series B Exchangeable Notes began to accrue as
of December 28, 2001, to reflect that repayment of the Series B Exchangeable Notes took place on December 28, 2001. On February 8, 2002, the Company issued an additional $50,000 in principal amount of Series B-1 Exchangeable Notes and related
warrants to investors. The interest on these notes began to accrue upon date of issue. Until May 30, 2002, the Company may issue up to




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VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




an additional $1.46 million in principal amount of Series B-1 Exchangeable Notes.Proceeds from the Series B-1 Exchangeable Notes may be used for the Companys general corporate purposes. If
the Series B-1 Exchangeable Notes are not repaid prior to August 15, 2002, the holders may, at their option, exchange principal and interest due under the Series B-1 Exchangeable Notes for Series A Convertible Notes. The Series A Convertible Notes
are described above in this Footnote 6.





A deemed discount existed at the date of issue of Series B-1 Exchangeable
Notes, due to both the fair value of attached warrants and the resultant beneficial conversion options. In accordance with EITF 98-5 and EITF 00-27, the deemed discount of $0.6 million for the fair value assigned to the warrants and the deemed
discount due to the beneficial conversion option of $2.3 million are being amortized over the period from January 31, 2002 to June 30, 2003. The fair value of the warrants was determined using the Black Scholes pricing model using the following
assumptions: a 1.4 year expected life, volatility factor of 80%, risk free rate of 5%, and no expected dividend yield.





Discount on Convertible Notes and Bridge Loan and Beneficial Conversion Features





In
conjunction with the assumption of the Bridge Loan, the sales of Series A Convertible Notes, the Series B Exchangeable Notes and the Series B-1 Exchangeable Notes and the issuance of warrants (described in note 7Investor Warrants), the Company
recorded a discount totaling $13.37 million for the issue of warrants and the beneficial conversion features of the bridge loan, convertible notes and exchangeable notes which were recorded as additional paid in capital during 2002 as follows (in
thousands):





Beneficial conversion features

Warrants

TotalBridge loan

$
1,913

$


$
1,913Series A Convertible Notes


4,483





4,483Series B Exchangeable Notes


2,723





2,723Series B Warrants





1,325


1,325Series B-1 Exchangeable Notes


2,290





2,290Series B-1 Warrants





639


639$
11,409

$
1,964

$
13,373





Upon extinguishment of the Series B Exchangeable Notes in December
2001, the Company reversed $2.98 million of non-cash beneficial conversion feature from additional paid in capital. The extinguishment resulted in an extraordinary loss of $0.3 million.





Related Party interests in Bridge Loan and convertible notes





Executive officers and affiliates of the Company hold the following principal amounts of convertible notes as of January 31, 2002 (in thousands):





Series A Convertible Notes (1)(2)

$
4,558Series B-1 Exchangeable Notes (2)


2,818$
7,376


---

|(1) |  | This amount includes principal amounts held by Mercantile Capital Partners I, L.P., of which Mr. I. Steven Edelson, the co-chairman of the Company, and Mr.
Nathaniel C.A. Kramer, a director of the Company, are members of the general partner, and Asia Internet Investment Group I, L.P., of which Messrs. Edelson and Kramer are managers of the general partner.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | This amount includes principal amounts held by BAPEF Investments XII, Limited, one of our greater-than-5% shareholders.
|--- |  | -----------------------------------------------------------------------------------------------------------------------



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VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







7.    INVESTOR WARRANTS





In connection with issuing the Series B Exchangeable Notes under the Series B Exchangeable Note Agreement, the Company issued warrants to
purchase 21,257,500 shares of its common stock (the Series B Warrants) to purchasers of the Series B Exchangeable Notes. The Series B Warrants have an exercise price of $0.10 per share and expire five years from date of issue. The
exercise price is subject to adjustment in the event of stock splits or combinations; certain dividends and distributions; reorganizations, mergers, consolidations or sales of assets; or a sale of shares of common stock below $0.10 a share.





In connection with issuing the Series B-1 Exchangeable Notes under the Series B-1 Exchangeable Note Agreement,
the Company issued warrants to purchase 14,695,980 shares of its common stock (the Series B-1 Warrants) to purchasers of the Series B-1 Exchangeable Notes. The Series B-1 Warrants have an exercise price of $0.10 per share and expire five
years from date of issue. The exercise price is subject to adjustment in the event of stock splits or combinations; certain dividends and distributions; reorganizations, mergers, consolidations or sales of assets; or a sale of shares of common stock
below $0.10 a share.





8.    COMMITMENTS AND CONTINGENCIES





Operating Leases





We lease our operating facilities under non-cancelable operating leases that expire at various dates through 2004. Certain of these leases contain renewal options. Rent expense was $1,063,139 in 2002, $243,315 in 2001 and
$114,221 in 2000. As of January 31, 2002, future minimum lease commitments were as follows (in thousands):





For the Year Ended January 31,2003

$
9782004


1432005


37$
1,158





Vendor Contracts





The Company has entered into two vendor contracts to service its obligation under its support services agreement with Gateway. The
contracts call for the Company to pay minimum aggregate fees of $1.24 million during the period from November 1, 2001 to October 31, 2002 for services rendered under such contracts. Management believes that the actual amounts to be paid under such
contracts in the course of fulfilling the Companys obligations under the support services agreement will exceed such minimum amounts.





Litigation





In October 2001, two lawsuits were filed
against Vsource by purported holders of Series 2-A Convertible Preferred Stock before the United States District Court for the Northern District of Illinois entitled Crestview Capital Fund, LLP v. Vsource, Inc., Case No. 01 C 7833, and
Abrahams v. Vsource, Inc., Case No. 01 C 7831. On January 3, 2002, the Companys motion to transfer these cases to the Central District of California was granted. Both lawsuits allege that the Company failed to register the underlying
common stock under the Securities Act of 1933, an obligation allegedly undertaken in connection with the original sale of those securities. Plaintiffs seek to recover at least $850,000 and $200,000, plus interest, respectively, plus attorneys
fees and




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VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




costs. At this early stage of the proceedings, it is difficult to determine the outcome of this litigation or the range of a potential loss with any degree of certainty; however, the Company
denies any and all liability and intends to vigorously defend against these charges.





9.    ACQUISITIONS





Acquisition of OTT





On December 14, 2000, the Company entered into an Agreement and Plan of Merger with OTT Acquisition Corp., a California corporation, OTT, Colin P. Kruger and Michael
Shirman (the Merger Agreement). On January 22, 2001, the transaction closed in accordance with the Merger Agreement. The merger was accounted for as a purchase and as a taxfree reorganization under Section 368(a) of the Internal
Revenue Code.





The aggregate purchase price payable at closing was 1,089,389 shares of the Companys common
stock. The number of shares was calculated based upon a specific formula in the Merger Agreement. The purchase price was subject to adjustment based on reductions or increases in the net book value of the assets of OTT from September 30, 2000
through closing. In accordance with Accounting Principles Board Opinion 16, the total recorded value of the shares issued was based on the average market price of the Companys stock for a stated period both before and after the Companys
announcement of the acquisition. The Company recorded $4.6 million as Goodwill as a result of the acquisition of OTT. During the year ended January 31, 2002, the Company determined based on the estimates of expected undiscounted cash flows, the
assets and the goodwill relating to the OTT merger did not continue to carry the value originally anticipated. As a result, the assets have been fully reduced to $0 and the Company recorded $4.1 million as an impairment of goodwill for the year
ended January 31, 2002.





Acquisition of Assets of NetCel360





On June 22, 2001, pursuant to the Acquisition Agreement dated May 24, 2001 between the Company and NetCel360, as amended by the Amendment
to Acquisition Agreement, dated June 22, 2001 (the Acquisition Agreement), the Company purchased substantially all of the assets of NetCel360, including 100% of most of its subsidiaries (collectively, the NetCel360
Corporations), in exchange for 3,709,699 shares of common stock of the Company. Of this amount, 2,774,213 shares were issued at the closing and the remaining 935,486 shares were issued to NetCel360 on February 7, 2002. This purchase price was
determined after negotiations between the Company and NetCel360. Based on the average closing price from May 23, 2001 to May 29, 2001, the shares had an average fair market value of $1.3 million. The NetCel360 Corporations were providers for
outsourcing services and distribution services to Fortune 500 and Global 500 companies in the Asia Pacific region.





Excluding NetCel360 Corporations cash balance of $499,000, the net assets acquired had a fair market value of $1.7 million, which had been reduced by a negative goodwill of $0.7 million offset against property and equipment,
and was allocated as follows (in thousands):





Property and equipment, net

$
8,159Other assets


992Liabilities assumed


(7,478
)$
1,673




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VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The purchase price was allocated to the assets acquired, including
tangible assets and liabilities assumed based upon the fair value of such assets and liabilities on the date of acquisition and was based on the Companys estimates of fair value with the excess assets written down for negative goodwill. The
other assets consisted primarily of accounts receivable and other tangible assets. The liabilities assumed consisted primarily of accounts payable, trade liabilities and amount payable to employees.





The following unaudited pro forma information combines the results of operations as if the acquisition of the NetCel360 Corporations were
consummated at the beginning of the periods presented (in thousands, except per share data):





(Unaudited)


(Unaudited)January 31, 2002


January 31, 2001Net revenue

$
14,154


$
4,651Net loss

$
(29,832
)

$
(51,225
)Net loss available to common shareholders

$
(31,927
)

$
(65,721
)Weighted average number of shares used in computing per share amounts


23,686



19,730Net loss per share

$
(1.35
)

$
(3.33
)





The pro forma financial information presented above is not
necessarily indicative of the results of operations that would have occurred had the acquisitions taken place at the beginning of the periods presented or future results of operations of the combined companies.





10.    PREFERRED STOCK





Effective February 24, 2000, the Company authorized 5,000,000 shares of preferred stock of which 2,900,000 shares were designated as Series 1-A Convertible Preferred Stock, of which 2,802,000 shares were
initially issued, with a conversion feature of $2.50 per share. The remaining 2,100,000 authorized shares were designated as Series 2-A Convertible Preferred Stock, of which 1,672,328 were initially issued, with rights, preferences and
privileges as designated by the board of directors. (See discussion below on Series 2-A Convertible Preferred Stock.)





The Company allocated the net proceeds of $6.87 million from the issuance of the Series 1-A Convertible Preferred Stock to an embedded beneficial conversion feature. The deemed non-cash discount resulting from the allocation was
fully amortized through retained earnings at issuance. In the event of any liquidation or dissolution, either voluntary or involuntary, the holders of the Series 1-A Convertible Preferred Stock shall be entitled to receive, prior and in preference
to any distribution of any of the assets or surplus funds, to the holders of the common stock by reason of their ownership thereof, a preference amount per share consisting of the sum of (A) $2.50 for each outstanding share of Series 1-A Convertible
Preferred Stock, and (B) an amount equal to declared but unpaid dividends on such shares, if any. Each share of Series 1-A Convertible Preferred Stock shall be convertible at any time after the date of issuance of such shares, into such number of
fully paid shares of Common Stock as is determined by dividing the Original Issue Price by the then applicable Conversion Price, in effect on the date the certificate evidencing such share is surrendered for conversion. Each share of Series 1-A
Convertible Preferred Stock, subject to the surrendering of the certificates of the Series 1-A Convertible Preferred Stock, shall be automatically converted into shares of common stock at the then effective Conversion Price, immediately upon closing
of a public offering of the Companys common stock with an aggregate gross proceeds of at least $10 million and a per share price of at least five dollars, or at the election of the holders of a majority of the outstanding shares of Series 1-A
Convertible Preferred Stock.







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VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




The holder of each share of Series 1-A Convertible Preferred Stock shall have the right to that number of
votes equal to the number of shares of common stock, which would be issued upon conversion of the Series 1-A Convertible Preferred Stock. Holders of the Series 1-A Convertible Preferred Stock are entitled to noncumulative dividends, if declared by
the Board of directors, of $0.20 per share annually. Under certain circumstances, such as stock splits or issuances of common stock at a price less than the issuance price of the Series 1-A Convertible Preferred Stock, these shares are subject to
stated Series 1-A Conversion Price adjustments.There were 1,703,741 shares of Series 1-A Convertible Preferred Stock issued and outstanding at January 31, 2002 with an aggregate liquidation value of $4.3 million. As a result of issuances during the
year ended January 31, 2002 of common stock or securities convertible into common stock at a price less than the issuance price of the Series 1-A Convertible Preferred Stock, the conversion price of the Series 1-A Convertible Preferred Stock was
reduced to $0.82 per share as of February 5, 2002.





In conjunction with expenses relating to the issuance of the
Series 1-A Convertible Preferred Stock, 235,985 warrants were granted at an exercise price of $6.00 per share and 150,706 warrants were granted at an exercise price of $2.50 per share. During the quarter ended July 31, 2000, 120,000
warrants were granted at an exercise price of $2.00 per share (the $2 Warrants), as compensation for services rendered. Ramin Kamfar, who subsequently was elected as a director of the Company, is a partner in a partnership that was
awarded 60,000 of the $2 Warrants.





During the period August 28, 2000 to September 18, 2000, the Company sold
1,672,328 shares of Series  2-A Convertible Preferred Stock with a conversion feature of $6.41 per shares and received $10.7 million, less offering costs.Each purchaser also received a warrant to purchase common stock at an exercise price of
$6.41 per share, with a five-year term. An aggregate of 145,550 such warrants were issued. In connection with the sales of the Series 2-A Convertible Preferred Stock, the Company issued warrants to purchase an aggregate of 144,881 shares of common
stock at exercise prices ranging from $6.41 to $6.69 as additional finders fees, commissions and other services in connection with the offering.





The Company allocated $7.6 million of the net proceeds from the issuance of the Series 2-A Convertible Preferred Stock to additional paid-in capital as required by an embedded beneficial conversion
feature. The deemed non-cash discount resulting from the allocation was fully amortized through retained earnings at issuance. In the event of any liquidation or dissolution, either voluntary or involuntary, the holders of the Series 2A
Convertible Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds, to the holders of the common stock by reason of their ownership thereof, a preference amount per share
consisting of the sum of (A) $6.41 for each outstanding share of Series 2-A Convertible Preferred Stock, and (B) an amount equal to declared but unpaid dividends on such shares, if any. Each share of Series 2-A Convertible Preferred Stock shall be
convertible at any time after the date of issuance of such shares, into such number of fully paid shares of common stock as is determined by dividing the original issue price by the then applicable conversion price (the Series 2-A Conversion Price),
in effect on the date the certificate evidencing such share is surrendered for conversion. Under certain circumstances, such as stock splits or issuances of common stock at a price less than the original issue price of the Series 2-A Convertible
Preferred Stock, these shares are subject to stated Series 2-A Conversion Price adjustments. There were 1,174,669 shares of Series 2-A Convertible Preferred Stock issued and outstanding at January 31, 2002 with an aggregate liquidation value of $7.5
million. As a result of issuances during the year ended January 31, 2002 of common stock or securities convertible into common stock at a price less than the issuance price of the Series 2-A Convertible Preferred Stock, the conversion price of the
Series 2-A Convertible Preferred Stock was reduced to $2.00 per share as of February 5, 2002.





During the year
ended January 31, 2002, 733,613 shares of Series 1-A Convertible Preferred Stock and 181,747 shares of Series 2-A Convertible Preferred Stock were converted into 915,360 shares of common stock.




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VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




During the year ended January 31, 2001, 364,646 shares of Series 1-A Convertible Preferred Stock and 296,411 shares of Series 2-A Convertible Preferred Stock were converted into shares of common
stock.





11.    STOCK OPTIONS AND WARRANTS





Warrants





In December 2000,
the Company terminated a strategic relationship with U.S. West, Inc. (now known as Qwest Communications) of Denver, Colorado, to which the two firms had agreed to make the Companys Virtual Source Network procurement application available to
Qwests business customers. In exchange for services to be rendered and a nominal amount of cash, the Company had granted to Qwest 600,000 warrants with a three-year term, at an exercise price of $5.00. The terms of the distribution and
marketing agreement were renewable each year; however, it was subject to cancellation by either party giving notice of its intent to terminate the agreement. The warrants were granted in the third quarter of the fiscal year when the Companys
stock was valued at $17.50 per share, resulting in a charge to the Company of $8.4 million. The Company recognized the full balance as a marketing expense in the year ended January 31, 2001 due to the cancellation of this arrangement.





On July 12, 2001, the Company issued Series B Warrants to purchase 21,257,500 shares of its common stock. The Series B Warrants
have an exercise price of $0.10 per share and expire five years after the date of issue. On January 31, 2002, the Company issued Series B-1 Warrants to purchase 14,695,980 shares of its common stock. The Series B-1 Warrants have an exercise price of
$0.10 per share and expire five years after the date of issue. The Company has also issued warrants in connection with the Companys Series 1-A and 2-A Convertible Preferred Stock and various warrants in connection with payment of services.





The following table summarizes information about warrant transactions for 2002, 2001 and 2000:





Number of Shares of Common Stock


Weighted Average Exercise PriceOutstanding at January 31, 1999




Granted

120,000


2.00Exercised




Cancelled




Outstanding at January 31, 2000

120,000


2.00Granted

1,733,421


6.37Exercised

(120,000
)

2.00Outstanding at January 31, 2001

1,733,421


6.37Granted

36,303,480


0.10Exercised

(120,000
)

2.00Cancelled

(201,697
)

4.51Outstanding and exercisable at January 31, 2002

37,715,204


0.36





Stock Options





On January 22, 2001, Company closed a Merger Agreement with OTT. In connection with the closing, two key employees of OTT were granted
options to purchase 100,000 shares each of the Companys common stock vesting over 24 months and with an exercise price of $6.41 per share.







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VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




Stock Options Plans





In November 2001, the Companys 2001 Stock Option/Stock Issuance Plan (the 2001 Plan) was adopted by the stockholders of the Company. The 2001 Plan allows
for the issuance of incentive stock options, non-statutory stock options and shares of common stock for either the immediate purchase of shares or as a bonus for services rendered, up to a maximum number of shares of the Companys common stock
equal to 20% of the total shares of common stock outstanding at the time the calculation is made, including, on an as-converted basis, all convertible preferred stock, convertible debt securities, warrants, options and other convertible securities
that are exercisable (but in the case of incentive stock option, no more than 20,000,000 shares of common stock). Options are generally granted for a term of ten years and generally vest over periods ranging from one to three years. The Company has
granted various non-qualified stock options to key executives, management and other employees at exercise prices equal to or below the market price at the date of grant.





In July 2000, the Company approved a stock option plan (2000 Plan). The 2000 Plan authorizes the grant of Incentive Stock Options and Non-statutory Stock
Options covering an aggregate of 795,000 shares of the Companys common stock (subject to limitations of applicable laws, and adjustment in the event of stock dividends, stock splits, reverse stock splits and certain other corporate events).
The 2000 Plan expires on July 6, 2010, unless it is terminated earlier or suspended by the board. The Plan is not subject to any provisions of the Employee Retirement Income Security act of 1974.





For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the one-year average vesting period of the options. If the
Company had determined compensation expenses based on the fair value at the grant date for its stock options in accordance with SFAS No. 123, the Companys net loss would have been increased to the pro forma amounts indicated below:





Year ended January 31,2002


2001


2000(in thousands)Net lossAs reported

$
(20,444
)

$
(27,599
)

$
(5,523
)Pro forma

$
(21,473
)

$
(28,412
)

$
(6,921
)Basic and diluted net loss available to shareholders per shareAs reported

$
(1.04
)

$
(2.63
)

$
(0.40
)Pro forma

$
(1.09
)

$
(2.68
)

$
(0.50
)





The pro forma disclosures provided are not likely to be
representative of the effects on reported net income for future years due to future grants and the vesting requirements of the stock options.





The weighted average fair value of stock options granted during 2002, 2001 and 2000 was $0.25, $14.24 and $2.13 respectively. The weighted average fair value of these stock options was estimated using
the Black-Scholes Option Pricing Model with the following weighted-average assumptions:





Year ended January 31,2002


2001


2000Dividend yield

0.00
%

0.00
%

0.00
%Expected volatility

218
%

161
%

30
%Risk-free rate of return

4.6
%

6
%

6
%Expected life (years)

2.5


10


5




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VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The following summarizes activities under the stock option plans:





Number of Options


Weighted-Average Exercise Price Per ShareYear ended January 31,


Year ended January 31,2002


2001


2000


2002

2001

2000Options outstanding at beginning of the period

1,845,312


1,643,250


1,136,100


2.57

0.85

0.49Grantedat above fair market value




339,200







9.13

at fair market value

7,944,008








0.26



at below fair market value

19,700,499


714,269


1,273,250


0.09

2.63

0.93Exercised




(209,334
)

(636,100
)



0.92

0.28Forfeited

(1,981,968
)

(642,073
)

(130,000
)

1.55

2.24

1.25Options outstanding at end of the period

27,507,851


1,845,312


1,643,250


0.20

2.57

0.85Options vested/exercisable at end of the period

14,064,971


1,065,390


676,856


0.25

1.24

0.72





The following summarizes information for stock options
outstanding as of January 31, 2002:





Number of options

Exercise price

Weighted-average exercise price

Weighted-average remaining contractual life26,715,507

$
0.01-0.29

$
.13

9.9519,169

$
0.59-2.00

$
.64

6.355,175

$
2.81-3.75

$
2.92

7.2203,000

$
6.41-6.94

$
6.42

9.015,000


$10.00

$
10.00

8.227,507,851





For 2002, 2001 and 2000, the Company recorded non-cash stock-based
compensation expense in the amounts of $3.1 million, $17.7 million and $0.4 million, respectively.





Employee Stock Purchase Plan





In November 2001, the stockholders of the Company approved an
Employee Stock Purchase Plan (the Purchase Plan), which provides for the issuance of a maximum of 7.0 million shares of common stock. Eligible employees can have up to 10% of their earnings withheld, up to certain maximums, to be used to
purchase shares of the Companys common stock at certain plan-defined dates. The Purchase Plan was not in effect, and no shares of common stock were issued under it during 2002. It is expected that the price of common stock purchased under the
Purchase Plan will be equal to 85% of the lower of the fair market value of the common stock on the commencement date and specified purchase date of each six-month offering period.





13.    401(k) PLAN





The Company
sponsors a 401(k) (401(k) Plan) employee savings plan under which eligible U.S. employees may choose to defer a portion of their eligible compensation on a pre-tax basis, subject to certain IRS limitations. The 401(k) Plan qualifies
under Section 401(k) of the United States Internal Revenue Code of 1986, as amended.





Participants may elect to
defer 1% to 14% of their eligible compensation. For the year ended December 31, 2001, the maximum contribution by each participant was subject to the federal law limitation of $10,500. A




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VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




participants maximum deferral percentage and/or dollar amount may also be limited by other applicable IRS limitations.





Matching contributions are made by the Company in an amount equal to 100% of the participants contribution up to a maximum of 3% of such participants annual
eligible compensation, subject to certain regulatory and plan limitations. Contributions are subjected to tax only upon withdrawal from the 401(k) Plan and subject to penalties under certain circumstances. Participant contributions are 100% vested
immediately and are not subject to forfeiture. The employer matching contributions are vested at 100% after 2 years of employee service. Matching contributions were not material for 2002.





14.    INCOME TAXES





The
components of loss before income taxes are as follows:





January 31,2002


2001Loss subject to U.S. income taxes only

$
(9,975
)

$
(27,599
)Loss subject to foreign income taxes


(10,469
)


Net loss

$
(20,444
)

$
(27,599
)





The deferred tax assets and liabilities were comprised of the
following:





January 31,2002


2001Deferred tax assets:net operating loss carryforward

$
16,624


$
9,569employee compensation


527



527others


159



Gross deferred tax assets


17,310



10,096Deferred tax liabilities






Gross deferred tax liabilities






Net deferred tax assets


17,310



10,096Valuation allowance


(17,310
)


(10,096
)$



$






The Company has reduced its net deferred tax assets by a valuation
allowance because, in the opinion of management, it is currently more likely than not that such benefits will not be realized.





As of January 31, 2002, the Company had U.S. federal, state and foreign net operating loss carryforwards of approximately $40.8 million, $20.4 million and $7.4 million, respectively, available to offset future regular alternative
minimum and foreign taxation income. Approximately $39.5 million and $19.8 million, respectively, of the Companys U.S. federal and state loss carryforwards were losses incurred on or before June 22, 2001. Furthermore, the Company also has $1.3
million in deferred tax deductions relating to stock options granted to employees before June 22, 2001. Under the U.S. tax rules, the annual use of these loss carryforwards and deferred tax deduction may be limited because a cumulative
greater-than-50% change in ownership of the Company may have occurred within a three-year period prior to June 22, 2001. Such annual limitation may delay or permanently disallow the utilization of these loss carryforwards and deferred tax
deductions.




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VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The US federal loss carryovers will expire between 2011 and 2021 and
the state operating losses will expire between 2003 to 2006. Foreign net operating loss carryforwards are available indefinitely. The Company and its subsidiaries in all geographical regions are governed by the respective local income tax laws with
statutory tax rates ranging from 0% to 35%.





15.    SEGMENT DATA





Prior to the quarter ended July 31, 2001, the Companys principal business was the development and sale of a technology solution and
there was therefore only one segment. As such, the Company did not prepare segment reporting. Following the acquisition of the NetCel360 assets on June 22, 2001, it became appropriate for the Company to report by business segment. Geographically,
all of the Companys material long-lived assets reside in Malaysia. Management does not review the assets of the Company by geographical regions or business units.





The Companys segments are based on category of services provided and goods sold under reseller contracts. For the period from June 22, 2001 to January 31, 2002, the
categories are Financial Services, Customer Relationship Management (CRM), Supply Chain Management (SCM), Professional Services and Distribution Services. The Company evaluates its segments based on revenue from third parties and gross margin. Gross
margin is calculated after selling, general, and administrative expenses, and other overhead charges directly attributable to the segment and excluding certain corporate expenses managed outside the reporting segment. Costs excluded from the
segments primarily consist of general and administrative expenses that are managed on a corporate basis and other special charges including loss on impairment of goodwill and interest charges.





The following table sets forth summary information by segment (in thousands):





Revenue

Segment Profit(loss)Financial Services

$
361

$
(588
)Customer Relationship Management


4,005


1,524Supply Chain Management


5,073


3,118Professional Services


392


(113
)Distribution Services


2,881


(19
)Total

$
12,712

$
3,922





A reconciliation of consolidated segment profit to consolidated
loss before income taxes and extraordinary item is as follows:





Consolidated Segment Gross Profit

$
3,922Unallocated Corporate expenses


(16,556
)Impairment of long-lived assets


(4,079
)Interest expense and interest income


(567
)Non cash beneficial conversion feature expense


(2,824
)Net loss before extraordinary item

$
(20,104
)





The Companys customers are mainly large US corporations to
which the Company provides services throughout the Asia-Pacific region from shared service centers in Kuala Lumpur, Malaysia and Osaka, Japan. Customers are generally invoiced centrally in United States dollars for such services. Therefore, it is
not practical to analyze the Companys revenues in the Asia-Pacific region by individual country.




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VSOURCE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Geographic revenue is as follows (in thousands):





Revenues

2002

2001

2000United States

$
2

$
35

$
4Asia-Pacific


12,710





$
12,712

$
35

$
4





16.    SUBSEQUENT EVENTS





On February 5, 2002, the Company notified holders of its Series 1-A and Series 2-A Convertible Preferred Stock (collectively, the
Preferred Stock) that as a result of the Companys sale of shares of common stock or securities convertible into common stock at a price below the respective original issue prices of the Preferred Stock, the respective conversion
prices of the Preferred Stock had been reduced to $0.82 with respect to Series 1-A Convertible Preferred Stock and $2.00 with respect to Series 2-A Convertible Preferred Stock. Accordingly, with effect from February 5, 2002, a holder of Series 1-A
Convertible Preferred Stock will receive 3.04 shares of common stock for each share of Series 1-A Convertible Preferred Stock converted, and a holder of Series 2-A Convertible Preferred Stock will receive 3.20 shares of common stock for each share
of Series 2-A Convertible Preferred Stock converted. Prior to February 5, 2002, a holder of Preferred Stock would have received one share of common stock for each share of Preferred Stock converted.





In January 2002, the Company experienced a burglary in one of its warehouses in Malaysia. The items stolen related to inventory used to
fulfill its service obligations under its support services agreement with Gateway. These items were insured and the Company has filed claims with its insurers. The Company has not been informed of the final amount to be paid by the insurers. The
Company does not believe that such burglary will have a material adverse impact on its ability to perform its obligations under the support services agreement or on its financial position or operating results.





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





On July 10, 2001, Grant Thornton LLP was dismissed as our independent public accountants with respect to the audit of our consolidated financial statements for the fiscal year ended January 31, 2002 (the 2002 Audit). On
July 31, 2001, the Audit Committee selected and appointed PricewaterhouseCoopers (PwC) to serve as our independent public accountants with respect to the 2002 Audit.





Neither the report of PwC with respect to the 2002 Audit nor the reports of Grant Thornton LLP with respect to the audits of our consolidated financial statements for the
fiscal years ended January 31, 2001 or January 31, 2000 contained an adverse opinion or a disclaimer of opinion, or were qualified or modified as to uncertainty, audit scope, or accounting principles. In addition, during our fiscal years ended
January 31, 2002, there were no disagreements with Grant Thornton LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure with respect to our consolidated financial statements, which
disagreements, if not resolved to the satisfaction of Grant Thornton LLP, would have caused it to make reference to the subject matter of the disagreements in connection with its reports.




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PART III





ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT





Directors





The name and certain information regarding each of our current and nominee directors is set forth below. There are no family relationships
among our directors or executive officers.





Name

Age

PositionPhillip E. Kelly(1)

44

Co-Chairman of the Board of Directors and Chief Executive OfficerI. Steven Edelson(1)

42

Co-Chairman of the Board of DirectorsDennis M. Smith

51

Vice Chairman, Chief Financial Officer and Chief Strategy OfficerScott T. Behan(2)

40

DirectorRamin Kamfar(2)

37

DirectorNathaniel C.A. Kramer(1)

40

DirectorRobert N. Schwartz, Ph.D.(2)

62

Director


---

|(1) |  | Member of the Compensation Committee.
|--- |  | -------------------------------------

|(2) |  | Member of the Audit Committee.
|--- |  | ------------------------------




Phillip E. Kelly.    Mr. Kelly has served on our Board of Directors and as Co-Chairman of the Board of Directors since June 2001 pursuant to the terms of our acquisition agreement with NetCel360
Holdings Limited. He has served as our Chief Executive Officer since July 2001. Mr. Kelly was a co-founder of NetCel360 and served as the Chairman of its Board of Directors since its inception. From November 1994 to 1998, he served as President of
Asia-Pacific for Dell Computer Corporation. Prior to joining Dell, Mr. Kelly worked in several capacities for Motorola, Inc., including as vice president and general manager of Motorolas Landmobile Products Sector North Asian Division and as
vice president and general manager of Motorolas Western U.S. Division. Mr. Kelly holds a Bachelor of Business Administration from the University of San Diego, California.





I. Steven Edelson.    Mr. Edelson has served on our Board of Directors since January 2001. He was elected Acting Chairman in March 2001 and
Co-Chairman in June 2001. Mr. Edelson has been Managing Director of Mercantile Companies, Inc., Northbrook, Illinois, since 1986. He is also a principal of Mercantile Capital Group, LLC, and the Managing Partner of Mercantile Capital Partners I, LP.
Since 1995, Mr. Edelson has also served as Managing Director of International Facilities Group, a facilities development and management company.





Dennis M. Smith.    Mr. Smith has served on our Board of Directors and as Vice Chairman since June 2001 pursuant to the terms of our acquisition agreement
with NetCel360. He has served as our Chief Strategy Officer since July 2001 and also as our Chief Financial Officer since December 2001. Mr. Smith was a co-founder of NetCel360 and has lived and worked in finance in Asia since 1976. In 1984 he
co-founded ChinaVest, one of the earliest and largest independent private equity firms in Asia. Prior to joining ChinaVest, Mr. Smith held senior positions in commercial banking and investment banking with First Chicago Corp. in Hong Kong, Singapore
and the Philippines. He holds an MBA degree from Loyola University of Chicago.





Scott T.
Behan.    Mr. Behan has served on our Board of Directors since August 1998. Since May 2001, Mr. Behan has been Vice President of Product Development of Xemod Incorporated, a privately held developer and manufacturer of radio
frequency power amplifier components for the wireless communication and networking markets. For the prior five years, Mr. Behan was employed as the Executive Vice President of AML Communications, Inc., a manufacturer of wireless amplifiers, and was
a director of AML until May 2001. Mr. Behan has a B.S. in Electrical Engineering from Worcester Polytechnic Institute.




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Ramin Kamfar.    Mr. Kamfar has served on our Board of
Directors since April 2000. Mr. Kamfar is a Managing Partner at New World Venture Partners, Inc., an investment banking boutique focusing on technology and new economy companies. Since 1993, Mr. Kamfar has also served in various capacities at New
World CoffeeManhattan Bagel, Inc., a company he founded, most recently as its Chairman and Chief Executive Officer. From 1988 to 1993 Mr. Kamfar worked in the investment banking department of Lehman Brothers, Inc., most recently as a vice
president in private placements. Mr. Kamfar has a B.S. in Finance from the University of Maryland and an M.B.A. in Finance from The Wharton School at the University of Pennsylvania.





Nathaniel C.A. Kramer.    Mr. Kramer has served on our Board of Directors since January 2001. Mr. Kramer is a principal of Mercantile
Capital Group, LLC and is Managing Director of its New York office. From 1999 to 2000 he was a vice president with Allen & Company, Inc., a private equity firm. From 1994 to 1999, he was the president and chief executive officer of Greenhouse
Film Group Limited and is currently the Chairman of its Board of Directors. Mr. Kramer produced the Emmy nominated documentary Choices and the Tony Award-winning 1998 revival of Arthur Millers A View From the Bridge.





Robert N. Schwartz, Ph.D.    Dr. Schwartz has served on our Board of Directors since
August 1998. Since 1979, Dr. Schwartz has been a visiting professor at U.C.L.A and, since December 2000, the owner of a scientific consulting company, Channel Islands Scientific Consulting. From 1981 to 2000, Dr. Schwartz was a Senior Research
Scientist at HRL Laboratories, LLC, Malibu, California. He has a B.A. in Mathematics, Chemistry and Physics and an M.S. in Chemical Physics from the University of Connecticut and a Ph.D. in Chemical Physics from the University of Colorado.





Board Meetings and Committees





The Board of Directors held fifteen meetings during the fiscal year ended January 31, 2002 (Fiscal 2002). On three other occasions, the Board of Directors took actions through unanimous
written consents. Each director attended at least 75 percent of the aggregate of all meetings of the Board of Directors and the committees of the Board of Directors on which he was a member.





At the beginning of Fiscal 2002, our Board of Directors was comprised of the following seven members: Robert McShirley, Samuel Bradt, Mr. Edelson, Mr. Kramer, Mr. Kamfar,
Mr. Behan and Dr. Schwartz. Messrs. McShirley and Bradt resigned from the Board of Directors in March 2001, and the Board of Directors did not fill the vacancies created by their resignations until it elected Messrs. Kelly and Smith to the
Board of Directors in June 2001.





The Audit Committee currently consists of Messrs. Behan and Kamfar and Dr.
Schwartz. The functions of the Audit Committee are noted in the Audit Committee report, included in this proxy statement, and in the Companys Audit Committee charter, a copy of which was attached to our 2001 annual meeting proxy statement. The
Audit Committee met four times during Fiscal 2002 and took one action by a unanimous written consent. Each of Mr. Behan, Mr. Kamfar and Dr. Schwartz is an independent director as defined in Rule 4200(a)(14) of the National Association of Securities
Dealers listing standards.





In January 2001, we established a Compensation Committee consisting of Messrs.
Bradt, Edelson and Kramer. Mr. Bradt resigned from the Board of Directors in March 2001, and Mr. Kelly joined the Compensation Committee upon his election to the Board of Directors in July 2001. Accordingly, the Compensation Committee currently
consists of Messrs. Edelson, Kelly and Kramer.





The Compensation Committee is authorized to make recommendations
to the full Board of Directors concerning the base salaries and cash bonuses of our executive officers and to review our employee compensation policies generally. It has also been authorized to administer our stock option/stock issuance plan. The
Compensation Committee did not hold any meetings in Fiscal 2002 as the above-described duties were carried out by the full Board of Directors. A separate committee of the Board of Directors, consisting of Messrs. Kamfar and Kramer, administers
our employee stock purchase plan.




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Executive Officers





The following sets forth certain information with respect to the two current executive officers of Vsource who are not directors:





John (Jack) G. Cantillon (age 37).Mr Cantillon has served as our Chief Operating Officer
since October 2001. Prior to that, he served as a Senior Vice President of Vsource from July 2001, and was a Senior Vice President of NetCel360 from April 2001 to June 2001. Prior to joining NetCel360, Mr. Cantillon was with Dell Computers
Asia-Pacific and Japan from May 1996 until April 2001 in various senior management positions, most recently as Corporate Director and Head of the Dell-online E-commerce Group for Dell Computers Asia-Pacific and Japan.





William R. DeKruif (age 42). Mr. DeKruif has served as Vice President of Global Sales and U.S. Operations since August
2001. Prior to that, he served as Vice President of U.S. Operations of Vsource from July 2001, and was Vice President of U.S. Operations of NetCel360 from October 2000 to June 2001. Prior to joining NetCel360, Mr. DeKruif was with Dell
Computers from July 1997 to July 2000 in a variety of senior sales positions, most recently as Director of Sales.


Section 16(a) Beneficial Ownership Reporting Compliance





Section 16(a) of the Securities Exchange Act of 1934 requires our directors and officers, and persons who
beneficially own more than ten percent of our common stock, to file with the SEC reports of beneficial ownership on Form 3 and changes in beneficial ownership of our common stock and other equity securities on Form 4 or Form 5. SEC regulations
require all officers, directors and greater than ten-percent stockholders to furnish us with copies of all Section 16(a) forms they file.





Based solely on the review of the copies of the reports furnished to us or written representations that no other reports were required, we believe that all Section 16(a) filing requirements applicable to our officers,
directors and greater than ten-percent stockholders with respect to the fiscal year ending January 31, 2002, were complied with in a timely fashion with the following exceptions: Mr. Kelly, our Co-Chairman and Chief Executive Officer, filed a late
amendment to a Form 4, Mr. Smith, our Vice Chairman and Chief Financial Officer, filed a late amendment to a Form 4, Mr. Kamfar, a director, filed a late Form 5, Dr. Schwartz, a director, filed a late Form 4, Mr. Cantillon, our Chief Operating
Officer, filed a late Form 3, Mr. James Root, our former Senior Vice President, filed a late Form 3, Mr. Waddell, our former Chief Financial Officer, filed a late Form 4, NetCel360 Holdings Limited, a 10% shareholder, filed a late Form 4, and BAPEF
Investments XII Ltd., a greater than 5% beneficial owner, filed a late Form 4 and Form 5.




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ITEM 11.EXECUTIVE COMPENSATION





The following summary compensation table sets forth
information regarding the compensation for the last three completed fiscal years of (a) the two persons who served as our Chief Executive Officers during the most recent fiscal year, (b) the mostly highly compensated executive officers other than
the Chief Executive Officer who were serving as executive officers as of January 31, 2002, and whose total annual salary and bonus for the most recent fiscal year exceeded $100,000 and (c) two other executive officers who would have been among the
highest paid executive officers if they had been executive officers as of January 31, 2002.





Summary Compensation Table





Annual Compensation

Long-Term Compensation


All Other CompensationName and Principal Position

Fiscal Year Ended Jan. 31,

Salary

Bonus

Restricted Stock Awards

Securities Underlying Options/SARs*Phillip E. Kelly

2002

$
106,789

$
1,000

0

8,605,189


$
126,914
(1)Chief Executive OfficerRobert C. McShirley

2002

$
31,538

$
0

0

0


$
0Former Chief Executive Officer

2001


147,115


0

0

0



115,000
(2)2000


114,000


0

0

200,000
(3)


0*Dennis M. Smith

2002

$
102,417

$
1,000

0

6,134,615


$
120,036
(4)Chief Financial Officer*John G. Cantillon

2002

$
91,936

$
10,216

0

2,517,008


$
17,286
(5)Chief Operating Officer*William R. DeKruif

2002

$
100,375

$
1,000

0

250,000


$
1,004
(6)Vice President of U.S. Operations,Global Sales and MarketingSandford T. Waddell

2002

$
112,460

$
0

0

0


$
1,250
(6)Former Chief Financial Officer

2001


105,629


0

0

125,000



02000


0


0

0

0



0Michael Shirman(7)

2002

$
134,405

$
50,000

0

0


$
1,451
(6)Former Chief Technology Officer


---

|* |  | Joined in June 2001.
|- |  | --------------------

| |  | No longer employed by us. Mr. McShirley left the Company in March 2001, Mr. Waddell left in November 2001, and Mr. Shirman left in December 2001.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|(1) |  | Includes the following paid by the Company on behalf of or to Mr. Kelly: (a) $45,186 in overseas housing allowance, (b) $63,839 for international tax
equalization benefits and associated tax filing fee, (c) $680 in Hong Kong Mandatory Provident Fund contribution, (d) $14,176 in health insurance premiums, and (e) $3,036 in relocation expenses.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Represents the forgiveness of amounts that we had advanced to Robert McShirley and related payments to compensate Mr. McShirley for the tax consequences of the
advances.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | We granted Mr. McShirley options to purchase 100,000 shares of common stock on May 15, 1999, with an exercise price of $0.75 per share. In addition, on May 15,
1999, we repriced options to purchase 100,000 shares of common stock which we had granted on August 4, 1998.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes the following paid by the Company on behalf of or to Mr. Smith: (a) $83,961 in housing allowance, (b) $16,566 in education allowance for one of Mr.
Smiths children, (c) $12,311 for a tax filing fee, (d) $936 in Hong Kong Mandatory Provident Fund contribution, and (e) $6,265 in health insurance premiums for Mr. Smith and certain of his family members.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Represents a composite allowance paid to Mr. Cantillon.
|--- |  | -------------------------------------------------------

|(6) |  | Represents 401(k) Plan contributions paid by the Company.
|--- |  | ---------------------------------------------------------

|(7) |  | Mr. Shirman joined the Company in February 2001 and left the Company in December 2001.
|--- |  | --------------------------------------------------------------------------------------



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Options





The following table sets forth certain information with respect to each of the executive officers listed in the Summary Compensation Table above concerning individual grants of options to purchase
common stock made during Fiscal 2002. Since January 31, 2002, we have granted options to three current executive officers and directors to purchase an aggregate of 267,710 shares of our common stock.





Option Grants In Last Fiscal Year


(Individual
Grants)





Name and Principal Position

Number of Shares Underlying Options Granted

% of Total Options Granted to Employees in Fiscal Year(1)


Exercise of Base Price Per Share

Expiration Date*Phillip E. Kelly

723,240

2.6
%

$
0.01

11/20/11
(2)Chief Executive Officer

6,129,949

22.4
%

$
0.10

12/18/11
(3)1,752,000

6.4
%

$
0.10

12/18/11
(4)Robert C. McShirley









Former Chief Executive Officer*Dennis M. Smith

229,241

0.8
%

$
0.01

11/20/11
(5)Chief Financial Officer

4,574,124

16.7
%

$
0.10

12/18/11
(6)1,331,250

4.9
%

$
0.10

12/18/11
(7)*John G. Cantillon

1,517,008

5.5
%

$
0.29

11/20/11
(8)Chief Operating Officer

1,000,000

3.7
%

$
0.17

01/14/12
(9)*William R. DeKruif

250,000

0.1
%

$
0.29

11/20/11
(10)Vice President of Global Sales and U.S. OperationsSandford T. Waddell









Former Chief Financial OfficerMichael Shirman









Former Chief Technical Officer


---

|* |  | Joined in June 2001.
|- |  | --------------------

| |  | No longer employed by us. Mr. McShirley left the Company in March 2001, Mr. Waddell left in November 2001, and Mr. Shirman left in December 2001.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|(1) |  | Based on an aggregate of 27,346,309 options granted to directors and employees of the Company in Fiscal 2002, including the executive officers listed in
the Summary Compensation Table above.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | On November 20, 2001, Mr. Kelly was granted options to purchase 723,240 shares of common stock at an exercise price of $0.01 per share, vesting on March 23,
2002. The fair market value of our common stock on the grant date was $0.29 per share.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | On December 18, 2001, Mr. Kelly was granted options to purchase 6,129,949 shares of common stock at an exercise price of $0.10 per share, vesting 50% on June
22, 2001, and the rest vesting in four equal quarterly installments beginning on September 22, 2001. The fair market value of our common stock on the grant date was $0.18 per share.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | On December 18, 2001, Mr. Kelly was granted options to purchase 1,752,000 shares of common stock at an exercise price of $0.10 per share, vesting in four equal
quarterly installments beginning on September 22, 2001. The fair market value of our common stock on the grant date was $0.18 per share.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | On November 20, 2001, Mr. Smith was granted options to purchase 229,241 shares of common stock at an exercise price of $0.01 per share, vesting on March 23,
2002. The fair market value of our common stock on the grant date was $0.29 per share.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(6) |  | On December 18, 2001, Mr. Smith was granted options to purchase 4,574,124 shares of common stock at an exercise price of $0.10 per share, vesting 50% on June
22, 2001, and the rest vesting in four equal quarterly installments beginning on September 22, 2001. The fair market value of our common stock on the grant date was $0.18 per share.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | On December 18, 2001, Mr. Smith was granted options to purchase 1,331,250 shares of common stock at an exercise price of $0.10 per share, vesting in four equal
quarterly installments beginning on September 22, 2001. The fair market value of our common stock on the grant date was $0.18 per share.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | On November 20, 2001, Mr. Cantillon was granted options to purchase 1,517,008 shares of common stock at an exercise price of $0.29, vesting 33.3% on December
22, 2001, and the balance in four equal quarterly installments beginning on March 22, 2002. The fair market value of our common stock on the grant date was $0.29 per share.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | On January 14, 2002, Mr. Cantillon was granted options to purchase 1,000,000 shares of common stock at an exercise price of $0.17 per share, vesting 16.67% on
July 14, 2002, and the balance in ten equal quarterly installments beginning on October 14, 2002. The fair market value of our common stock on the grant date was $0.17 per share.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | On November 20, 2001, Mr. DeKruif was granted options to purchase 250,000 shares of common stock at an exercise price of $0.29 per share, vesting 25% on
December 22, 2001, and the rest in six equal installments beginning on March 22, 2002. The fair market value of our common stock on the grant date was $0.29 per share.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The following table sets forth certain information with respect to each of the executive officers listed in the Summary Compensation Table above concerning unexercised
options to purchase common stock held as of the end of the fiscal year ended January 31, 2002. None of these executive officers exercised any options to purchase common stock during the fiscal year.





Fiscal Year-End Option/SAR Values





Number of Securities Underlying Unexercised Options at January 31, 2002

Value of Unexercised In-the-Money Options January 31, 2002(1)Name

Exercisable

Unexercisable

Exercisable

UnexercisablePhillip E. Kelly

5,473,462

3,131,727

$
273,673

$
156,586Chief Executive OfficerRobert C. McShirley









Former Chief Executive Officer*Dennis M. Smith

4,096,218

2,038,397

$
204,811

$
101,920Chief Financial Officer*John G. Cantillon

505,669

2,011,339

$
0

$
0Chief Operating Officer*William R. DeKruif

62,500

187,500

$
0

$
0Vice President of Global Sales and U.S. OperationsSandford T. Waddell









Former Chief Financial OfficerMichael Shirman









Former Chief Technical Officer


---

|* |  | Joined in June 2001.
|- |  | --------------------

| |  | No longer employed by us. Mr. McShirley left the Company in March 2001, Mr. Waddell left in November 2001, and Mr. Shirman left in December 2001.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|(1) |  | Value is calculated in accordance with SEC rules by subtracting the exercise price per share for each option from the fair market value of the underlying common
stock as of January 31, 2002, and multiplying that difference by the number of shares of common stock subject to the option. The fair market value of one share of common stock as of January 31, 2002, was $0.15.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Equity Compensation Plan Information





The following table sets forth certain information as of January 31, 2002 about the Companys common stock that may be issued upon the exercise of options, warrants
and rights under all of our existing equity compensation plans:





Equity Compensation Plan Table





Plan category

Number of securities to be issued upon exercise of outstanding options, warrants and rights

Weighted-average exercise price of outstanding options, warrants and rights

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected
in column (a))(a)

(b)

(c)Equity compensation plans approved by security holders(1)

26,715,507

$
0.13

11,456,226Equity compensation plans not approved by security holders(2)

792,344

$
2.46

2,656Total

27,507,851

$
0.20

11,458,882


---

|(1) |  | Consists of two plans: (a) our 2001 Stock Options/Stock Issuance Plan (the 2001 Plan) and (b) our Employee Stock Purchase Plan. Both plans were
approved by stockholders at our 2001 annual meeting. The maximum number of shares of common stock that may be issued under the 2001 Plan cannot exceed 20% of the total shares of common stock outstanding at the time the calculation is made
(including, on an as-converted basis, all convertible preferred stock, convertible debt securities, warrants, options and other convertible securities that are exercisable) but in no event will the maximum number of shares of common stock which may
be issued under this plan as incentive stock options exceed 20,000,000. As of January 31, 2002, based on the 20% calculation, the maximum number of shares issuable under the 2001 Plan was 31,171,733. The maximum number of shares of common stock that
may be purchased under our Employee Stock Purchase Plan is 7,000,000. During Fiscal 2002, no shares of common stock were purchased pursuant to the Employee Stock Purchase Plan.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | In July 2000, the Company approved a stock option plan (the 2000 Plan). The 2000 Plan has not been approved by our stockholders. The 2000 Plan
authorizes the grant of incentive stock options and non-statutory stock options covering an aggregate of 795,000 shares of common stock (subject to limitations of applicable laws, and adjustment in the event of stock dividends, stock splits, reverse
stock splits and certain other corporate events). The 2000 Plan expires on July 6, 2010, unless it is terminated earlier or suspended by the Board of Directors. The 2000 Plan is not subject to any provisions of the Employee Retirement Income
Security Act of 1974. The Company does not intend to issue any further options under the 2000 Plan.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Compensation
Committee Interlocks and Insider Participation





Robert McShirley was appointed to our Compensation Committee
in January 2001 upon its formation. At the time, Mr. McShirley was our Chief Executive Officer. In June 2001, our Board of Directors appointed Mr. Kelly, our current Co-Chairman of the Board of Directors and Chief Executive Officer, to the
Compensation Committee. Our Compensation Committee, however, did not meet during Fiscal 2002.





Compensation of Directors





Apart from the compensation agreement relating to Mr. Edelson referenced below, we do not currently have any
standard arrangements for compensating our directors for services provided as directors.





We have agreed on a
directors compensation agreement with Mr. Edelson. This agreement is described under Certain Transactions in Item 13 below.




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On November 20, 2001, we granted each of our non-employee directors options to
purchase an aggregate of 75,000 shares of common stock at a purchase price of $0.29 per share with an expiration date of November 19, 2011. These options vest in eight equal quarterly installments beginning on February 20, 2002.





Compensation of Executive Officers





Certain of our executive officers have employment agreements. These agreements are described under Certain Transactions in Item 13 below.





REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION





During Fiscal 2002, the Board of Directors set the salaries and other compensation of the Companys executive officers and certain other key employees and administered the Companys stock
option and bonus plans. Although the Board of Directors formed a Compensation Committee in January 2001, the committee did not meet during the last fiscal year.





General Compensation Policy





For Fiscal 2002, the Board of Directors determined
the base salary for executive officers, other than for the Chief Executive Officer, based largely on recommendations by the Companys Chief Executive Officer. The goal of the Board of Directors compensation policy during the last fiscal
year was to retain, motivate and reward management through the Companys compensation policies and awards. Generally, compensation of executive officers is designed to be competitive, to reward exceptional performance and to align the interest
of executive officers with the interests of stockholders. The Board of Directors has approved compensation policies consistent with these goals and has authorized the Compensation Committee to supervise the implementation of these policies.





The compensation program for executives consists of three basic elements:





| |  |  | a base salary;
| | - |  | --------------




| |  |  | performance-based bonuses; and
| | - |  | ------------------------------




| |  |  | periodic grants of stock options.
| | - |  | ---------------------------------




Base Salary.    Base salary is generally set within the ranges of salaries of executive officers with comparable qualifications, experience and responsibilities at other
companies of similar size, complexity and profitability taking into account the position involved and the level of the executives experience. In addition, consideration is given to other factors, including an officers contribution to the
Company as a whole.





Bonus Compensation.    The Board of Directors believes that cash
bonuses are an important part of executive officers compensation. The actual amount to be awarded to an executive officer is contingent upon the Company meeting specified Company goals and the officer meeting specified individual goals, with
Company performance having a significantly heavier weighting in the calculation of an executive officers bonus.





Long Term Incentives.    Currently, stock options are the Companys primary long-term incentive vehicle. Substantially all of the Companys employees are eligible for stock option awards on an
annual basis. Whether an award is made, and the size of the award, is based on position, responsibilities and Company and individual performance. During Fiscal 2002, we awarded stock options to purchase an aggregate of 17,506,812 shares of common
stock to Mr. Kelly and our other current executive officers.





The Compensation Committee has the authority to
review annually the annual and long-term compensation of all of the Companys executives and employees to assure that all such executives and employees continue to be properly motivated to serve the interests of the Companys stockholders.




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Federal tax law establishes certain requirements in order for compensation
exceeding $1 million earned by certain executives to be deductible. Because no executive officer had total compensation exceeding $1 million in the previous fiscal year, the Board of Directors has not found it necessary to address the issues related
to these requirements.





Executive Compensation for the Fiscal Year Ended January 31, 2002





During Fiscal 2002, the Company had two serving Chief Executive Officers, Robert McShirley and Phillip Kelly. Mr. McShirley served as the
Companys Chief Executive Officer from the start of Fiscal 2002 until March 2001. During that period, Mr. McShirley received a salary of $31,538. In addition, the Company forgave the repayment of a promissory note in the principal amount of
$75,000 issued by Mr. McShirley to the Company on January 31, 2000, which amount had represented amounts that had been advanced to Mr. McShirley over three years, and the Company paid withholding taxes of approximately $40,000 to compensate him for
the tax consequences of the forgiveness of the advanced amount. Mr. Kelly has served as the Companys Chief Executive Officer since July 2001. From his start date until the end of the fiscal year in January 31, 2002, Mr. Kelly received a
salary of $106,789 and a $1,000 bonus. In addition, Mr. Kelly received other compensation in the amount of $126,914. The current Board of Directors, as well as the current members of the Compensation Committee, believe that Mr. McShirleys and
Mr. Kellys salary and other compensation, as well as the salaries of other current executive officers and the stock option grants granted to current executive officers for the fiscal year ended January 31, 2002, were determined in a manner
generally consistent with the factors described above.





Phillip E. Kelly


I. Steven Edelson


Dennis M. Smith


Scott T. Behan


Ramin
Kamfar


Nathaniel C.A. Kramer


Robert N. Schwartz, Ph.D.





COMPARISON OF CUMULATIVE TOTAL STOCKHOLDER RETURN





The following graph compares the cumulative total stockholder return on our common stock on January 31, 1997, and
as of the end of each fiscal year through January 31, 2002, with the cumulative total return of the Nasdaq Composite Index, the Goldman Sachs Technology Services Index and the Morgan Stanley High Tech Index. This graph assumes the investment of $100
on February 1, 1997, in our common stock, the Nasdaq Composite Index, the Morgan Stanley High Tech Index, the Goldman Sachs Technology Services Index and the reinvestment of dividends. No dividends have been declared or paid on our common stock
during the period. The stock price performance shown on the graph following is not necessarily indicative of future price performance.





In our proxy statement distributed to stockholders in connection with last years annual meeting, we presented a graph comparing the cumulative total stockholder return on our common stock with the cumulative total
return of the Amex Internet Index. As we stated in that proxy statement, we no longer believe that the Amex Internet Index represents a relevant industry index with which to compare our stock price performance and this index is no longer included
for comparison purposes. Moreover, in last years proxy statement we also compared the cumulative total stockholder return on our common stock with the Morgan Stanley High Technology Index. In order to refine our index comparison, we have
chosen to use the Goldman Sachs Technology Services Index instead of the Morgan Stanley High Technology Index because we believe that the companies that comprise that index better represent our line of business. Accordingly, in the future we will
substitute the Goldman Sachs Technology Services Index for the Morgan Stanley High Technology Index. Finally, although our common stock




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##### Table of Contents

stopped trading on the Nasdaq National Market on December 21, 2001, and now trades on the OTC Bulletin Board, we have compared the cumulative total stockholder return of our common stock with the
Nasdaq Composite Index.





LOGO




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##### Table of Contents




ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





Common Stock





The following table sets forth certain information, as of May 1, 2002, regarding the beneficial ownership of our common stock
by (i) all persons or entities who beneficially own 5% or more of our common stock, (ii) each of our current directors and nominee directors, (iii) the executive officers listed in the Summary Compensation Table below, and (iv) all of our current
executive officers and directors as a group, in each case, to the best of our knowledge. As of May 1, 2002, there were 34,259,220 shares of common stock outstanding.





Name of Beneficial Owner(1)

Number of Shares Beneficially Owned

Percent of Total Common Stock Outstanding(2)


Percent of Total Outstanding(3)GREATER THAN FIVE PERCENT BENEFICIAL OWNERSBAPEF Investments XII Ltd.(4)

34,945,573

52.85
%

22.83
%Victoria Road, St. Peter PortGuernsey, Channel IslandsMercantile Capital Partners, I LP(5)

16,189,592

32.09
%

10.57
%1372 Shermer RoadNorthbrook, IL 60062CURRENT AND NOMINEE DIRECTORSI. Steven Edelson(6)

23,155,778

40.58
%

15.12
%1372 Shermer RoadNorthbrook, IL 60062Nathaniel C. A. Kramer(7)

19,273,332

36.24
%

12.59
%641 Lexington Avenue, Suite 1450New York, NY 10022Ramin Kamfar(8)

65,207

*


*666 Greenwich St., #710New York, NY 10014Robert N. Schwartz, Ph.D(9)

60,897

*


*770 Paularino AvenueCosta Mesa, CA 92626Scott T. Behan(10)

28,990

*


*902 E. Liberty LaneGilbert, AZ 85296Phillip E. Kelly(11)

28,571,017

49.98
%

18.66
%Unit 501, AXA Centre151 Gloucester Road, WanchaiHong KongDennis M. Smith(12)

11,346,964

26.33
%

7.41
%Unit 501, AXA Centre151 Gloucester Road, WanchaiHong Kong




70




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##### Table of Contents

Name of Beneficial Owner(1)

Number of Shares Beneficially Owned

Percent of Total Common Stock Outstanding(2)


Percent of Total Outstanding(3)EXECUTIVE OFFICERS WHO ARE NOT DIRECTORSJohn G. Cantillon(13)

15,791,536

31.55
%

10.31
%Level 12, Menara HLANo. 3, Jalan Kia PengKuala Lumpur, MalaysiaWilliam R. DeKruif

128,000

*


*16875 West Bernardo DriveSuite 250San Diego, CA 92127FORMER EXECUTIVE OFFICERSRobert C. McShirley(14)

224,927

*


*4536 Falkirk BayOxnard, CA 93035Michael Shirman(15)

0

0
%

0
%311 Hopkins AvenueHermosa Beach, CA 90254Sandford T. Waddell(16)

64,100

*


%1822 Marisol DriveVentura, CA 93001Current and nominee directors and executive officers as a group (9 persons)(17)

79,167,139

75.30
%

51.71
%


---

|* |  | Less than 1%.
|- |  | -------------

|(1) |  | Except as otherwise indicated, we believe that the beneficial owners of the securities listed have sole investment and voting power with respect to their
shares. The number of shares shown as beneficially owned by any person or entity includes all preferred convertible stock, options, warrants and other convertible securities currently exercisable by that person or entity within 60 days of May 1,
2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The percentages of beneficial ownership shown assume the exercise or conversion of all preferred convertible stock, options, warrants and other securities
convertible into common stock held by such person or entity currently exercisable within 60 days of May 1, 2002 but not the exercise or conversion of preferred convertible stock, options, warrants and other convertible securities held by other
holders of such securities.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Based on a total of 153,097,350 shares of common stock outstanding on a fully-diluted basis as of May 1, 2002, which is derived from (a) 34,259,220 shares of
common stock, (b) 1,622,468 shares of Series 1-A Preferred Stock converted into common stock on a 1:3.04 basis, (c) 1,166,869 shares of Series 2-A Preferred Stock converted into common stock on a 1:3.20 basis, (d) 49,552,800 shares of common stock
issuable upon conversion of our Series A convertible promissory notes (the Series A Convertible Notes), (e) 36,203,480 shares of common stock issuable upon the exercise of all of our outstanding (i) Series B Warrants issued under the
Exchangeable Note and Warrant Purchase Agreement (the Series B Agreement) dated July 12, 2001, and (ii) Series B-1 Warrants issued under the Exchangeable Note and Warrant Purchase Agreement dated January 28, 2002 (the Series B-1
Agreement), (f) 1,761,724 shares of common stock issuable upon the conversion of all our other outstanding convertible securities, and (g) 22,653,842 shares of common stock issuable upon the exercise of stock options currently exercisable
within 60 days of May 1, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | BAPEF Investments XII, Limited (BAPEF) serves as an investment vehicle for a private equity fund composed of several limited partnerships and is the
beneficial owner of all shares of common stock
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



71




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##### Table of Contents

| | reported above. Includes 10,875,600 shares of common stock issuable upon conversion of Series A Convertible Notes, 10,250,000 shares of common stock issuable upon exercise of a Series B Warrant
and 10,736,785 shares of common stock issuable upon exercise of a Series B-1 Warrant.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Includes (a) 624,025 shares of Series 2-A Preferred Stock, which are convertible into 1,996,880 shares of common stock, (b) 54,312 shares of common stock
issuable upon the exercise of a warrant and (c) 14,138,400 shares of common stock which are issuable upon the conversion of a Series A Convertible Note. These shares are also beneficially owned by (a) Mercantile Capital Group, LLC
(MCG), the general partner of Mercantile Capital Partners I, L.P. (MCP), (b) Mercantile Capital Management Corp. (MCM), a manager of MCG, (c) Michael A Reinsdorf, a member of MCP and a member of the Investment
Committee of MCM, and (d) Messrs. Edelson and Kramer. See Notes 6 and 7 respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Includes shares beneficially owned by Mr. Edelson in his capacity as (a) a managing member of Mercantile Equity Partners III, LLC (MEP, LLC), and a
trustee of the Edelson Family Trust dated September 17, 1997, who is also a managing member of MEP, LLC, (b) a member of MCG, (c) a member of the Investment Committee of MCM, and (d) a managing member of Mercantile Asia, LLC (MA, LLC).
MCG is the general partner of MCP. MEP, LLC is the general partner of Mercantile Equity Partners III, L.P. (MEP, LP). MEP, LP directly holds 91,161 shares of Series 1-A Preferred Stock which are convertible into 277,129 shares of common
stock. See Note 5 for detail on shares beneficially owned by MCP. MA, LLC is the general partner of Mercantile Asia Investors, L.P., which is the managing member of Asia Investors Group, LLC, which is the general partner of Asia Investing Group, LP
(AIG, LP), which is the managing member of Asia Internet Investment Group I, LLC (AIIG). AIIG directly holds (a) 346,990 shares of common stock, and (b) a Series A Convertible Note which is currently convertible into
2,718,000 shares of common stock. In addition, Mr. Edelson is also the trustee of the Mercantile Companies Inc. Money Purchase Plan which holds 3,838 shares of Series 1-A Preferred Stock which are convertible into 11,667 shares of common stock. Also
includes 3,612,400 shares of common stock issuable upon exercise of Mr. Edelsons stock options.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Includes shares beneficially owned by Mr. Kramer in his capacity as (a) a member of MCG, the general partner of MCP, (b) a member of the Investment Committee of
MCM, and (c) a managing member of MA, LLC, which is the managing member of AIG, LP, which is the managing member of AIIG. See Note 5 for detail on shares beneficially owned by MCP and AIIG, respectively. Also includes 18,750 shares of common stock
issuable upon exercise of Mr. Kramers stock options.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Includes 43,957 shares of common stock held by New World Investment Partners, of which Mr. Kamfar is a principal. Also includes 18,750 shares of common stock
issuable upon exercise of Mr. Kamfars stock options.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Includes 18,750 shares of common stock issuable upon exercise of Mr. Schwartzs stock options.
|--- |  | ----------------------------------------------------------------------------------------------

|(10) |  | Includes 18,750 shares of common stock issuable upon exercise of Mr. Behans stock options.
|---- |  | -------------------------------------------------------------------------------------------

|(11) |  | Includes (a) 8,346,000 shares of common stock issuable upon conversion of a Series A Convertible Note, (b) 3,843,750 shares of common stock issuable upon
exercise of a Series B Warrant, and (c) 2,013,147 shares of common stock issuable upon exercise of a Series B-1 Warrant. Also includes 8,700,039 shares of common stock issuable upon exercise of Mr. Kellys stock options.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | Includes a Series A Convertible Note, which is convertible into 2,599,200 shares of common stock. Also includes 6,229,090 shares of common stock issuable upon
exercise of Mr. Smiths stock options.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) |  | Includes (a) 10,875,600 shares of common stock issuable upon conversion of a Series A Convertible Note, (b) 2,562,500 shares of common stock issuable upon
exercise of a Series B Warrant, and (c) 1,342,098 shares of common stock issuable upon exercise of a Series B-1 Warrant. Also includes 1,011,338 shares of common stock issuable upon exercise of Mr. Cantillons stock options.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) |  | No longer employed by us. Mr. McShirley left the Company in March 2001.
|---- |  | -----------------------------------------------------------------------

|(15) |  | No longer employed by us. Mr. Shirman left the Company in December 2001.
|---- |  | ------------------------------------------------------------------------

|(16) |  | No longer employed by us. Mr. Waddell left the Company in November 2001. Represents 62,403 shares of common stock issuable upon conversion of 19,501 shares
of Series 2-A Preferred Stock held by Mr. Waddell and 1,697 shares of common stock issuable upon exercise of a warrant held by Mr. Waddell.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(17) |  | Includes shares held directly, as well as shares held jointly with family members, held in retirement accounts, held in a fiduciary capacity, held by certain of
the group members families, or held by trusts of which the group member is a trustee or substantial beneficiary, with respect to which shares the group
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



72




---

##### Table of Contents

| | member may be deemed to have sole or shared voting and/or investment powers. Also includes an aggregate of 19,752,867 shares of common stock issuable upon exercise of stock options held by all
nominee directors and current executive officers as a group.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Preferred Stock





Series 1-A Convertible Preferred Stock





The Series 1-A Preferred Stock votes as a single class with the common stock and the Series 2-A Preferred Stock, with each share of Series 1-A Preferred Stock and Series 2-A Preferred Stock entitled to
the number of votes equal to that number of shares of common stock into which it would then be converted (with any fractional share determined on an aggregate conversion basis being rounded down to the nearest whole share). Each share of the Series
1-A Preferred Stock is currently convertible into approximately 3.04 shares of common stock.





The following table
sets forth certain information as of May 1, 2002, regarding the beneficial ownership of Series 1-A Preferred Stock by (i) all persons or entities who beneficially own 5% or more of our outstanding Series 1-A Preferred Stock, (ii) each of our current
directors and nominee directors, (iii) the executive officers listed in the Summary Compensation Table below, and (iv) all of our current executive officers and directors as a group, in each case, to the best of our knowledge. As of May 1, 2002,
there were 1,622,468 shares of Series 1-A Preferred Stock outstanding.





Name of Beneficial Owner

Number of Shares Beneficially Owned

Percent of Total Series 1-A Preferred Stock Outstanding


Percent of Total Outstanding(1)GREATER THAN FIVE PERCENT BENEFICIAL OWNERS787, LLC

191,918

11.83
%

*9919 S.E. Fifth StreetBellevue, WA 98004Jefferies Employees Merchant Banking Fund LLC

136,318

8.40
%

*11100 Santa Monica Blvd.Los Angeles, CA 90025Denmore Investments Ltd

115,151

7.10
%

*One World Financial Center200 Liberty St., Tower ANew York, NY 10281U.S. West Internet Ventures

115,151

7.10
%

*1801 California St., Suite 5100Denver, CO 80202Fidelity National Title Insurance Company of New York

95,959

5.91
%

*3916 State Street, Suite 28Santa Barbara, CA 93105The R S Orphan Fund LP

95,383

5.88
%

*388 Market Street Nbr 200San Francisco, CA 94111Mercantile Equity Partners III L.P.(2)

91,161

5.62
%

*1372 Shermer RoadNorthbrook, IL 60062PPM America Private Equity

90,705

5.59
%

*225 West Wacker Drive, Suite 1200Chicago, IL 60606




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##### Table of Contents




Name of Beneficial Owner

Number of Shares Beneficially Owned

Percent of Total Series 1-A Preferred Stock Outstanding


Percent of Total Outstanding(1)CURRENT AND NOMINEE DIRECTORSI. Steven Edelson(3)

94,999

5.86
%

*1372 Shermer RoadNorthbrook, IL 60062Current and nominee directors and executive officers as a group (1 person)(3)

94,999

5.86
%

*


---

|* |  | Less than 1%.
|- |  | -------------

|(1) |  | The percentages of beneficial ownership assume the conversion into common stock of all Series 1-A Preferred Stock held by such person or entity and is based on
a total of 153,097,350 shares of common stock outstanding on a fully diluted basis as of May 1, 2002, which is derived from (a) 34,259,220 shares of common stock, (b) 1,622,468 shares of Series 1-A Preferred Stock converted into common stock on a
1:3.04 basis, (c) 1,166,869 shares of Series 2-A Preferred Stock converted into common stock on a 1:3.20 basis, (d) 49,552,800 shares of common stock issuable upon conversion of our Series A Convertible Notes, (e) 36,203,480 shares of
common stock issuable upon the exercise of all of our outstanding (i) Series B Warrants and (ii) Series B-1 Warrants, (f) 1,761,724 shares of common stock issuable upon the conversion of all our other outstanding convertible securities,
and (g) 22,653,842 shares of common stock issuable upon the exercise of stock options currently exercisable within 60 days of May 1, 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | These shares are also beneficially owned by (a) MEP, LLC, its general partner, (b) Michael A. Reinsdorf, as a managing member of MEP, LLC, and (c) Mr. Edelson.
See Note 3.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Mr. Edelson is the beneficial owner of these shares solely through his capacity as (a) a managing member of MEP, LLC and a trustee of the Edelson Family Trust
dated September 17, 1997, which is also a managing member of MEP, LLC, and (b) the trustee of the Mercantile Companies Inc. Money Purchase Plan which holds 3,838 shares of Series 1-A Preferred Stock. Mr. Edelson disclaims beneficial ownership of all
these shares except to the extent of his pecuniary interest in these shares.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Series 2-A
Convertible Preferred Stock





The Series 2-A Preferred Stock votes as a single class with the common stock and
Series 2-A Preferred Stock, with each share of Series 1-A Preferred Stock and Series 2-A Preferred Stock entitled to the number of votes equal to that number of shares of common stock into which it would then be converted (with any fractional share
determined on an aggregate conversion basis being rounded down to the nearest whole share). Each share of the Series 2-A Preferred Stock is currently convertible into approximately 3.20 shares of common stock.




74




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##### Table of Contents




The following table sets forth certain information as of May 1, 2002, regarding
the beneficial ownership of Series 2-A Preferred Stock by (i) all individuals known to beneficially own 5% or more of our outstanding Series 2-A Preferred Stock, (ii) each of our current directors and nominee directors, (iii) the executive
officers listed in the Summary Compensation Table below, and (iv) all of our current executive officers and directors as a group, in each case, to the best of our knowledge. As of May 1, 2002, there were 1,166,869 shares of Series 2-A Preferred
Stock outstanding.





Name of Beneficial Owner

Number of Shares Beneficially Owned

Percent of Total Series 2-A Preferred Stock Outstanding


Percent of Total Outstanding(1)GREATER THAN FIVE PERCENT BENEFICIAL OWNERSMercantile Capital Partners I LP(2)

624,025

53.48
%

1.30
%1372 Shermer RoadNorthbrook, IL 60062Crestview Capital Fund LP

132,605

11.36
%

*c/o Dillion Capital3000 Dundee Road, Suite 105Northbrook, IL 60062Bruce Nakfoor

78,003

6.68
%

*4207 Creek LedgeAustin, TX 78731The Mabinogi LLC

63,183

5.41
%

*c/o Chartwell Capital Management922 Plaza 600 Building600 Stewart StreetSeattle, CA 98101CURRENT AND NOMINEE DIRECTORSI. Steven Edelson(3)

624,025

53.48
%

1.30
%1372 Shermer RoadNorthbrook, IL 60062Nathaniel C. A. Kramer(4)

624,025

53.48
%

1.30
%641 Lexington AvenueSuite 1450New York, NY 10022FORMER EXECUTIVE OFFICERSSandford T. Waddell

19,501

1.67
%

*1822 Marisol DriveVentura, CA 93001Current and nominee directors and executive officers as a group (2 persons)

624,025

53.48
%

1.30
%


---

|* |  | Less than 1%.
|- |  | -------------

|(1) |  | The percentages of beneficial ownership assume the conversion into common stock of all Series 2-A Preferred Stock held by such person or entity and is based on
a total of 153,097,350 shares of common stock outstanding on a fully diluted basis as of May 1, 2002, which is derived from (a) 34,259,220 shares of common stock, (b) 1,622,468 shares of Series 1-A Preferred Stock converted into common stock on a
1:3.04 basis, (c) 1,166,869 shares of Series 2-A Preferred Stock converted into common stock on a 1:3.20 basis, (d) 49,552,800 shares of common stock issuable upon conversion of our Series A Convertible Notes, (e) 36,203,480 shares of
common stock issuable upon the exercise of all of our outstanding
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



75




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##### Table of Contents

| | (i) Series B Warrants and (ii) Series B-1 Warrants, (f) 1,761,724 shares of common stock issuable upon the conversion of all our other outstanding convertible securities, and (g)
22,653,842 shares of common stock issuable upon the exercise of stock options currently exercisable within 60 days of May 1, 2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | These shares are also beneficially owned by (a) MCG, the general partner of MCP, (b) MCM, a manager of MCG, (c) Michael A. Reinsdorf, a member of MCP and a
member of the Investment Committee of MCM, and (d) Messrs. Edelson and Kramer. See Notes 3 and 4, respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Mr. Edelson is the beneficial owner of these shares solely through his capacity as a member of MCG and a member of the Investment Committee of MCM. Mr. Edelson
disclaims beneficial ownership of all of these shares except to the extent of his pecuniary interest in these shares.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Mr. Kramer is the beneficial owner of these shares solely through his capacity as a member of MCG and a member of the Investment Committee of MCM. Mr. Kramer
disclaims beneficial ownership of all of these shares except to the extent of his pecuniary interest in these shares.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM
13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





NetCel360 Acquisition





On June 22, 2001, we acquired substantially all of the assets of NetCel360 Holdings Limited (NetCel360). In
connection with the acquisition, we issued a total of 3,709,699 shares of our common stock to NetCel360 (the Consideration Shares), of which 2,774,213 shares were issued on June 22, 2001 and the remaining 935,486 shares were issued
on February 7, 2002. We also assumed approximately $3.7 million of bridge financing (the Bridge Loan), $1.25 million in principal amount of which we discharged by issuing Series A Convertible Notes in exchange and the remainder of which
we discharged on December 18, 2001 by issuing 11,620,310 shares of our common stock at a conversion rate of $0.20 per share.





In connection with completing the acquisition, Mr. Kelly was appointed our Co-Chairman and Chief Executive Officer. Prior to the acquisition, Mr. Kelly was the Chief Executive Officer and Chairman of NetCel360. As a result of Mr.
Kellys direct ownership interest in NetCel360, he received 235,235 Consideration Shares. In addition, through his indirect ownership interest in NetCel360, 290,280 Consideration Shares are distributable to Mr. Kelly. Because Mr. Kelly does not
control the distribution of such 290,280 Consideration Shares, he does not claim beneficial ownership of such shares. At the time of the acquisition, Mr. Kelly held $1.9 million in principal amount of the Bridge Loan. On June 25, 2001, we
repaid to Mr. Kelly $200,000 in principal amount and accrued interest of the Bridge Loan, and Mr. Kelly surrendered $767,414 in principal amount and accrued interest of the Bridge Loan in exchange for a Series A Convertible Note in principal amount
of $767,414. On December 15, 2001, Mr. Kelly purchased an additional $135,783 in principal and accrued interest of the Bridge Loan from other holders of the Bridge Loan for $67,892 in cash. We discharged our remaining obligations to Mr. Kelly under
the Bridge Loan on December 18, 2001 by converting the remaining balance of Mr. Kellys Bridge Loan into 5,432,846 shares of our common stock in accordance with the terms of the Bridge Loan.





In connection with completing the acquisition, Mr. Smith was appointed our Vice Chairman and Chief Strategy Officer. In December 2001, he was
also appointed as our Chief Financial Officer. Prior to the acquisition, Mr. Smith was NetCel360s Vice Chairman. As a result of Mr. Smiths direct ownership interest in NetCel360, he received 107,095 Consideration Shares. In addition,
through his indirect ownership interest in NetCel360, 105,517 Consideration Shares are distributable to Mr. Smith. Because Mr. Smith does not control the distribution of such 105,517 Consideration Shares, he does not claim beneficial ownership of
such shares. At the time of the acquisition, Mr. Smith held $774,632 in principal amount of the Bridge Loan. On June 25, 2001, he surrendered $239,031 in principal amount and accrued interest of the Bridge Loan in exchange for a Series A Convertible
Note in principal amount of $239,031. On December 1, 2001, Mr. Smith sold $121,957 in principal and accrued interest of the Bridge Loan for a cash purchase price of $121,957. On December 15, 2001, Mr. Smith then purchased an additional $49,460
in principal and accrued interest of the Bridge Loan from other holders of the Bridge Loan for $49,460 in cash. We discharged our remaining obligations to Mr. Smith under the Bridge Loan on December 18, 2001 by converting the remaining balance of
Mr. Smiths Bridge Loan into 2,411,579 shares of our common stock in accordance with the terms of the Bridge Loan.




76




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##### Table of Contents




AIIG has informed us that as a result of its direct ownership interest in
NetCel360, it received 119,687 Consideration Shares. At the time of the acquisition, AIIG held $294,012 in principal amount of the Bridge Loan. On July 13, 2001, AIIG surrendered $251,160.58 in principal amount and accrued interest of the
Bridge Loan in exchange for a Series A Convertible Note in principal amount of $251,160.58. We discharged our remaining obligations to AIIG under the Bridge Loan on December 18, 2001 by converting the remaining balance of AIIGs Bridge Loan
into 227,303 shares of our common stock in accordance with the terms of the Bridge Loan. Both Mr. Edelson, our Co-Chairman of the Board of Directors, and Mr. Kramer, a director, are controlling persons of the managing member of the general partner
of the managing member of AIIG.





BAPEF has informed us that as a result of its direct ownership interest in
NetCel360, it received 966,123 Consideration Shares. At the time of the acquisition, BAPEF held $409,920 in principal amount of the Bridge Loan. We discharged our obligations to BAPEF under the Bridge Loan on December 18, 2001 by converting the
balance of BAPEFs Bridge Loan into 2,117,065 shares of our common stock in accordance with the terms of the Bridge Loan. BAPEF beneficially owns more than five percent of our total outstanding shares.





Financing Agreements





On June 25, 2001, we entered into a Convertible Note Purchase Agreement pursuant to which we sold Series A Convertible Notes to a group of lenders including Mr. Kelly, Mr. Smith, Mr. Cantillon, MCP, AIIG and BAPEF. The Series A
Convertible Notes bear interest at a rate of 10% per annum and mature on June 30, 2003. In addition, these notes are convertible, at the holders option, into shares of our Series 3-A Preferred Stock, which, in turn, are convertible at the
holders option into shares of our common stock.





The following table sets forth the principal amount of
Series A Convertible Notes purchased by each of Mr. Kelly, Mr. Smith, Mr. Cantillon, AIIG, MCP and BAPEF on June 25, 2001, the number of shares of Series 3-A Preferred Stock into which their respective Series A Convertible Notes could be
converted as of such date, and the number of shares of our common stock into which such shares of Series 3-A Preferred Stock could be converted as of such date.





Purchaser

Series A Convertible Notes

Series 3-A Preferred
Stock

Common StockPhillip E. Kelly

$
767,414

12,790

7,674,000Dennis M. Smith

$
239,031

3,983

2,389,800John G. Cantillon

$
1,000,000

16,666

9,999,600Asia Internet Investment Group I, LLC

$
251,151

4,185

2,511,000Mercantile Capital Partners I, L.P.

$
1,300,000

16,666

12,999,600BAPEF Investments XII Ltd.

$
1,000,000

16,666

9,999,600





On July 12, 2001, we entered into the Series B Agreement pursuant
to which we sold exchangeable promissory notes (the Series B Exchangeable Notes) and Series B Warrants to a group of purchasers including Mr. Kelly, Mr. Cantillon and BAPEF. The Series B Exchangeable Notes accrued interest at a rate of
10% per annum and were to mature on June 30, 2003. The Series B Warrants have an exercise price of $0.10 per share and expire on July 12, 2006. In addition, the purchasers of the Series B Exchangeable Notes received upon issuance a transaction fee
of 2.5% of the total principal amount of their Series B Exchangeable Notes. We used the proceeds from the sale of the Series B Exchangeable Notes and Series B Warrants to secure a letter of credit supporting our reseller arrangements with Gateway
Manufacturing, Inc. In accordance with the terms of the Series B Agreement, following the termination of such letter of credit when Gateway terminated those reseller arrangements, we repaid the Series B Exchangeable Notes in full on December 28,
2001. As described further below, Messrs. Kelly and Cantillon each elected to have half of the outstanding balance of their respective Series B Exchangeable Notes, including accrued interest, repaid in cash ($402,630 and $268,419, respectively)
and the other half repaid through surrender for Series B-1 Exchangeable Notes, and BAPEF elected to have the entire amount of its Series B Exchangeable Notes repaid through surrender for Series B1 Exchangeable Notes.




77




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##### Table of Contents




The following table sets forth the principal amount of Series B Exchangeable
Notes purchased by each of Mr. Kelly, Mr. Cantillon and BAPEF on July 12, 2001 and the number of shares of common stock issuable upon exercise of the Series B Warrants purchased by them on that date. The Series B Exchangeable Notes are no longer
outstanding, as they were repaid in full on December 28, 2001.





Purchaser

Series B Exchangeable Notes

Series B WarrantsPhillip E. Kelly

$
768,750

3,843,750John G. Cantillon

$
512,500

2,562,500BAPEF Investments XII Ltd.

$
2,050,000

10,250,000





On January 31, 2002, pursuant to the Series B-1 Agreement, we
issued $2.9 million in principal amount of exchangeable promissory notes (the Series B-1 Exchangeable Notes) and Series B-1 Warrants to holders of Series B Exchangeable Notes (including Mr. Kelly, Mr. Cantillon and BAPEF) who elected to
surrender some or all of the principal and accrued interest on their respective Series B Exchangeable Notes in exchange for Series B-1 Exchangeable Notes and Series B-1 Warrants. The Series B-1 Exchangeable Notes accrue interest at a rate of
10% per annum and have a maturity date of June 30, 2003. The Series B-1 Exchangeable Notes are convertible into Series A Convertible Notes if the Series B-1 Exchangeable Notes are not repaid prior to August 15, 2002. As noted previously, Series
A Convertible Notes are convertible, at the holders option, into shares of our Series 3-A Preferred Stock, which, in turn, are convertible, at the holders option, into shares of our common stock. Unlike the Series B Exchangeable Notes,
the proceeds of the Series B-1 Exchangeable Notes may be used by us for general corporate purposes. The Series B-1 Warrants have an exercise price of $0.10 per share and expire on January 30, 2007.





The following table sets forth the principal amount of Series B-1 Exchangeable Notes received by each of Mr. Kelly, Mr. Cantillon and
BAPEF upon surrender of their Series B Exchangeable Notes on January 31, 2002 and the number of shares of common stock issuable upon exercise of the Series B-1 Warrants purchased by them on that date. As the Series B-1 Exchangeable Notes are not
convertible into Series A Convertible Notes unless they have not been repaid prior to August 15, 2002, this table does not show the number of shares of Series 3-A Preferred Stock or common stock into which the Series B-1 Exchangeable Notes could
ultimately be converted.





Purchaser

Series B-1 Exchangeable Notes

Series B-1 WarrantsPhillip E. Kelly

$
402,629

2,013,145John G. Cantillon

$
268,420

1,342,100BAPEF Investments XII Ltd.

$
2,147,357

10,736,785





McShirley Notes





In October 2000, Robert McShirley, our former Chief Executive Officer, borrowed $400,000 from us in exchange for a secured ninety-day promissory note bearing interest at a
rate of 8% per annum due on January 9, 2001. The ninety-day note from Mr. McShirley was collateralized by 300,000 shares of our common stock held by Mr. McShirley as our sole recourse. In October 2000, Mr. McShirley repaid the Company $250,000 of
the original balance, leaving a balance of $150,000. On January 30, 2001, the Board of Directors approved an extension of this note for 90 days. On March 8, 2001, in connection with Mr. McShirleys resignation, the terms of the October 2000
note were extended to August 27, 2001, and this note along with another note with a principal amount of $68,164 also issued to us by Mr. McShirley were collectively collateralized by 300,000 shares of common stock held by Mr. McShirley as our
sole recourse. Effective July 31, 2001, Mr. McShirley transferred to us the 300,000 shares of our common stock that served as collateral for the notes we held, and we cancelled the two notes. Accordingly, there is no longer any remaining
balance on the notes.




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The following table indicates with the largest aggregate amount of debt
outstanding with regard to the McShirley notes during the fiscal year ended January 31, 2002, and the aggregate amount of debt outstanding as of January 31, 2002.





Largest Total Debt During FYE 1/31/02

Total Debt as of 1/31/02Robert McShirley

483,732

0





Edelson Compensation Agreement





We have agreed with Mr. Edelson on a directors compensation agreement, and expect to execute a contract evidencing such agreement.
Pursuant to this agreement, in consideration for his service on our Board of Directors, Mr. Edelson receives an annual service fee of $120,000, which has been paid monthly commencing from June 22, 2001.





In accordance with this agreement, we have paid a total of $62,500 in fees during Fiscal 2002. Also in accordance with this agreement, we
have granted Mr. Edelson an option to acquire a number of shares of common stock equal to two percent of our outstanding common stock, calculated on a fully diluted basis as of the date of the agreement (the Edelson Option). In addition,
if after the date of such grant and prior to February 15, 2002 we issued additional shares of common stock or securities convertible into common stock, then we were obligated to issue Mr. Edelson additional options so that in aggregate Mr. Edelson
would have been granted options to acquire two percent of our outstanding common stock, calculated on a fully diluted basis, as of February 15, 2002 (the Edelson Gross-up). The Edelson Option has an exercise price of $0.10 per share and
vested 50% on June 22, 2001, with the remainder vesting in a series of four successive equal quarterly installments of 12.5% each, beginning on September 22, 2001. The options to purchase an aggregate of 3,034,015 shares of common stock granted to
Mr. Edelson on December 18, 2001 were issued in full satisfaction of our obligation with respect to the Edelson Option. On February 20, 2002, we granted Mr. Edelson an option to purchase 78,385 shares of common stock, with the same terms as the
option granted pursuant to the Edelson Option, in full satisfaction of our obligation with respect to the Edelson Gross-up. Finally, in accordance with this agreement we also granted Mr. Edelson an option to purchase 500,000 shares of common stock,
with an exercise price of $0.10 per share and vesting schedule of four quarterly installments of 25% each, beginning on September 22, 2001.





Employment Agreements





The Company has employment agreements with each of Messrs. Kelly,
Smith and Cantillon.





Mr. Kelly is party to parallel employment agreements with two of our subsidiaries, each
dated as of June 22, 2001. Under these agreements, Mr. Kelly receives in the aggregate a base salary of $175,200 per year and is eligible for a target incentive bonus equal to 100% of the aggregate base salary. This bonus is payable upon achievement
of certain targets set by the Compensation Committee. Under the agreements, we also granted Mr. Kelly an option to acquire a number of shares of common stock equal to four percent of our outstanding common stock, calculated on a fully diluted
basis as of the date of the agreement (the Kelly Option). In addition, if after the date of such grant and prior to February 15, 2002 we issued additional shares of common stock or securities convertible into common stock, then we were
obligated to issue Mr. Kelly additional options so that in aggregate Mr. Kelly would have been granted options to acquire four percent of our outstanding common stock, calculated on a fully diluted basis, as of February 15, 2002 (the Kelly
Gross-up). The Kelly Option has an exercise price of $0.10 per share and vested 50% on June 22, 2001, with the remainder vesting in a series of four successive equal quarterly installments of 12.5% each, beginning on September 22, 2001. The
options to purchase an aggregate of 6,129,949 shares of common stock granted to Mr. Kelly on December 18, 2001 were issued in full satisfaction of our obligation with respect to the Kelly Option. On February 20, 2002, we granted Mr. Kelly an option
to purchase 94,850 shares of common stock, with the same terms as the options




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granted pursuant to the Kelly Option, in full satisfaction of our obligation with respect to the Kelly Gross-up. Under the agreements, we also granted Mr. Kelly another option to purchase
1,752,000 shares of common stock, with an exercise price of $0.10 per share and a vesting schedule of four equal quarterly installments, beginning on September 22, 2001. Under the agreements, we are obligated, at our expense, to equalize Mr.
Kellys tax to the level he would be responsible for in the United States. We must reimburse Mr. Kelly for all housing expenses up to HK$46,000 per month (approximately $6,000 per month) and provide him with an executive automobile. Mr.
Kellys employment agreement has an initial term that expires on June 22, 2003, and renews automatically for one-year periods unless either party gives notice of termination not less than 90 days prior to the end of the existing term. We may
terminate Mr. Kellys employment agreement with cause upon the happening of certain specified events and the Board of Directors may, at its discretion, terminate Mr. Kellys employment upon 90 days notice.





Mr. Smith is party to parallel employment agreements with two of our subsidiaries, each dated as of June 22, 2001. Under these
agreements, Mr. Smith receives in the aggregate a base salary of $133,125 per year and is eligible for a target incentive bonus equal to 100% of the aggregate base salary. This bonus is payable upon achievement of certain targets set by the
Compensation Committee. Under the agreements, we also granted Mr. Smith an option to acquire a number of shares of common stock equal to three percent of our outstanding common stock, calculated on a fully diluted basis as of the date of the
agreement (the Smith Option). In addition, if after the date of such grant and prior to February 15, 2002 we issued additional shares of common stock or securities convertible into common stock, then we were obligated to issue Mr. Smith
additional options so that in aggregate Mr. Smith would have been granted options to acquire three percent of our outstanding common stock, calculated on a fully diluted basis, as of February 15, 2002 (the Smith Gross-up). The Smith
Option has an exercise price of $0.10 per share and vested 50% on June 22, 2001, with the remainder vesting in a series of four successive equal quarterly installments of 12.5% each, beginning on September 22, 2001. The options to purchase an
aggregate of 4,574,124 shares of common stock granted to Mr. Smith on December 18, 2001 were issued in full satisfaction of our obligation with respect to the Smith Option. On February 20, 2002, we granted Mr. Smith an option to purchase 94,475
shares of common stock, with the same terms as the options granted pursuant to the Smith Option, in full satisfaction of our obligation with respect to the Smith Gross-up. Under the agreements, we also granted Mr. Smith another option to purchase
1,331,250 shares of common stock, with an exercise price of $0.10 per share and a vesting schedule of four equal quarterly installments, beginning on September 22, 2001. Under the agreements, we have agreed to reimburse Mr. Smith for all housing
expenses up to HK$85,000 per month (approximately $10,900 per month) and all tuition costs of one child. Mr. Smiths employment agreement has an initial term that expires on June 22, 2003, and renews automatically for one-year periods unless
either party gives notice of termination not less than 90 days prior to the end of the existing term. We may terminate Mr. Smiths employment agreement with cause upon the happening of certain specified events and the Board of Directors may, at
its discretion, terminate Mr. Smiths employment upon 90 days notice.





Under Mr. Cantillons employment
agreement with NetCel360s Malaysian subsidiary, dated April 4, 2001, which was assumed by us following the acquisition of NetCel360, Mr. Cantillon receives a base salary of $12,594 per month and a guaranteed bonus equal to one months
base salary (pro rated if he has had less than one full year of service). Additionally, Mr. Cantillons employment agreement provides for a target bonus of 50% of his annual salary, with the actual payment based upon his performance against
established metrics and Vsource policies. We also provide Mr. Cantillon with a composite allowance of $2,368 per month. Either party upon three months notice may terminate Mr. Cantillons agreement without cause. If terminated by us
without cause, we would be obligated to pay Mr. Cantillon any salary due through the term of the notice period.




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PART IV





ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K





|(a) |  | The following documents are filed as part of this Form 10-K:
|--- |  | ------------------------------------------------------------




| | (1) |  | Consolidated Financial Statements
| | --- |  | ---------------------------------




| |  | Reports of Independent Accountants
| |  | ----------------------------------

| |  | Consolidated Balance Sheets as of January 31, 2002 and 2001
| |  | -----------------------------------------------------------

| |  | Consolidated Statements of Operations for each of the three years in the period ended January 31, 2002.
| |  | -------------------------------------------------------------------------------------------------------

| |  | Consolidated Statements of Stockholders Equity for each of the three years in the period ended January 31, 2002.
| |  | -----------------------------------------------------------------------------------------------------------------

| |  | Consolidated Statements of Cash Flows for each of the three years in the period ended January 31, 2002.
| |  | -------------------------------------------------------------------------------------------------------

| |  | Notes to the Consolidated Financial Statements
| |  | ----------------------------------------------




| | (2) |  | Financial Statement Schedule
| | --- |  | ----------------------------




| |  | All schedules have been omitted because they are not required or the required information is shown in the financial statements or notes thereto.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------




| | (3) |  | Exhibits are incorporated herein by reference or are filed with this Form 10-K as indicated below (numbered in accordance with Item 601 of Regulation S-K):
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------




ExhibitNo.

Description2.1(*)

Acquisition Agreement by and among Vsource, Inc. and NetCel360 Holdings Limited dated as of May 24, 2001
(incorporated herein by reference to Exhibit 2.1 to the Registrants Quarterly Report on Form 10-Q for the period ending April 30, 2001)2.2(*)

Amendment to Acquisition Agreement, dated June 22, 2001, between Vsource, Inc. and NetCel360 Holdings Limited
(incorporated herein by reference to Exhibit 2.2 to the Registrants Form 8-K filed on July 2, 2001 (the July 2, 2001 Form 8-K))3.1(*)

Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to Registrants Form 8-K filed on
November 14, 2000 (the November 14, 2000 Form 8-K)3.2(*)

Bylaws (incorporated herein by reference to Exhibit 3.2 to the November 14, 2000 Form 8-K)3.3(*)

Amendment to Certificate of Incorporation (incorporated herein by reference to Exhibit 3.3 to Registrants Form
8-K filed on January 23, 2002)4.1(*)

Certificate of Designation of Series 2-A Convertible Preferred Stock (incorporated herein by reference to Exhibit 4.1
to the November 14, 2000 Form 8-K)4.2(*)

Certificate of Merger (incorporated herein by reference to Exhibit 4.2 to the November 14, 2000 Form
8-K)4.3(*)

Form of Series 3 Convertible Demand Note (incorporated herein by reference to Exhibit 3.2 to Registrants
Registration Statement on Form 10-SB filed on September 21, 1999 (SEC File No. 000-26563) (the Form 10-SB))4.4(*)

Form of Series 2 Convertible Demand Note (incorporated herein by reference to Exhibit 3.3 to the Form
10-SB)4.5(*)

Form of Common Stock Purchase Warrant (incorporated herein by reference to Registrants Form 8-K filed
September 26, 2000 (the September 26, 2000 Form 8-K))4.6(*)

Form of Registration Rights Agreement (incorporated herein by reference to the September 26, 2000 Form
8-K)4.7(*)

Certificate of Designations of Series 3-A Convertible Preferred Stock (incorporated herein by reference to Exhibit
4.1 of the July 2, 2001 Form 8-K)




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ExhibitNo.

Description4.8(*)

Amended and Restated Bridge Loan Agreement, dated May 24, 2001, among NetCel360.com Ltd., NetCel360 Holdings Limited,
NetCel360 Sdn Bhd., and the Lenders named therein (incorporated herein by reference to Exhibit 4.2 of the July 2, 2001 Form 8-K)4.9(*)

First Amendment to Amended and Restated Bridge Loan Agreement, dated June 22, 2001, among NetCel360.com Ltd.,
NetCel360 Holdings Limited, NetCel360 Sdn Bhd., and the Lenders named therein (incorporated herein by reference to Exhibit 4.3 of the July 2, 2001 Form 8-K)4.10(*)

Convertible Note Purchase Agreement, dated June 25, 2001, among Vsource, Inc., NetCel360.com Ltd., NetCel360 Sdn
Bhd., and the Purchasers named therein (incorporated herein by reference to Exhibit 4.4 of the July 2, 2001 Form 8-K)4.11(*)

Exchangeable Note and Warrant Purchase Agreement, dated as of July 12, 2001, by and among Vsource, Inc.,
NetCel360.com Ltd., NetCel360 Sdn Bhd and Purchasers named therein, and form of Exchangeable Promissory Note (incorporated herein by reference to Exhibit 4.7 to the Registrants Quarterly Report on Form 10-Q for the period ending July 31, 2001
(the July 31, 2001 Form 10-Q))10.1(*)

Ventura Professional Center First Amendment to Lease between Virtual Source, Inc. and Security National Properties,
LLC, dated October 27, 1998 (incorporated herein by reference to Exhibit 10.2 to Registrants Form 10-KSB for the year ended January 31, 2000 (the 1999 Form 10-KSB))10.2(*)

LeaseRazore Land Company, Landlord and Interactive Buyers Network International, Tenant, dated October 11, 1999
(incorporated herein by reference to Exhibit 10.3 to the 1999 Form 10-KSB)10.3(*)

Promissory Note by Robert C. McShirley dated October 11, 2000 (incorporated herein by reference to Exhibit 10.4 to
Registrants Form 10-QSB for the period ending October 31, 2000 (the October 31, 2000 Form 10-QSB))10.4(*)

Pledge and Security Agreement with Robert C. McShirley dated October 11, 2000 (incorporated herein by reference to
Exhibit 10.5 to the October 31, 2000 Form 10-QSB)10.5(*)

Promissory Note by P. Scott Turner dated October 13, 2000 (incorporated herein by reference to Exhibit 10.6 to the
October 31, 2000 Form 10-QSB)10.6(*)

Promissory Note by Sandford T. Waddell dated September 18, 2000 (incorporated herein by reference to Exhibit 10.7 to
the October 31, 2000 Form 10-QSB)10.7(*)

Pledge and Security Agreement with Sandford T. Waddell dated September 18, 2000 (incorporated herein by reference to
Exhibit 10.8 to the October 31, 2000 Form 10-QSB)10.8(*)

Promissory Note by P. Scott Turner dated September 18, 2000 (incorporated herein by reference to Exhibit 10.9 to the
October 31, 2000 Form 10-QSB)10.9(*)

Pledge and Security Agreement with P. Scott Turner dated September 18, 2000 (incorporated herein by reference to
Exhibit 10.10 to the October 31, 2000 Form 10-QSB)10.10(*)

Agreement and Plan of Merger dated as of December 14, 2000 (incorporated herein by reference to Exhibit 10.11 to the
October 31, 2000 Form 10-QSB)10.11(*)

Supplement to merger agreement with Colin Kruger and Michael Shirman dated December 14, 2000 (incorporated herein by
reference to Exhibit 10.11 to the Registrants Form 10-KSB for the year ended January 31, 2001 (the 2000 Form 10-KSB))10.12(*)

Form of Warrant Holder Agreement with OTT Shareholders (incorporated herein by reference to Exhibit 10.12 to the 2000
Form 10-KSB)10.13(*)

Form of Registration Rights Agreement with OTT Shareholders (incorporated herein by reference to Exhibit 10.13 to the
2000 Form 10-KSB)10.14(*)

At Will Employment Agreement with Colin P. Kruger (incorporated herein by reference to Exhibit 10.14 to the 2000 Form
10-KSB)10.15(*)

At Will Employment Agreement with Michael Shirman (incorporated herein by reference to Exhibit 10.15 to the 2000 Form
10-KSB)




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ExhibitNo.

Description10.16(*)

Office Lease between L.A.T. Investment Corporation and Online Transaction Technologies, Inc. dated March 7, 1999
(incorporated herein by reference to Exhibit 10.16 to the 2000 Form 10-KSB)10.17(*)

First Amendment to Lease between L.A.T. Investment Corporation dated February 1, 2000 (incorporated herein by
reference to Exhibit 10.17 to the 2000 Form 10-KSB)10.18(*)

Alliance Agreement between Registrant and IBM dated September 18, 2000 (incorporated herein by reference to Exhibit
10.18 to the 2000 Form 10-KSB)10.19(*)

IBM PartnerWorld AgreementInternational Basic General Terms between OTT and IBM (incorporated herein by
reference to Exhibit 10.19 to the 2000 Form 10-KSB)10.20(*)

Redacted Reseller Agreement with Gateway Manufacturing Inc. (incorporated herein by reference to Exhibit 10.20 to the
July 31, 2001 Form 10-Q)10.21(*)

Employment Agreements of Phillip Kelly (incorporated herein by reference to Exhibit 10.21 to the July 31, 2001 Form
10-Q)10.22(*)

Employment Agreements of Dennis Smith (incorporated herein by reference to Exhibit 10.22 to the July 31, 2001 Form
10-Q)10.23(*)

Employment Agreement of Jack Cantillon (incorporated herein by reference to Exhibit 10.23 to the July 31, 2001 Form
10-Q)10.24(*)

Employment Agreement of James Root (incorporated herein by reference to Exhibit 10.24 to the July 31, 2001 Form
10-Q)10.25(*)

Master Services Agreement with Network Appliance Inc. (incorporated herein by reference to Exhibit 10.25 to the July
31, 2001 Form 10-Q)10.26(*)

Support Services Agreement dated October 24, 2001 between Vsource (CI) Ltd, Vsource, Inc. and Gateway Japan Inc.
(incorporated herein by reference to Exhibit 10.26 to Amendment No. 2 to the Registrants Quarterly Report on Form 10-Q for the period ending October 31, 2001 (the October 31, 2001 Form 10-Q))10.27(*)

Lease Agreement dated October 31, 2001 between Vsource (Japan) Limited and Kintetsu Properties Co. Ltd. (incorporated
herein by reference to Exhibit 10.27 to the October 31, 2001 Form 10-Q)10.28(*)

2000 Stock Option Plan (incorporated herein by reference to Exhibit 99.1 to Registrants Form 10-QSB/A for the
period ending July 31, 200010.29

2001 Stock Option/Stock Issuance Plan10.30

Form of Stock Option Agreement10.31

Employee Stock Purchase Plan10.32(*)

Exchangeable Note and Warrant Purchase Agreement, dated January 28, 2002, by and among Vsource, Inc., Vsource (CI)
Ltd, Vsource (Malaysia) Sdn Bhd, and the Purchasers named therein (incorporated herein by reference to Exhibit 4.1 to the Registrants Form 8-K filed on February 6, 2002)10.33

Master Services Agreement with Agilant Technologies Singapore (Sales) Pte Ltd21.1

Subsidiaries of Vsource, Inc.


---

|* |  | Previously filed with Securities and Exchange Commission.
|- |  | ---------------------------------------------------------

| |  | Confidential treatment requested with respect to portions of this Exhibit.
|- |  | --------------------------------------------------------------------------




(b) Reports on Form 8-K





On November
8, 2001, Vsource filed an amendment to its Current Report on Form 8-K/A filed on July 20, 2001 to amend its unaudited pro forma financial statements as of and for the year ended January 31, 2001.





On December 21, 2001, Vsource filed a Current Report on Form 8-K announcing the discharge of its bridge loan obligations through the issuance of new shares of common
stock.




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On December 26, 2001, Vsource filed a Current Report on Form 8-K announcing that
its common stock had been delisted from the Nasdaq Stock Market, Inc.





On January 23, 2002, Vsource filed a
Current Report on Form 8-K (the January 23, 2002 Form 8-K) announcing that it had filed an amendment to its certificate of incorporation to increase the number of authorized shares of its common stock, and that such amendment had caused
the conversion conditions with respect to its Series 3-A Convertible Preferred Stock and Series B Warrants to be satisfied, which in turn caused the conversion price of its Series 1-A and Series 2-A Convertible Preferred Stock to be reduced.





On February 6, 2002, Vsource filed an amendment to the January 23, 2002 Form 8-K correcting an error in the
conversion price of its Series 1-A and Series 2-A Convertible Preferred Stock that had been reported in the January 23, 2002 Form 8-K.




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SIGNATURES





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





VSOURCE, INC.Date:    June 10, 2002

/S/    PHILLIP E. KELLYPhillip E. KellyChief Executive Officer(Principal Executive Officer)





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





Signature

Title

Date/S/    PHILLIP E.
KELLY Phillip E. Kelly

Chief Executive Officer Co-Chairman (Principal Executive Officer)

June 10, 2002/S/    DENNIS M.
SMITH Dennis M. Smith

Vice-Chairman Chief Financial Officer & Chief Strategy Officer (Principal Financial Officer)

June 10, 2002/S/    MARK R.
HARRIS Mark R. Harris

Vice President (Principal Accounting Officer)

June 10, 2002/S/    SCOTT T.
BEHAN Scott T. Behan

Director

June 10, 2002/S/    RAMIN
KAMFAR Ramin Kamfar

Director

June 10, 2002/S/    ROBERT N.
SCHWARTZ Robert N. Schwartz

Director

June 10, 2002




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EXHIBIT INDEX





Exhibit No.


Description2.1
(*)

Acquisition Agreement by and among Vsource, Inc. and NetCel360 Holdings Limited dated as of May 24, 2001
(incorporated herein by reference to Exhibit 2.1 to the Registrants Quarterly Report on Form 10-Q for the period ending April 30, 2001)2.2
(*)

Amendment to Acquisition Agreement, dated June 22, 2001, between Vsource, Inc. and NetCel360 Holdings Limited
(incorporated herein by reference to Exhibit 2.2 to the Registrants Form 8-K filed on July 2, 2001 (the July 2, 2001 Form 8-K))3.1
(*)

Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to Registrants Form 8-K filed on
November 14, 2000 (the November 14, 2000 Form 8-K)3.2
(*)

Bylaws (incorporated herein by reference to Exhibit 3.2 to the November 14, 2000 Form 8-K)3.3
(*)

Amendment to Certificate of Incorporation (incorporated herein by reference to Exhibit 3.3 to Registrants Form
8-K filed on January 23, 2002)4.1
(*)

Certificate of Designation of Series 2-A Convertible Preferred Stock (incorporated herein by reference to Exhibit 4.1
to the November 14, 2000 Form 8-K)4.2
(*)

Certificate of Merger (incorporated herein by reference to Exhibit 4.2 to the November 14, 2000 Form
8-K)4.3
(*)

Form of Series 3 Convertible Demand Note (incorporated herein by reference to Exhibit 3.2 to Registrants
Registration Statement on Form 10SB filed on September 21, 1999 (SEC File No. 000-26563) (the Form 10-SB))4.4
(*)

Form of Series 2 Convertible Demand Note (incorporated herein by reference to Exhibit 3.3 to the Form
10-SB)4.5
(*)

Form of Common Stock Purchase Warrant (incorporated herein by reference to Registrants Form 8-K filed September
26, 2000 (the September 26, 2000 Form 8-K))4.6
(*)

Form of Registration Rights Agreement (incorporated herein by reference to the September 26, 2000 Form
8-K)4.7
(*)

Certificate of Designations of Series 3-A Convertible Preferred Stock (incorporated herein by reference to Exhibit
4.1 of the July 2, 2001 Form 8-K)4.8
(*)

Amended and Restated Bridge Loan Agreement, dated May 24, 2001, among NetCel360.com Ltd., NetCel360 Holdings Limited,
NetCel360 Sdn Bhd., and the Lenders named therein (incorporated herein by reference to Exhibit 4.2 of the July 2, 2001 Form 8-K)4.9
(*)

First Amendment to Amended and Restated Bridge Loan Agreement, dated June 22, 2001, among NetCel360.com Ltd.,
NetCel360 Holdings Limited, NetCel360 Sdn Bhd., and the Lenders named therein (incorporated herein by reference to Exhibit 4.3 of the July 2, 2001 Form 8-K)4.10
(*)

Convertible Note Purchase Agreement, dated June 25, 2001, among Vsource, Inc., NetCel360.com Ltd., NetCel360 Sdn
Bhd., and the Purchasers named therein (incorporated herein by reference to Exhibit 4.4 of the July 2, 2001 Form 8-K)4.11
(*)

Exchangeable Note and Warrant Purchase Agreement, dated as of July 12, 2001, by and among Vsource, Inc.,
NetCel360.com Ltd., NetCel360 Sdn Bhd and Purchasers named therein, and form of Exchangeable Promissory Note (incorporated herein by reference to Exhibit 4.7 to the Registrants Quarterly Report on Form 10-Q for the period ending July 31, 2001
(the July 31, 2001 Form 10-Q))10.1
(*)

Ventura Professional Center First Amendment to Lease between Virtual Source, Inc. and Security National Properties,
LLC, dated October 27, 1998 (incorporated herein by reference to Exhibit 10.2 to Registrants Form 10-KSB for the year ended January 31, 2000 (the 1999 Form 10-KSB))




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##### Table of Contents

Exhibit No.


Description10.2
(*)

LeaseRazore Land Company, Landlord and Interactive Buyers Network International, Tenant, dated October 11, 1999
(incorporated herein by reference to Exhibit 10.3 to the 1999 Form 10-KSB)10.3
(*)

Promissory Note by Robert C. McShirley dated October 11, 2000 (incorporated herein by reference to Exhibit 10.4 to
Registrants Form 10-QSB for the period ending October 31, 2000 (the October 31, 2000 Form 10-QSB))10.4
(*)

Pledge and Security Agreement with Robert C. McShirley dated October 11, 2000 (incorporated herein by reference to
Exhibit 10.5 to the October 31, 2000 Form 10-QSB)10.5
(*)

Promissory Note by P. Scott Turner dated October 13, 2000 (incorporated herein by reference to Exhibit 10.6 to the
October 31, 2000 Form 10-QSB)10.6
(*)

Promissory Note by Sandford T. Waddell dated September 18, 2000 (incorporated herein by reference to Exhibit 10.7 to
the October 31, 2000 Form 10-QSB)10.7
(*)

Pledge and Security Agreement with Sandford T. Waddell dated September 18, 2000 (incorporated herein by reference to
Exhibit 10.8 to the October 31, 2000 Form 10-QSB)10.8
(*)

Promissory Note by P. Scott Turner dated September 18, 2000 (incorporated herein by reference to Exhibit 10.9 to the
October 31, 2000 Form 10-QSB)10.9
(*)

Pledge and Security Agreement with P. Scott Turner dated September 18, 2000 (incorporated herein by reference to
Exhibit 10.10 to the October 31, 2000 Form 10-QSB)10.10
(*)

Agreement and Plan of Merger dated as of December 14, 2000 (incorporated herein by reference to Exhibit 10.11 to the
October 31, 2000 Form 10-QSB)10.11
(*)

Supplement to merger agreement with Colin Kruger and Michael Shirman dated December 14, 2000 (incorporated herein by
reference to Exhibit 10.11 to the Registrants Form 10-KSB for the year ended January 31, 2001 (the 2000 Form 10-KSB))10.12
(*)

Form of Warrant Holder Agreement with OTT Shareholders (incorporated herein by reference to Exhibit 10.12 to the 2000
Form 10-KSB)10.13
(*)

Form of Registration Rights Agreement with OTT Shareholders (incorporated herein by reference to Exhibit 10.13 to the
2000 Form 10-KSB)10.14
(*)

At Will Employment Agreement with Colin P. Kruger (incorporated herein by reference to Exhibit 10.14 to the 2000 Form
10-KSB)10.15
(*)

At Will Employment Agreement with Michael Shirman (incorporated herein by reference to Exhibit 10.15 to the 2000 Form
10-KSB)10.16
(*)

Office Lease between L.A.T. Investment Corporation and Online Transaction Technologies, Inc. dated March 7, 1999
(incorporated herein by reference to Exhibit 10.16 to the 2000 Form 10-KSB)10.17
(*)

First Amendment to Lease between L.A.T. Investment Corporation dated February 1, 2000 (incorporated herein by
reference to Exhibit 10.17 to the 2000 Form 10-KSB)10.18
(*)

Alliance Agreement between Registrant and IBM dated September 18, 2000 (incorporated herein by reference to Exhibit
10.18 to the 2000 Form 10-KSB)10.19
(*)

IBM PartnerWorld AgreementInternational Basic General Terms between OTT and IBM (incorporated herein by
reference to Exhibit 10.19 to the 2000 Form 10-KSB)10.20
(*)

Redacted Reseller Agreement with Gateway Manufacturing Inc. (incorporated herein by reference to Exhibit 10.20 to the
July 31, 2001 Form 10-Q)10.21
(*)

Employment Agreements of Phillip Kelly (incorporated herein by reference to Exhibit 10.21 to the July 31, 2001 Form
10-Q)




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##### Table of Contents

Exhibit No.


Description10.22
(*)

Employment Agreements of Dennis Smith (incorporated herein by reference to Exhibit 10.22 to the July 31, 2001 Form
10-Q)10.23
(*)

Employment Agreement of Jack Cantillon (incorporated herein by reference to Exhibit 10.23 to the July 31, 2001 Form
10-Q)10.24
(*)

Employment Agreement of James Root (incorporated herein by reference to Exhibit 10.24 to the July 31, 2001 Form
10-Q)10.25
(*)

Master Services Agreement with Network Appliance Inc. (incorporated herein by reference to Exhibit 10.25 to the July
31, 2001 Form 10-Q)10.26
(*)

Support Services Agreement dated October 24, 2001 between Vsource (CI) Ltd, Vsource, Inc. and Gateway Japan Inc.
(incorporated herein by reference to Exhibit 10.26 to Amendment No. 2 to the Registrants Quarterly Report on Form 10-Q for the period ending October 31, 2001 (the October 31, 2001 Form 10-Q))10.27
(*)

Lease Agreement dated October 31, 2001 between Vsource (Japan) Limited and Kintetsu Properties Co. Ltd. (incorporated
herein by reference to Exhibit 10.27 to the October 31, 2001 Form 10-Q)10.28
(*)

2000 Stock Option Plan (incorporated herein by reference to Exhibit 99.1 to Registrants Form 10-QSB/A for the
period ending July 31, 200010.29


2001 Stock Option/Stock Issuance Plan10.30


Form of Stock Option Agreement10.31


Employee Stock Purchase Plan10.32
(*)

Exchangeable Note and Warrant Purchase Agreement, dated January 28, 2002, by and among Vsource, Inc., Vsource (CI)
Ltd, Vsource (Malaysia) Sdn Bhd, and the Purchasers named therein (incorporated herein by reference to Exhibit 4.1 to the Registrants Form 8-K filed on February 6, 2002)10.33


Master Services Agreement with Agilent Technologies Singapore (Sales) Pte Ltd21.1


Subsidiaries of Vsource, Inc.


---

|* |  | Previously filed with Securities and Exchange Commission.
|- |  | ---------------------------------------------------------

| |  | Confidential treatment requested with respect to portions of this Exhibit.
|- |  | --------------------------------------------------------------------------