---




UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 20-F





(Mark One)


 ̈

REGISTRATION STATEMENT PURSUANT TO SECTION 12() OR () OF THE SECURITIES EXCHANGE ACT OF 1934ORx

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15() OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended March 31, 2002OR ̈

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
to





Commission file number: 000-12230





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BAKBONE SOFTWARE INCORPORATED


(Exact name of Registrant as specified in its charter)





PROVINCE OF ALBERTA, CANADA


(Jurisdiction of incorporation or organization)





10145 Pacific Heights Boulevard, Suite 900


San Diego, CA 92121


(Address of principal executive offices)





Securities registered or to be registered pursuant to Section 12(g) of the Act.





Title of each class:

Name of each exchange on which registered:Common Shares Without Par Value

Toronto Stock Exchange





Securities registered or to be registered pursuant to Section 12(b)
of the Act.None





Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act.None





---




Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report: 54,298,756 as at May 31, 2002.





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 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 which financial statement item the registrant has elected to follow.


x  Item 17  ̈ Item 18





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TABLE OF CONTENTS





PART IItem 1.    Identity of Directors, Senior Management and Advisers

1Item 2.    Offer Statistics and Expected Timetable

1Item 3.    Key Information

1A.    Selected financial data

1B.    Capitalization and indebtedness

3C.    Reasons for the offer and use of proceeds

3D.    Risk factors

3Item 4.    Information on the Company

10A.    History and development of the company

10B.    Business overview

11C.    Organizational structure

16D.    Property, plants and equipment

16Item 5.    Operating and Financial Review and Prospects

17A.    Operating Results

20B.    Liquidity and Capital Resources

26C.    Research and Development (R&D)

31D.    Trend information

31Item 6.    Directors, Senior Management and Employees

33A.    Directors and senior management

33B.    Compensation

35C.    Board practices

36D.    Employees

36E.    Share ownership

37Item 7.    Major Shareholders and Related Party Transactions

37A.    Major shareholders

37B.    Related party transactions

38C.    Interests of experts and counsel

38Item 8.    Financial Information

38A.    Consolidated Statements and Other Financial Information

38B.    Significant Changes

38Item 9.    The Offer and Listing

38A.    Offer and listing details

38B.    Plan of distribution

39C.    Markets

39D.    Selling shareholders

39E.    Dilution

39F.    Expenses of the issue

40Item 10.    Additional Information

40A.    Share capital

40B.    Memorandum and articles of association

40C.    Material Contracts

40D.    Exchange Controls and Other Limitations Affecting Security Holders

40E.    Taxation

41F.    Dividends and paying agents

45G.    Statement by experts

45H.    Documents on display

45I.    Subsidiary Information

46




i




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Item 11.    Quantitative and Qualitative Disclosures About Market Risk

46Item 12.    Description of Securities Other than Equity Securities

46PART IIItem 13.    Defaults, Dividend Arrearages and Delinquencies

46Item 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds

46Item 15.    [Reserved]

46Item 16.    [Reserved]

46PART IIIItem 17.    Financial Statements

47Item 18.    Financial Statements

47Item 19.    Exhibits

47







ii




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GLOSSARY OF TERMS





The following are definitions of certain terms used throughout this Form 20-F.





APM:  Application Plug in Modules, a component of software targeted towards a certain type of application, which enhances the performance of the core software when used with that
application.





BakBoneor the Company:  BakBone Software Incorporated, a corporation
incorporated under the laws of Alberta, Canada, and its subsidiaries.





BakBone Acquisition
Corp.:  A corporation incorporated under the laws of the State of Maryland, United States, merged with Tracer Technologies, Inc. in June 2000.





BakBone KK:  BakBone Software KK, formerly NetVault Corporation KK, located in Tokyo, Japan.





BakBone Ltd.:  BakBone Software Limited, formerly NetVault Limited, located in Poole, United Kingdom.





BakBone Inc.:  BakBone Software Inc., a corporation incorporated under the laws of the State of California, United States, located in San Diego,
California.





Common Shares:  The common shares of BakBone.





CD/CD-R:  Compact Disc / Compact DiscRecordable, a type of storage media.





DVD:  Digital Video Disc, a type of storage media.





DAS:  Direct Attached Storage, a method for connecting storage devices to servers.





Device drivers:  Software embedded within an operating system, which manages communication with external devices.





File systems:  A method and protocol for organizing and managing data.





IP:  Internet Protocol, a Layer 3 (network layer) protocol containing addressing information that allows packets of
information to be routed over the Internet.





IPS:  IP Storage, a protocol for communicating and
transferring data over IP networks.





LAN:  Local Area Network, a short distance data
communications network used to link together computers and peripheral devices (such as printers) under some form of standard control.





MagnaVaultor MagnaVault Software:  BakBones comprehensive secondary storage management software for UNIX and Linux host operating environments.





MO:  Magneto-Optical, a storage format using optical technologies on rotating media.





NAS:  Network Attached Storage, a type of data storage that delivers high performance by connecting directly to the
Ethernet network rather than to the server. Network attached storage devices contain their own microprocessors and operating systems eliminating the need to go through the server.





Net Resources:  Net Resources Incorporated, prior to changing its name to BakBone Software Incorporated, a company engaged in mineral exploration
activities until 1999.





NetVaultor NetVault Software:  BakBones storage management
application software used for the backup and restoration of data on various storage topologies.





NetVault
Acquisition:  The acquisition by BakBone in March 2000 of all of the issued and outstanding capital of each of NVS, NetVault Holdings, NetVault Limited and 47% of the issued and outstanding capital of NetVault Corporation KK.




iii




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NetVault Holdings:  NetVault Holdings Limited, a
whollyowned subsidiary of BakBone, incorporated under the laws of the United Kingdom.





NetVault Holdings
Agreement:  The acquisition agreement dated December 1999 among BakBone, NVS, and the principal shareholders of NetVault Holdings.





BakBone KKor NetVault Corporation KK:  A wholly-owned subsidiary of BakBone, incorporated under the laws of Japan, now known as BakBone KK.





BakBone KK Agreement:  The acquisition agreement dated December 1999 between BakBone and the principal shareholders of
NetVault Corporation (now known as BakBone KK).





BakBone KK Distribution Agreement:  The software
license distribution agreement dated October 1997 between NetVault Ltd. and BakBone KK pursuant to which NetVault Limited licensed the NetVault software to BakBone KK for distribution in Japan, South Korea, Taiwan, Singapore, Malaysia, Hong Kong,
the Peoples Republic of China, Australia, New Zealand, Indonesia, the Philippines, Thailand, India, Laos, Cambodia and Vietnam.





NetVault Ltd:  NetVault Limited, a wholly-owned subsidiary of BakBone, incorporated under the laws of the United Kingdom, now known as BakBone Ltd.





NVS:  NVS Holdings Inc., a wholly-owned subsidiary of BakBone, incorporated under the laws of the Province of Alberta, Canada.





NVS Agreement:  The acquisition agreement dated December 1999 among BakBone, NVS and the shareholders of NVS.





OEM:  Original Equipment Manufacturers.





SAN:  Storage Area Network, a short distance data communications network used to link elements within a storage environment.





SP:  A solution provider, including resellers, VARs, system integrators or others.





Tracer:  Tracer Technologies Inc., a corporation incorporated in the State of Maryland, United States, merged with
BakBone Acquisition Corp. in June 2000.





Tracer Acquisition:  The acquisition by BakBone of
Tracer, a private corporation based in Gaithersburg, Maryland and its 50% interest in Tracer Technologies Japan KK.





Tracer KK:  Tracer Technologies Japan KK, located in Tokyo, Japan.





TSE:  Toronto Stock Exchange, the stock exchange on which BakBone Common Shares are traded under the symbol BKB.





VAD:  Value added distributor, a type of channel partner.





VAR:  Value added reseller, a type of channel partner.





WAN:  Wide Area Network, a network that encompasses interconnectivity between devices over a wide geographic area.




iv




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FORWARD LOOKING STATEMENTS





This Annual Report (including the following section regarding results of operations) contains forward-looking statements regarding our business, financial condition,
results of operations and prospects. Words such as expects, anticipates, intends, plans, believes, seeks, estimates and similar expressions or variations of such
words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Annual Report. Additionally, statements concerning future matters such as the development of new products,
enhancements or technologies, sales levels, expense levels and other statements regarding matters that are not historical are forward-looking statements.





Although forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently,
forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause
or contribute to such differences in results and outcomes include without limitation those discussed under the heading Risk Factors below, as well as those discussed elsewhere in this Annual Report. We urge you not to place undue
reliance on these forward-looking statements, which speak only as of the date of this Annual Report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the
date of this Annual Report. We urge you to carefully review and consider the various disclosures made in this Annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition,
results of operations and prospects.





CURRENCY





Unless otherwise indicated, all dollar amounts herein are expressed in U.S dollars. Amounts expressed in Canadian dollars are preceded by the symbol CDN$.




v




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PART I





Item 1.    Identity of Directors, Senior Management and Advisers





Not Applicable.





Item 2.    Offer Statistics and Expected Timetable





Not Applicable.





Item 3.    Key Information





A.    Selected financial data.





The following tables present
selected financial data for Bakbone. We were effectively formed in March 2000 through our acquisition of NVS. At the time of the acquisition, BakBone was a public shell and NVS was privately owned. Since the shareholders of NVS received the greater
proportion of the voting shares of BakBone, the acquisition was accounted for as a reverse takeover whereby NVS was treated as the acquirer of BakBone for accounting purposes. This resulted in the continuation of the financial statements of NVS with
the continuation of BakBones legal name and share capital.





Concurrent with our acquisition of NVS, we
acquired 100% of NetVault Holdings, a non-operating holding company, and its wholly owned subsidiary, NetVault Ltd. and NetVault Ltd.s 25% interest in BakBone KK. At the time of this acquisition, NetVault Holdings was a non-operating private
holding company while NetVault Ltd. and BakBone KK had substantive operations. We acquired an additional 22% of BakBone KK in a separate transaction, bringing the total ownership in BakBone KK to 47%.





On June 9, 2000, we acquired all of the issued and outstanding common shares of Tracer Technologies, Inc. and its 50% ownership of the
common shares of Tracer Technologies Japan Corporation (collectively Tracer). At the time of this acquisition, Tracer had substantive operations.





In January 2002, we acquired an additional 25% interest in Tracer Technologies Japan Corporation (Tracer KK), bringing our total ownership in Tracer KK to 75%. In March 2002 and in connection with the
BakBone KK minority interest acquisition (discussed below), we acquired the remaining 25% minority interest in Tracer KK, bringing our total ownership in Tracer KK to 100%. As of March 31, 2002, Tracer KK is a wholly-owned subsidiary of the Company.





In March 2002, we acquired the remaining 53% interest in BakBone KK, bringing our total ownership in BakBone KK
to 100%. As of March 31, 2002, BakBone KK is a wholly-owned subsidiary of the Company.





Although the 2000
consolidated financial statements are presented as of the year ended April 30, 2000, they reflect only two months of operations (March and April) because NVS had no operations prior to March 2000.





Selected financial data are presented for our predecessor entities, NetVault Ltd. and BakBone KK, from 1999 through our acquisition of
these entities in March 2000.





The predecessor data presented below were translated from the local currency for
both entities, Great British pounds and Japanese yen, for NetVault Ltd. and BakBone KK, respectively, to U.S. dollars and the resulting financial statements were combined for the periods presented in the following tables. In preparing the combined
information, revenues recorded by NetVault Ltd. for sales of software to BakBone KK, as well as the related cost of revenues recorded by BakBone KK for the software purchased from NetVault Ltd. were eliminated to provide comparisons to the
Companys post acquisition revenues and cost of revenues as these intercompany transactions were eliminated upon consolidation.




---




Both predecessor entities fiscal year ends were December 31, and as such, a
stub period is presented in the table below for the period between December 31, 1999 and the acquisition date of March 1, 2000. In addition, net income or net loss per share for the predecessor entities has been omitted as these entities were
private companies and management believes that information is not meaningful.





Our consolidated financial
statements have been prepared in accordance with accounting principles generally accepted (GAAP) in Canada, which differs in certain significant respects from U.S. GAAP. A detailed description of the principal differences between Canadian GAAP and
U.S. GAAP as they relate to the Company and a reconciliation to U.S. GAAP of net loss for the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year ended April 30, 2000, is included in Note 14 to our consolidated financial
statements included in this Annual Report.





The following selected financial data should be read in conjunction
with Operating and Financial Review and Prospects in Item 5 and our audited consolidated financial statements and related notes, included in this Annual Report.





The Company Year
Ended March 31, 2002


The Company Eleven Months Ended March 31, 2001


The Company Year Ended April 30, 2000


Combined Predecessors Two Months Ended February 29, 2000

Combined Predecessors Year Ended December 31,
1999(in thousands  except per share data)Canadian GAAP:Revenues

$
9,863


$
4,975


$
337


$
384

$
2,573Cost of revenues


1,244



782



37



64


745Gross margin


8,619



4,193



300



320


1,828Operating expenses


20,930



23,300



1,249



247


1,577Operating (loss) income


(12,311
)


(19,107
)


(949
)


73


251Other expense (income)


6,480



2,585



(53
)


9


2Net (loss) income

$
(18,791
)

$
(21,692
)

$
(896
)

$
64

$
249Net loss per sharebasic and diluted

$
(0.46
)

$
(0.87
)

$
(0.11
)


N/A


N/A





The Company Year
Ended March 31, 2002


The Company Eleven Months Ended March
31, 2001


The Company Year Ended April 30, 2000(in thousands  except per share data)U.S. GAAP:Revenues

$
6,609


$
3,233


$
168Cost of revenues


1,158



629



18Gross margin


5,451



2,604



150Operating expenses


42,468



43,982



32,782Operating loss


(37,017
)


(41,378
)


(32,632
)Other (expense) income


(388
)


302



221Net loss

$
(37,405
)

$
(41,076
)

$
(32,411
)Net loss per sharebasic and diluted

$
(0.92
)

$
(1.65
)

$
(4.03
)




2




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The Company March
31, 2002

The Company March
31, 2001


The Company April
30, 2000

Combined Predecessors February 29, 2000


Combined Predecessors December 31, 1999(in thousands)Canadian GAAP:Working capital (deficit)

$
6,039

$
(192
)

$
19,838

$
(528
)

$
(608
)Long-term assets


8,113


12,949



3,398


310



318Total assets


18,296


18,758



25,180


1,435



1,658Long-term liabilities


2,004


428










Shareholders equity (deficit)


12,148


12,229



23,236


(218
)


(290
)








The Company March
31, 2002


The Company March
31, 2001(in thousands)U.S. GAAP:Working capital (deficit)

$
6,039


$
(1,124
)Long-term assets


8,863



15,552Total assets


19,046



19,778Long-term liabilities


4,881
(1)


240Shareholders equity


10,021



14,188


---

|(1) |  | Includes $2,877 related to common shares to be issued in fiscal 2003.
|--- |  | ---------------------------------------------------------------------




B.    Capitalization and indebtedness.





Not Applicable.





C.    Reasons for the offer and use of proceeds.





Not
Applicable.





D.    Risk factors.





You should consider each of the following
factors as well as the other information in this Annual Report in evaluating our business and our prospects. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or
that we currently consider immaterial may also impair our business operations. If any of the following risks actually occur, our business and financial results could be harmed. In that case the trading price of our common stock could decline. You
should also refer to the other information set forth in this Annual Report on Form 20-F, including our financial statements and the related notes.




3




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We depend on large orders from end-user customers for a significant portion
of our revenue.





We depend on large orders for a significant portion of our revenue. Our revenue in one
quarter may fluctuate significantly based on whether a large sale near the end of a quarter is closed or delayed. Our individual sales generally range in value from a few thousand dollars to tens of thousands of dollars. The process of closing large
sales is sometimes lengthy, therefore, our revenue for a given period is likely to be affected by the timing of these large orders, which makes it difficult for us to predict the amount of quarterly revenue. The factors that may delay these large
orders include:





| |  |  | time needed for end-user customers to evaluate our software;
| | - |  | ------------------------------------------------------------




| |  |  | customer budget restrictions, particularly in weak or uncertain general economic and industry conditions; and
| | - |  | -------------------------------------------------------------------------------------------------------------




| |  |  | customers internal engineering work needed to integrate our software with their systems.
| | - |  | -----------------------------------------------------------------------------------------




We derive a significant amount of revenue from only a few customers.





If any of our largest customers were to reduce purchases from us, our business would be adversely affected, unless we were able to increase sales to other customers
substantially. Many of these customers have recently announced that their own businesses are slowing, which could adversely affect their demand for our products. We do not have a contract with any of these customers that requires the customer to
purchase a specified number of software licenses from us. Therefore, we cannot be sure that these customers will continue to purchase our products at current levels.





We face intense competition on several fronts.





We have a number of competitors in our product market. If existing or new competitors gain market share, our business and operating results could be adversely affected. Many of our competitors have greater financial
resources than we do in the areas of sales, marketing and product development. Our future and existing competitors could introduce products with superior features, scalability and functionality at lower prices than our products, and could also
bundle existing or new products with other more established products in order to compete with us. Our competitors could also gain market share by acquiring or forming strategic alliances with our other competitors. As a result, we expect to face
additional competition from these companies in the future.





Our primary competitors and their products are:





Veritas Software

NetBackup, BackupExecLegato Systems

NetWorker, SmartMedia, CelestraHewlett Packard

OmnibackIBM

Tivoli Storage Manager, ADSMComputer Associates

ARCServe, AlexandriaEMC

EDM (software only)





We may require additional capital.





Our actual expenses may exceed our projected amounts and/or actual revenues may be less than we currently project, in which
case we may need to raise additional funds from lenders and equity markets in the future. In addition, we may choose to raise additional financing in order to capitalize on market opportunities, that may accelerate our growth objectives. Our ability
to arrange such financing in the future will depend in part on the prevailing capital market conditions as well as our business performance. We cannot assure you that we will be successful in our efforts to arrange additional financing, if needed,
on terms satisfactory to us or at all. If we raise additional equity or debt financing by the issuance of shares, control of the Company may change and shareholders may experience dilution to their equity interest in the Company.




4




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Our quarterly revenue may fluctuate significantly, which could cause the
market price of our stock to be extremely volatile.





We may experience a shortfall in revenue in any given
quarter in relation to our plans or investor expectations. Any such shortfall in revenue could cause the market price of our stock to fall substantially. Our revenue in general, and our license revenue in particular, are difficult to forecast and
are likely to fluctuate significantly from quarter to quarter due to a number of factors, many of which are outside of our control. These factors include:





| |  |  | the timing and magnitude of sales through our OEM customers, including Seagate and NCR;
| | - |  | ---------------------------------------------------------------------------------------




| |  |  | the possibility that a slowdown in sales by our OEM customers could result in reduced demand for our products;
| | - |  | --------------------------------------------------------------------------------------------------------------




| |  |  | the introduction, timing and market acceptance of new products;
| | - |  | ---------------------------------------------------------------




| |  |  | changes in data storage and networking technology or introduction of new operating system upgrades by our OEM customers, which could require us to modify our
products or to develop new products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the relative growth rates of the Windows NT, UNIX and Linux markets;
| | - |  | --------------------------------------------------------------------




| |  |  | the rate of adoption of storage area networks and the timing and magnitude of sales of our storage area networking products and services;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the rate of adoption of network attached storage appliance technology and the timing and magnitude of sales of our network attached storage appliance products
and services;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the extent to which our customers renew their maintenance contracts with us;
| | - |  | ----------------------------------------------------------------------------




| |  |  | changes in our pricing policies and distribution terms;
| | - |  | -------------------------------------------------------




| |  |  | the ability of our end-user customers to purchase our products may be adversely affected by their inability to raise additional capital or to meet their
business objectives;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the possibility that our customers may defer purchases or choose to not purchase at all as a result of reduced information technology budgets;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the possibility that our customers may defer purchases in anticipation of new products or product updates by us or by our competitors;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the overall demand for data availability products and services, which is likely to be lower in weak or uncertain general economic and industry conditions; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the possibility of an overall economic slowdown.
| | - |  | ------------------------------------------------




You should not rely on the results of any prior periods as an indication of our future performance. If we have a shortfall in revenue in any given quarter, our efforts to reduce our operating expenses
in response will likely lag behind the revenue shortfall. Therefore, any significant shortfall in revenue will likely have an immediate adverse effect on our operating results for that quarter.




5




---




Our business could be adversely affected if we fail to manage our growth
effectively.





If we fail to manage our growth effectively, our business and operating results could be
adversely affected, which could cause the market price of our stock to fall. We expect to continue to grow our operations domestically and internationally, and to hire additional employees. The growth in our operations and staff has placed, and will
continue to place, a significant strain on our management systems and resources. If we fail to manage our future anticipated growth, we may experience higher operating expenses, and we may be unable to meet the expectations of securities analysts or
investors with respect to future operating results. To manage this growth we must continue to:





| |  |  | improve our financial and management controls, reporting systems and procedures;
| | - |  | --------------------------------------------------------------------------------




| |  |  | add and integrate new senior management personnel;
| | - |  | --------------------------------------------------




| |  |  | improve our licensing models and procedures;
| | - |  | --------------------------------------------




| |  |  | hire, train and retain qualified employees;
| | - |  | -------------------------------------------




| |  |  | control expenses;
| | - |  | -----------------




| |  |  | diversify channel sales strategies;
| | - |  | -----------------------------------




| |  |  | integrate geographically dispersed operations; and
| | - |  | --------------------------------------------------




| |  |  | invest in our internal networking infrastructure and facilities.
| | - |  | ----------------------------------------------------------------




We have committed a significant amount of funds to obtaining additional systems and facilities to accommodate our current and future anticipated growth. To the extent that
this anticipated growth does not occur or occurs more slowly than we anticipate, we may not be able to reduce expenses to the same degree. If we incur operating expenses out of proportion to revenue in any given quarter, our operating results may be
adversely impacted.





Third parties may claim that we infringe their proprietary rights.





We may potentially receive claims that we have infringed the intellectual property rights of others. As
the number of products in the software industry increases and the functionality of these products further overlap, we may become increasingly subject to infringement claims, including patent, trademark and copyright infringement claims. In addition,
former employers of our former, current or future employees may assert claims that such employees have improperly disclosed to us the confidential or proprietary information of these former employers. Any such claim, with or without merit, could be
time-consuming to defend, result in costly litigation, divert managements attention from our core business, require us to stop selling or delay shipping, or cause the redesign of our product. In addition, we may be required to pay monetary
amounts as damages, for royalty or licensing arrangements, or to satisfy indemnification obligations that we have with some of our customers.





We license and use software from third parties in our business. These third party software licenses may not continue to be available to us on acceptable terms. Also, these third parties may from time
to time receive claims that they have infringed the intellectual property rights of others, including patent and copyright infringement claims, which may affect our ability to continue licensing this software. Our inability to use any of this third
party software could result in shipment delays or other disruptions in our business, which could materially and adversely affect our operating results.





We may not be able to protect our proprietary information.





We rely on a combination of copyright, trademark and trade secret laws, confidentiality procedures, contractual provisions and other measures to protect our proprietary information. All of these measures afford only limited
protection. These measures may be invalidated, circumvented or challenged, and others may develop technologies or processes that are similar or superior to our technology. We license some of our products




6




---

under shrink wrap license agreements that do not require a physical signature by the end user licensee and therefore may be unenforceable under the laws of some jurisdictions. Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt to copy our products or to obtain or use information that we regard as proprietary.





Existing strategic alliances may be terminated and we may be unable to develop new relationships.





Our growth and marketing strategies are based, in part, on seeking out and forming strategic alliances with third party suppliers, VARs, VADs, OEMs and other businesses
integral to our future success. There can be no assurance that existing strategic alliances will not be terminated or modified in the future nor can there be any assurance that new relationships will be developed.





None of our channel partners and OEMs worldwide have any obligation to continue selling our products and any of them may terminate their
relationship with us at any time.





A portion of our future revenue is expected to come from OEM sales that
incorporate our storage management software into the OEM hardware solution. We will have no control over the shipping dates or volumes of systems the OEMs ship and they have no obligation to ship systems incorporating our software. They also have no
obligation to recommend or offer our software products exclusively or at all. These OEMs also could choose to bundle a competitors product in lieu of our product.





We expect a large portion of our revenues will come from our channel partners across the world. These partners have no obligation to establish a sales relationship, or to
continue selling any of our products and may terminate the relationship with us at any time upon written notice as described in the related channel partner agreements.





Our various distribution channels require constant management.





If we fail to manage our various distribution channels successfully, they may conflict with one another or otherwise not function as we anticipate, and our business and operating results could be
adversely affected. The BakBone brand does not currently have high recognition in our various distribution channels which could impact sales.





We rely on competing equipment manufacturers as a material source of revenue.





A portion of our revenue is expected to come from our OEMs that incorporate our storage management software into their hardware solution. Risks associated with our OEM customers include:





| |  |  | we have no control over the shipping dates or volumes of systems they ship;
| | - |  | ---------------------------------------------------------------------------




| |  |  | they have no obligation to recommend or offer our software products;
| | - |  | --------------------------------------------------------------------




| |  |  | they may generally have no minimum sales requirements and can terminate our relationship at any time or upon short notice;
| | - |  | --------------------------------------------------------------------------------------------------------------------------




| |  |  | they could choose to develop their own data availability products and incorporate those products into their systems instead of our products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | they could develop enhancements to and derivative products from our products; and
| | - |  | ---------------------------------------------------------------------------------




| |  |  | they could change their own base products, which could make it difficult for us to adapt our products to theirs.
| | - |  | ----------------------------------------------------------------------------------------------------------------




Finally, our OEM customers compete with one another. If one of our OEM customers views the products we have developed for another OEM as
competing with its products, it might decide to stop doing business with us, which could adversely affect our business and our operating results.




7




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Some of our OEM agreements may not result in increased product sales.





We have OEM agreements with Seagate Technology, Inc., Disc, Inc., and Turbolinux Japan. If we are unable
to leverage these relationships to increase product sales, we will have expended significant resources without generating corresponding revenue, which could adversely affect our business and our operating results. We expect to leverage the inclusion
of our products in the OEMs products to generate sales of additional products to the OEMs customers. These relationships require our personnel to develop expertise with respect to the OEMs products and markets and to cooperate
closely with their personnel. We cannot assure you that we will be able to attract and retain qualified employees to work with our OEM customers or to develop and improve the products designed for these customers.





Our product lines are not broadly diversified.





We derive and expect to derive a substantial majority of our revenue from a limited number of software products. If customers do not purchase our products as a result of
competition, technological change, budget constraints or other factors, we do not have other product categories that we could rely on to make up any shortfall in sales. As a result, our revenue could decrease and our business and operating results
would be adversely affected.





Our software may have a short life cycle.





Software products typically have a limited life cycle and it is difficult to estimate when they will become obsolete. We must therefore
continually develop and introduce innovative new products and/or upgraded versions of our existing products before the current software has completed its life cycle. If we are unable to keep pace with the need to supply new products, we may not be
able to grow and sustain the level of sales required for success.





Our success depends on our ability to
develop new and enhanced products that achieve widespread market acceptance.





Our future success depends
on our ability to address the rapidly changing needs of our customers by developing and introducing new products, product updates and services on a timely basis, by extending the operation of our products on new platforms, and by keeping pace with
technological developments and emerging industry standards. In order to grow our business, we are committing substantial resources to developing software products and services for the SAN market and the NAS market. Each of these markets is new and
unproven, and industry standards for these markets are evolving and changing. If these markets do not develop as anticipated, or demand for our products in these markets does not materialize or occurs more slowly that we expect, we will have
expended substantial resources and capital without realizing sufficient revenue, and our business and operating results could be adversely affected.





Our products may contain significant defects which may result in liability and/or decreased sales.





Software products frequently contain errors or failures, especially when first introduced or when new versions are released. Despite our efforts to test our products, we might experience significant
errors or failures in our products, or they might not work with other hardware or software as expected, which could delay the development or release of new products or new versions of products, or which could adversely affect market acceptance of
our products. End-user customers use our products for applications that are critical to their businesses, and they have a greater sensitivity to product defects than the market for other software products generally. Our customers may claim that we
are responsible for damages to the extent they are harmed by the failure of any of our products. If we were to experience significant delays in the release of new products or new versions of products, or if customers were dissatisfied with product
functionality or performance, we could lose revenue or be subject to liability for service or warranty costs, and our business and operating results could be adversely affected.




8




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We may be unable to hire and retain qualified employees.





Our future growth and success depends on our ability to hire and retain qualified employees as needed,
and to manage our employee base effectively. If we are unable to hire and retain qualified employees, our business and operating results may be adversely affected. Conversely, if we fail to reduce staffing levels when necessary, our costs would be
excessive and our business and operating results would be adversely affected. We need to hire and retain sales, technical, and senior management personnel to support the planned expansion of our business and to meet the anticipated increased
customer demand for our products and services. Competition for people with the skills we require is intense, particularly in the San Diego area where our headquarters are located, and the high costs of living in this area make our recruiting and
compensation costs higher. As a result, we expect to continue to experience increases in compensation costs. We cannot assure that we will be successful in hiring or retaining new personnel.





The loss of key personnel could adversely affect our business.





Our future anticipated growth and success depends on the continued service of our key sales, technical, and senior management personnel. Many of our senior personnel have been with the Company or its
predecessors for a number of years, and we cannot assure that we will be able to retain them. The loss of senior personnel can result in significant disruption to our ongoing operations, and new senior personnel must spend a significant amount of
time learning our business and our systems in addition to performing their regular duties. Even though we have entered into employment agreements with some key management personnel, these agreements cannot prevent their departure. We do not have key
person life insurance covering any of our personnel, nor do we currently intend to obtain this insurance.





Our foreign operations and sales create unique problems that could adversely affect our operating results.





An investment in our securities involves greater risk than an investment in many businesses because we have significant operations outside of the United States, including engineering, sales, and client services, and we plan
to expand these international operations. As of March 31, 2002, we had 39 employees in Europe and 21 employees in Japan. Our foreign operations are subject to risks, including:





| |  |  | potential loss of proprietary information due to piracy, misappropriation or weaker laws regarding intellectual property protection;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------




| |  |  | imposition of foreign laws and other governmental controls, including trade restrictions;
| | - |  | -----------------------------------------------------------------------------------------




| |  |  | fluctuations in currency exchange rates and economic instability such as higher interest rates and inflation, which could reduce our customers ability to
obtain financing for software products or which could make our products more expensive in those countries;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | longer payment cycles for sales in foreign countries and difficulties in collecting accounts receivable;
| | - |  | --------------------------------------------------------------------------------------------------------




| |  |  | difficulties in staffing and managing our foreign operations;
| | - |  | -------------------------------------------------------------




| |  |  | difficulties in coordinating the activities of our geographically dispersed and culturally diverse operations;
| | - |  | --------------------------------------------------------------------------------------------------------------




| |  |  | seasonal reductions in business activity in the summer months in Europe and other countries; and
| | - |  | ------------------------------------------------------------------------------------------------




| |  |  | costs and delays associated with developing software in multiple languages.
| | - |  | ---------------------------------------------------------------------------




In addition, our foreign sales are substantially denominated in their respective local currency, creating risk of foreign currency translation gains and losses that could
adversely affect our business and operating results.




9




---




Our past results are not indicative of our future prospects.





Operating results of Net Resources, our corporate predecessor, prior to the NetVault Acquisition are not
representative of our current business of selling data storage management software. We therefore should be analyzed as a new business with a limited operating history in the software industry.





The costs of integrating recently acquired companies may continue.





There have been significant costs of integration associated with our acquisitions of NVS, NetVault Holdings, NetVault Limited, BakBone KK, and Tracer. As each of these
corporations carry on operations in different jurisdictions, we have had to update their accounting systems to accommodate them. We believe that the majority of integration costs for these entities have been incurred.





Power outages or natural disasters could disrupt our business.





We must protect our business and our network infrastructure against damage from earthquake, flood, hurricane and similar events, as well as from power outages. A
substantial portion of our operations are subject to these risks, particularly our operations located in California. While the impact to our business and operating results has not yet been material, we cannot assure that power losses will not
adversely affect our business in the future, or that the cost of acquiring sufficient power to run our business will not increase significantly.





Item 4.    Information on the Company





A.    History and development of the company.





The name of the
Company is BakBone Software Incorporated. Our Common Shares trade on the Toronto Stock Exchange under the symbol BKB and on pink sheets in the United States under the symbol BKBOF.PK.





BakBone was incorporated in British Columbia, Canada in December 1986 as CANU Resources Limited under The Company Act through the
amalgamation of Canu Resources Limited and Ican Resources Ltd., carrying on business under the name Ican Minerals Ltd. In November 1992, Ican Minerals Ltd. continued from the Province of British Columbia to the Province of Alberta. Effective
December 1998, Ican Minerals Ltd. changed its name to Net Resources Inc. and consolidated its issued and outstanding common stock on the basis of one new Common Share for each six Common Shares formerly issued and outstanding. All references in this
document to our Common Shares refer to such shares after giving effect to the consolidation, unless specifically noted otherwise. By Articles of Amendment filed in March 2000, Net Resources Inc. changed its name to BakBone Software Incorporated.





We were effectively formed in March 2000 through our acquisition of NVS. At the time of the acquisition, BakBone
was a public shell and NVS was privately owned. Since the shareholders of NVS received the greater proportion of the voting shares of BakBone, the acquisition was accounted for as a reverse takeover whereby NVS was treated as the acquirer of BakBone
for accounting purposes. This resulted in the continuation of the financial statements of NVS with the continuation of BakBones legal name and share capital.





Concurrent with our acquisition of NVS, we acquired 100% of NetVault Holdings, a non-operating holding company, and its wholly owned subsidiary, NetVault Ltd. and NetVault
Ltd.s 25% interest in BakBone KK. At the time of this acquisition, NetVault Holdings was a non-operating private holding company while NetVault Ltd. and BakBone KK had substantive operations. We acquired an additional 22% of BakBone KK in a
separate transaction, bringing our total initial ownership in BakBone KK to 47%.




10




---




Corporate transactional activity during the last full fiscal year is described
below:





In January 2002, we acquired an additional 25% interest in Tracer KK in exchange for 30,000 Common Shares
and $200,000 in cash, bringing our total ownership in Tracer KK to 75%. The Common Shares are to be held in escrow and issued in equal annual installments, commencing January 2003. Of the cash consideration given, $100,000 was paid upon the closing
of the transaction, with the remaining $100,000 being paid in five equal and consecutive monthly payments, commencing April 1, 2002. Both the escrowed Common Shares and the cash installment payments are contingent upon the seller maintaining his
employment with the Company. In March 2002, we acquired the remaining 25% minority interest in Tracer KK, bringing our total ownership in Tracer KK to 100%. The consideration given for the remaining 25% was nominal.





In March 2002, we entered into an agreement to issue 2,100,000 Common Shares and $170,000 in cash to acquire the remaining 53% interest in
BakBone KK, bringing our total ownership in BakBone KK to 100%. The cash is to be paid in twelve equal monthly installments of $10,000, commencing April 1, 2002, with the remainder to be paid upon the earlier of our next financing or March 31, 2004.
Of the total consideration given, 1,822,642 Common Shares and the cash commitment were issued to Pat Barcus, a former principal of NVS and BakBone KK, for his 46% interest in BakBone KK, and 277,358 Common Shares were issued to a Japanese citizen,
who was a principal of BakBone KK prior to the March 2000 acquisitions, for her 7% interest in BakBone KK. The Common Shares will be issued in fiscal 2003.





To the knowledge of management, there has been no indication of any significant formal public takeover offers by third parties in respect of our shares or by us in respect of other companies
shares during the last and current financial year.





Our corporate headquarters are located at 10145 Pacific
Heights Boulevard, Suite 900, San Diego, CA, 92121. Our registered office is located at Suite 1400, 350  7th Avenue S.W., Calgary, Alberta, T2P 3N9. The telephone number for our transfer agent in Canada is (800) 387-0825.





B.    Business overview.





BakBone develops and markets
high-performance storage management software designed for the network storage and open systems markets. Our goal is to become the leader in the field of storage management software through our two primary products: NetVault and MagnaVault, which are
described in detail below. Our solutions are intended to deliver greater productivity and benefits to our customers, while embracing leading edge storage technologies. We strive to provide network administrators with products that contain a broader
array of features, and that are easier to use, than the software packages that typically come bundled with network storage hardware. Corporations will purchase our products if they accept the proposition that our software packages provide a better
combination of performance and value than the other alternatives in the marketplace.





NetVault





NetVault is a backup and recovery software that permits computer network administrators to maintain
backup copies of documents, data, images and records so that they may be restored for access if files are lost or corrupted or in the event of a future catastrophic local server or network failure. NetVault addresses the growing data
storage needs of systems administrators across a wide range of storage topologies, including: DAS, SAN, NAS, LAN and WAN. NetVaults scalable, modular architecture meets the challenges of storage management for a wide variety of applications,
including the most popular databases used by firms worldwide including, but not limited to: Oracle, SQL, Sybase and Microsoft Exchange.





NetVault is a fully functional software suite that offers several advantages over competitive products (such as Veritas NetBackup and Legatos Networker). Over the last two years, NetVault has been completely
re-architected to allow for the rapid, seamless integration of new features. From a business standpoint, this gives




11




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BakBone a faster time to market in our dynamically changing industry. From a users standpoint, it allows for the addition of new features and enhancements without adding significant
administrative burden.





Another key advantage of NetVault is its industry recognized speed of installation and
ease of use. NetVault can be installed in a complex SAN environment in as little as six minutes while many of our competitors products can take several days to a week or more for a complete installation. Once installed, NetVault is operated
from a single central graphic user interface (GUI) console. The GUI provides for point and click operation of NetVault whereas some competitive products require the user to key in specific commands, a skill that may require extensive training and
additional costs to the operation of the software once installed.





Also central to the success of NetVault are its
APMs. The primary benefit of these modules is that they allow hot backup of applications, meaning that user databases remain online during backup operations, assuring zero downtime of the users systems. BakBone leads the industry in
application interoperability with over 270 APMs, each providing for unique configurations. Bringing the product offering into the broader storage software market definition are also APMs that address disaster recovery and open file management.





We acquired NetVault as a part of the NetVault Acquisition and we are the sole owner of the related intellectual
property rights for NetVault.





MagnaVault





MagnaVault is our comprehensive secondary storage (or near-line) archival storage management software for UNIX and Linux host operating environments. MagnaVault
is a suite of device driver, robotic management, file systems, migration and web-based management software designed for seamless integration of CD, DVD and MO optical drive and library technologies. MagnaVault allows an optical library to appear as
a standard file system, offering transparent user access to archived data for any existing application or database. Users can browse the contents of an optical library as if the files were on a hard drive, transparently scheduling access to media
within the optical library file system environment.





MagnaVault includes a browser-based Web interface for easy
administration from any Internet connection, along with a command line and application programmers interface (API) toolkit. MagnaVault includes powerful virtual file system capabilities that enable spanning of data across media surfaces, libraries
and storage servers, while providing data and media interchange between unlike host environments. MagnaVault is designed to maximize the performance and utility of all types of secondary optical storage media, and provides transparent file system
access to both NFS (Unix) and CIFS (Windows) clients.





MagnaVault offers a wide range of media and device support
for most of todays major manufacturers, including Asaca, DISC, HP, Hitachi, JVC, Kubota, Panasonic, Pioneer, Plasmon, Sony and Toshiba. Ongoing relationships and procedures are in place that are designed to provide a continuous stream of
technology upgrades for future MagnaVault product features. BakBone participates in numerous industry forums and interest groups with the intention of ensuring that MagnaVault will continue to maintain relevance and utility into the future archival
storage market niche.





We acquired MagnaVault as a part of the Tracer Acquisition and we are the sole owner of the
related intellectual property rights for MagnaVault.





Product distribution





We presently market our products and associated services to OEMs and to end-user customers through indirect sales channels such as
resellers, solution providers, hardware distributors, application software vendors and systems integrators.




12




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BakBone KK and Tracer KK, both located in Tokyo, Japan, distribute the NetVault
and MagnaVault software in the Pacific Rim via distribution channels in Japan and other countries throughout Asia.





BakBone Ltd., located in the United Kingdom, distributes the NetVault and MagnaVault software in Europe, Africa and the Middle East.





BakBone Inc., located in the United States, distributes the NetVault and MagnaVault software throughout the United States, Canada and Latin America.





Target Markets





BakBones products can be used in virtually any industry where there is a need for electronic data or images to be backed up, archived or prepared for disaster recovery. The environments covered
within those industries range from workgroup, to departmental, to enterprise wide. More specifically within those environments, BakBone products are targeted to network storage, a market projected to constitute 71% of all storage by the year 2005,
according to an IDC December 2000 report. The growth of network storage is in part due to the emergence of NAS and SAN solutions, for which BakBone products are ideally suited.





Technology Alliances





One of BakBones key areas of focus is working with complementary storage software and hardware vendors to assure smooth operation of our software with other solution devices. BakBone maintains an interoperability laboratory
that is populated with an extensive array of hardware and software from all the leading storage vendors. To date, over 500 configurations have been tested and certified with BakBone software. Certified hardware includes drives and libraries
including, but not limited to: Hewlet Packard, Hitachi, IBM, Panasonic, Quantum/ATL, Seagate, Sony, and StorageTek as well as the full range of smaller storage manufacturers.





Financial Information By Segment





Management has determined that the Company operates in two segments, which are the NetVault product line and the MagnaVault product line. Operating revenues are generated from the licensing of software and sales of support services.
The following table represents a summary of revenues by product line for the periods presented (in thousands):





Year ended March
31, 2002

Eleven months ended March 31, 2001

Year ended April
30, 2000RevenuesLicensing:NetVault

$
6,894

$
2,378

$
242MagnaVault


1,201


1,808


Total


8,095


4,186


242Service:NetVault


1,218


530


95MagnaVault


550


259


Total


1,768


789


95Total revenues

$
9,863

$
4,975

$
337




13




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The following table represents a summary of revenues by major geographic region
(in thousands):





Year ended March 31, 2002

Eleven months ended March 31, 2001

Year ended April 30, 2000RevenuesLicensing:Europe

$
1,355

$
398

$
29Asia


3,714


2,512


213North America


3,026


1,276


Total


8,095


4,186


242Service:Europe


379


278


65Asia


359


198


30North America


1,030


313


Total


1,768


789


95Total revenues

$
9,863

$
4,975

$
337





Seasonality; Dependence on Raw Materials





Our software business is not seasonal. Our products consist primarily of intellectual property and do not
depend in the traditional sense on raw materials. Fluctuation of price and supply of materials does not have a material effect on our business performance.





OEM and bundling agreements





To date, our main form
of product distribution has been through our VAR and VAD partners. We have also signed agreements with OEM and bundling partners creating an additional form of product distribution. OEM and bundling allow us to distribute a limited version of our
storage management software with complementary software and hardware solutions offered by other vendors. In addition to providing an additional source of distribution for our products, these agreements show third party support and validation of our
product in the competitive storage management markets because these agreements make our software the exclusive backup solution offered by the OEM and bundle partners.





In OEM and bundling relationships, we generally receive a nominal per unit fee for each unit of our product that is shipped with the OEM or bundling partners
products. These fees are established predominantly to recoup the costs of running the related program. The material revenue impact for the Company comes in the form of upgrade opportunities where an end user that receives our OEM or bundled product
makes a purchase decision to upgrade to a fully functional version of our product. Upgrade sales are passed through our VAR and VAD partners, as with all other of our licensing sales, and the customer is charged by the reseller based on our master
price list.





OEM and bundling revenues from the related agreements have not been a material source of revenues to
date. Management believes that the existing unit sales data relating to OEM and bundling agreements are not adequate to provide a basis for projecting revenue from potential upgrades. In addition, the related upgrade rate for products already
shipped can not yet be relied upon as a basis of projecting upgrade revenue. To date, the Company has not realized material revenues and does not expect these agreements directly to generate material revenues. Revenues may result in the future
because the products sold as a result of these agreements facilitate the distribution of our products to end users who may (or may not) make a purchase decision to upgrade to a more fully functional version of the NetVault Software. The point of
achieving material revenues cannot be predicted at this time as these relationships are in their initial stages and reliable sales information for these relationships does not exist.




14




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The following is a discussion of the OEM and bundling agreements currently in
place.





Turbolinux Japan





In April 2001, we signed a bundling agreement with Turbolinux Japan under which the version 6.5 of Turbolinux is bundled with a customized copy of NetVault. In Japan,
Turbolinux is a version of the Linux operating system generally preferred by small and mid-sized companies. Distribution of the product is handled either through Turbolinuxs distributors or on a retail level through computer shops. For each of
the bundled Turbolinux/NetVault units shipped, BakBone receives a nominal fee as set forth in the agreement. Upgrade opportunities for this product are somewhat less than for our other OEM and bundled products, as users of Turbolinux typically do
not have large systems that would require additional functionality for the bundled NetVault software.





Seagate Removable Storage Solutions (Seagate RSS)





In May 2001, we entered into an
OEM agreement with Seagate RSS that allows Seagate to include a basic version of our NetVault product with their TapeStor branded LTO single drive (Viper 200) and 11-slot autoloader (Viper 2000) products sold through commercial distribution
channels. This is an exclusive agreement between Seagate and BakBone and allows for only BakBone software to be shipped with all Seagate Viper 200 and Viper 2000 hardware units. Shipments of Seagate units containing our product started in June 2001.





Seagate sells their equipment through distributors and resellers. The Seagate bundling programs create
significant opportunities for sales upgrades as well as sales leads for our channel sales organization and our reseller partners, as the OEM agreement requires that all NetVault upgrades (including service contracts, specific database/application
support, and expansion backup server and client licenses) be purchased through our normal sales channels.





Disc, Inc. (Disc)





In September 2001, we entered into an agreement with Disc which
allows Disc to distribute a private-labeled version of our MagnaVault software for UNIX-based optical storage management. We created the private-labeled software to Discs specifications and end users receiving the software with Discs
hardware are unaware that the underlying software code is MagnaVault. We receive a nominal per unit fee for each unit shipped by Disc and, like Seagate, upgrade sales as well as sales leads are expected to result from this agreement. Upgrade sales
will be made directly through Disc and Disc will provide all first-line support for end users.





Protection
of Proprietary Information





We rely on a combination of contract, copyright, trademark and trade secret
laws, confidentiality procedures and other measures to protect our proprietary information. As part of our confidentiality procedures, we generally enter into non-disclosure agreements with our employees, distributors and corporate partners. In
addition, we enter into license agreements with respect to our software, documentation and other proprietary information. These licenses are nontransferable and have limited terms.





We have several registered and/or common law trademarks in the United States and other countries, among them NetVault, BakBone, the BakBone logo, MagnaVault, CentraVault,
MagnaWriter, DirectSAN, Dynamic Shared Devices/DSD, Magna, TurboVault, Power Press, Application Plug-In Module/APM and Smart Client.




15




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Governmental Regulations





We are a multi-national corporation and we ship our software products all over the world. As such we must abide by the export regulations
as promulgated by the Bureau of Export Administration and U.S. Department of Commerce. In the event such regulations would restrict our ability to ship our products into countries where we have a high volume of customers, the business could be
affected.





To managements knowledge, there are no known government regulations regarding storage management
that would adversely affect our business. Certain government required standards are normally a part of industry knowledge, and as such, would be understood and acted upon by us in the normal course of doing business. Certain government regulations
have come up recently that have a positive impact upon us. The most significant legislation that encompasses digital storage management on a global basis is the National Archives Records Archive Initiative as outlined in the Department of
Defenses 5015.2 rule. Active program participants include Hitachi, IBM, Intel and Microsoft, and encompass many US-based initiatives that include the Stanford Digital Library Technologies project, National Science Foundation (NSF) Digital
Library Initiative, DARPA, National Library of Medicine, Library of Congress (LOC) Digital Library, NASA and the FBI. Other significant digital storage management legislation that has a positive impact on the Company is recent SEC mandates towards
audited integrity for emails by storing them on optical (non-volatile, non-rewritable) media, covered under the US Presidential initiative (PERPOS), an additional component of the Department of Defenses 1505.2 rulemaking. All facets of
international, national, state and local governments all have legislation governing digital storage management guidelines that have a significant positive impact on the overall storage management initiatives within the Company.





C.    Organizational structure.





BakBone carries on its
operations in the United Kingdom, Japan, Canada and the United States through its subsidiaries. BakBone owns all of the capital stock of BakBone Software Inc. (U.S.), NVS Holdings Inc. (Alberta, Canada), and BakBone Acquisition Corp. (U.S.), which
in turn owns 100% of the capital stock of Tracer KK. NVS Holdings owns all of the capital stock of NetVault Holdings Limited (U.K.), which in turn owns all of the capital stock of BakBone Software Limited (U.K.). The capital stock of BakBone KK
(Japan) is owned 25% by BakBone Software Limited (U.K.) and 75% by BakBone.





A list of our subsidiaries is filed
as Exhibit 8.1 to this Annual Report.





D.    Property, plants and equipment.





All assets are held in
the name of BakBone or our affiliated subsidiaries. The following table details our capital assets as of March 31, 2002 (in thousands):





Cost

Accumulated depreciation

Net book valueComputer equipment and software

$
2,833

$
959

$
1,874Furniture and fixtures


523


154


369Leasehold improvements


620


101


519$
3,976

$
1,214

$
2,762





We will require additional computer systems for further development
of ongoing products, as well as for product testing and time to market configuration testing. Management estimates that the cost of the total equipment infrastructure, including development and testing costs, will approximate $400,000 during the
fiscal year ending March 31, 2003.




16




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The following tables details the Companys facility leases for office
locations throughout the world:





Location

Sq. Ft.

Lease Commencement Date

Lease Expiration Date

Use of PropertyCorporate Office 10145
Pacific Heights Blvd. Suite 900 San Diego, CA
92121

12,500

August 14, 2000

June 30, 2006

Administration Development
Sales MarketingCorporate Office 10105
Pacific Heights Blvd. Suite 300 San Diego, CA
92121

12,500

October 1, 2001

October 1, 2006

AdministrationCorporate Apartment 10986
W Ocean Air Drive Apt. 377 San Diego, CA 92130

1,250

May 3, 2000

May 31, 2001 Month to Month

Out of town Employee Visits to Corp.Beltsville, MD Office 11785 Beltsville Drive Beltsville, MD 20705

7,727

December 1, 2001

May 1, 2004

Development SalesMunich Germany Sales Office Regus Centre Arnulfstrasse 27 Munich, Germany 80335

300

September 1, 2000

December 31, 2000 Month to Month

SalesUnited Kingdom Office Merck House 2nd Floor Seldown
Road Poole, Dorset

7,853

July 1, 2000

June 30, 2005

Development Administration Sales MarketingJapan Office Shinjuku
Daiichi-seimei bldg. 11F No.7-1, Nishi-Shinjuku,
Shinjuku-ku Tokyo, Japan 163-0071

5,988

September 1, 2000

August 31, 2003

Administration Development Sales Marketing





In connection with the San Diego lease that commenced on October 1,
2001, we entered into a letter of credit with a bank, whereby the bank, on behalf of our landlord, is currently holding cash deposits of $780,000. The cash is restricted until January 2003, the date upon which the letter of credit expires.





We are not aware of any environmental issues that will effect our utilization of assets.





We currently have no plans to construct, expand or improve facilities in the near future as we maintain sufficient additional capacity
within our existing facilities to accommodate growth in employee headcount. Our processes for production of software units shipped to customers entail the assembly of the software CD, manual and any additional collateral material in product specific
packaging and, as such, occupies minimal space.





Item 5.    Operating and Financial Review and Prospects





The
following section contains forward-looking statements relating to revenues, expenditures and sufficiency of capital resources. Actual results may differ from those projected in the forward-looking statements for a number of reasons, including those
described in the forepart of this registration statement. The following discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying notes.




17




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OVERVIEW





BakBone is an international storage management software company that develops and globally distributes storage management solutions. Our corporate headquarters is located in San Diego, California. This
facility houses executive management as well as sales, marketing, engineering, customer support and administrative departments. We maintain offices in Tokyo, Japan and Poole, Dorset, United Kingdom, that concentrate on sales, marketing and
administrative functions for the Asian and European regions, respectively. In addition, our United Kingdom and Beltsville, Maryland offices include engineering personnel responsible for the core development effort of our NetVault and MagnaVault
software products, respectively.





We have incurred net operating losses and net losses since inception of our
operations in March 2000. Our operating losses were $12.3 million, $19.1 million and $949,000 for the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year ended April 30, 2000, respectively. Losses are expected to continue
through at least the year ending March 31, 2003 as we expand our sales efforts, particularly in North America, and develop and enhance our current software product offerings. We have incurred an accumulated deficit of $41.4 million through March 31,
2002.





CRITICAL ACCOUNTING POLICIES AND ESTIMATES





Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada, which conform to accounting principles
generally accepted in the United States, except as discussed in detail in Note 14 to the consolidated financial statements. The preparation of these financial statements requires BakBone to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, BakBone evaluates its estimates, including those related to allowance for doubtful accounts, intangible assets
valuation, income tax asset allowance, and contingencies. BakBone bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.





We believe that there are several accounting policies that are critical to understanding our historical and future performance, as these
policies affect the reported amounts of revenue and other significant areas that involve managements judgments and estimates. These significant accounting policies are:





| |  |  | Revenue recognition;
| | - |  | --------------------




| |  |  | Impairment of long-lived assets;
| | - |  | --------------------------------




| |  |  | Allowance for doubtful accounts; and
| | - |  | ------------------------------------




| |  |  | Valuation allowance for deferred tax assets;
| | - |  | --------------------------------------------




These policies, and our procedures related to these policies, are described in detail below and under specific areas within the discussion and analysis of our financial condition and result of operations.





Revenue Recognition.





We derive revenue from licensing software and from the sale of customer support services (maintenance) and professional services. Professional services include training and consulting services. We sell almost exclusively
through a network of partners and all sales are based on a published master price list with set discounts given to partners based on their specific contract. We generally recognize revenue from licensing of software products through our indirect
sales channel when 1) the value added reseller, hardware distributor, application software vendor or system integrator (collectively the Partners) sells our software products to its




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customers, and 2) we deliver the sold software products either to the Partners for distribution or to the end-user directly. Our partners do not stock our products and thus there is no channel
inventory.





Vendor specific objective evidence exists for the software element and the professional services
element in that we sell each element separately, based on the established prices in the master price list. The prices for professional services are based on set hourly rates. Vendor specific objective evidence exists for the maintenance element in
that the maintenance agreements include technical support for a one-year period, with an option to renew the agreements for a period of one or more years, and the annual renewal fee ranges generally from 18% to 22% of the software license fee. As
vendor specific objective evidence exists for each element, we use separate element accounting. We have standard payment terms, which we offer to all of its customers, and do not offer any extended payment terms. In addition, our sales agreements do
not contain stock balancing rotation rights.





We define revenue recognition criteria as follows:





Persuasive Evidence of an Arrangement Exists.    It is our customary practice to have an executed
written contract or a purchase order prior to recognizing revenue on an arrangement.





Delivery Has
Occurred.    For all software sales, our software products are physically delivered to our customers, with standard transfer terms as FOB shipping point.





The Vendors Fee is Fixed or Determinable.    The fee our customers pay for the products is based on the established prices in the master
price list. We have standard payment terms, which we offer to all customers, and we do not offer any extended payment terms.





Collection is Probable.    We assess probability of collection on a customer-by-customer basis. We typically sell to customers where we have a history of successful collection. We subject new customers to a
credit review process that evaluates the customers financial position and ultimately their ability to pay.





Impairment of long-lived assets.





We review our long-lived assets, including capital assets
and intangibles, for impairment when events or changes in facts and circumstances indicate that their carrying amount may not be recoverable. Events or changes in facts and circumstances that we consider as impairment indicators include the
following:





| |  |  | Significant underperformance of our corporation relative to expected operating results;
| | - |  | ---------------------------------------------------------------------------------------




| |  |  | Our net book value compared to our market capitalization;
| | - |  | ---------------------------------------------------------




| |  |  | Significant adverse economic and industry trends;
| | - |  | -------------------------------------------------




| |  |  | Significant decrease in the market value of the asset;
| | - |  | ------------------------------------------------------




| |  |  | The extent that we use an asset or changes in the manner that we use it; and
| | - |  | ----------------------------------------------------------------------------




| |  |  | Significant changes to the asset since we acquired it.
| | - |  | ------------------------------------------------------




When we determine that one or more impairment indicators are present for our long-lived assets, we compare the carrying amount of the asset to net future undiscounted cash
flows that the asset is expected to generate. If the carrying amount of the asset is greater than the net future undiscounted cash flows that the asset is expected to generate, we would recognize an impairment loss. The impairment loss would be the
excess of the carrying amount of the asset over its fair value. During the quarter ended March 31, 2002, we determined that the carrying value of the intangibles recorded in connection with the Tracer acquisition exceeded the estimated cash flows
expected to be generated by the underlying assets. Thus, an impairment loss, reflecting the difference between the carrying value and discounted expected future cash flows of $2.5 million, was recognized in the accompanying consolidated statement of
operations for the year ended March 31, 2002.




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Allowance for doubtful accounts.





We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required
payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.





Valuation allowance for deferred tax assets





The consolidated financial statements reflect a full valuation allowance against the net deferred income tax assets based on our assessment that it is more likely than not that we will be able to utilize certain deductions before
their expiry. Our assessment is based on a judgment of estimated loss before such deductions. Changes in the timing of the recognition and amount of revenues and expenses in the future may impact our ability to utilize these deductions.





| | A.    Operating |  | Results
| | --------------- |  | -------




In March 2000, we completed the acquisitions of NVS and issued 13,525,000 Common Shares in exchange for the common shares of NVS. At the time of the acquisition, BakBone was a public shell and NVS was a privately owned holding
company. Since the shareholders of NVS received the greater proportion of the voting shares of BakBone, the acquisition was accounted for as a reverse acquisition whereby NVS was treated as the acquirer of BakBone for accounting purposes.





Concurrent with our acquisition of NVS, we acquired 100% of NetVault Holdings a non-operating holding company,
and its wholly owned subsidiary, NetVault Ltd. and NetVault Ltd.s 25% interest in BakBone KK. At the time of this acquisition, NetVault Holdings was a non-operating private holding company while NetVault Ltd. and BakBone KK had substantive
operations. We acquired an additional 22% of BakBone KK in a separate transaction, bringing our total ownership in BakBone KK to 47%.





On June 9, 2000, we acquired of all the issued and outstanding common shares of Tracer Technologies, Inc. and its 50% ownership of the common shares of Tracer Technologies Japan Corporation (collectively Tracer). At the time
of this acquisition Tracer had substantive operations.





In January 2002, we acquired an additional 25% interest in
Tracer Technologies Japan Corporation (Tracer KK), bringing our total ownership in Tracer KK to 75%. In March 2002 and in connection with the BakBone KK minority interest acquisition (discussed below), we acquired the remaining 25% minority interest
in Tracer KK, bringing our total ownership in Tracer KK to 100%. As of March 31, 2002, Tracer KK is a wholly-owned subsidiary of ours.





In March 2002, we acquired the remaining 53% interest in BakBone KK, bringing our total ownership in BakBone KK to 100%. As of March 31, 2002, BakBone KK is a wholly-owned subsidiary of ours.





The following discussions include the operations of BakBone since the acquisitions, specifically the year ended March 31, 2002, the eleven
months ended March 31, 2001 and the year ended April 30, 2000. For purpose of this discussion, the year ended April 30, 2000 will be referred to as the two months ended April 30, 2000, as the year contributed only two months of operations due to the
nature of the acquisition.





Our operating results for the year ended March 31, 2002 compared to the eleven
months ended March 31, 2001.





Revenues





Revenues for the year ended March 31, 2002 were $9.9 million, consisting of $8.1 million in licensing revenue and $1.8 million in service revenues. Comparatively,
revenues for the eleven months ended March 31, 2001 were $5.0 million, consisting of $4.2 million in licensing revenue and $789,000 in services revenue.




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Licensing Revenues





Our products are sold almost exclusively through our channel partners, VARs, VADs and OEMs, in three geographic segments: Asia, North
America and Europe. Asia, North America and Europe contributed $3.7 million, $3.0 million and $1.4 million, respectively, during the year ended March 31, 2002. During the eleven months ended March 31, 2001, Asia, North America and Europe
contributed $2.5 million, $1.3 million and $400,000, respectively.





During the year ended March 31, 2002 and the
eleven months ended March 31, 2001, our Asian operations provided 46% and 60% of total licensing revenues, respectively. Asian revenues increased $1.2 million, or 48%, due to continued market acceptance of NetVault software in Japan and to expansion
into new territories including: China, Korea and Vietnam. As of March 31, 2002, these new territories were directed from one office in Tokyo, Japan.





During the year ended March 31, 2002 and the eleven months ended March 31, 2001, our North American operations provided 37% and 30% of total licensing revenues, respectively. North American revenues
increased $1.8 million, or 137%, resulting primarily from the growth in our North American NetVault sales force and the increased market acceptance of NetVault. We began establishing our partner channels for NetVault in North America in July 2000
and as of March 31, 2001, we had executed partner agreements with over 50 VAR / VAD partners, and grew the number of VAR / VAD partners to 70 by March 31, 2002. Furthermore, as we first introduced NetVault in North America in August 2000, the year
ended March 31, 2002 contained 12 months of NetVault sales, whereas the eleven months ended March 31, 2001 contained only eight months of NetVault sales. Average monthly sales were $252,000 and $160,000 for the year ended March 31, 2002 and the
eleven months ended March 31, 2001, respectively. The increase in average monthly revenue coincides with the overall revenue growth trend in North America.





During the year ended March 31, 2002 and the eleven months ended March 31, 2001, our European operations provided 17% and 10% of total licensing revenues, respectively. These revenues resulted almost
entirely from sales of NetVault and were generated from our sales office in Poole, Dorset, United Kingdom. European revenues increased $957,000, or 240%, resulting from increased sales in all regions of Europe, as well as from expansion into Israel
and South Africa during the year ended March 31, 2002.





Service Revenues





Service revenues consists principally of maintenance revenues derived from the sale of customer support contracts for both NetVault and
MagnaVault. These contract fees generally approximate 20% of the licensing fee. Revenues from customer support contracts are deferred and amortized on a straight-line basis over the life of the contract, generally one year. North America, Asia and
Europe contributed $1.0 million, $359,000 and $379,000, respectively, for service revenues for the year ended March 31, 2002.





During the year ended March 31, 2002, service revenues generated in North America, European and Asian regions were 58%, 22% and 20% of total service revenues, respectively. During the eleven months ended March 31, 2001, service
revenues generated in the North America, European and Asian regions were 40%, 35% and 25%, respectively. The increase noted in North American service revenues as a percent of total service revenues resulted from a combination of the first full year
of maintenance services being provided to North American customers and the first maintenance contract renewals.





As of March 31, 2002, NetVault and MagnaVault were supported from our offices in North America, Europe and Asia.





Cost of Revenues





Cost of revenues totaled $1.2 million and $782,000, or 13% and 16%
of total revenues, during the year ended March 31, 2002 and the eleven months ended March 31, 2001, respectively. These costs consisted




21




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primarily of the direct cost of providing customer support, including salary and benefits of staff working in our customer support departments as well as associated costs of computer equipment,
telephone and other general costs necessary to maintain an adequate level of customer support to our end users. Also included in cost of revenues are the direct costs of raw materials and packaging for the products shipped to customers. These costs,
however, are nominal as the products shipped to customers consist of a CD, manual, printed box and other media. Product costs for these items individually and in aggregate are minimal and we have little risk of inventory obsolescence due to the
small quantities of these items needed to fill our customers' orders and the short lead time to acquire additional materials. Raw material purchases are held in inventory until the sale of the related software product at which time the cost per unit
sold is released to cost of revenues.





The decrease in cost of revenues as a percent of total revenues resulted
from a combination of higher average revenue per client service representative, increased efficiencies in distributing and supporting our software products, and reduced customer service headcount during the year ended March 31, 2002.





Sales and Marketing Expenses





Sales and marketing expenses totaled $11.1 million and $11.7 million, or 113% and 235% of total revenues, during the year ended March 31, 2002 and the eleven months ended
March 31, 2001, respectively. Sales and marketing expenditures, which consist primarily of payroll, commission, marketing and travel costs, remained relatively consistent between the two periods. However, additional resources were expended during
the eleven months ended March 31, 2001 to introduce the NetVault product in North America. Our efforts to introduce NetVault and promote MagnaVault in North America during the eleven months ended March 31, 2001 led to substantial spending in
advertising and public relations. We engaged in similar activities during the year ended March 31, 2002, albeit to a lesser extent.





The decrease in sales and marketing expenses as a percentage of total revenues was primarily a function of revenue growth during the year ended March 31, 2002, as total sales and marketing expense in dollars remained fairly
consistent. Thus, to the extent that revenues increase, we expect that sales and marketing expense will decrease as a percentage of total revenues.





Research and Development Expenses





Research and
development expenses totaled $4.1 million and $3.6 million, or 42% and 72% of total revenues, during the year ended March 31, 2002 and the eleven months ended March 31, 2001, respectively. Research and development expenses consist primarily of
salary and related costs for our worldwide engineering staff. The decrease in research and development expenses as a percentage of revenues was due primarily to the increase in revenue between the year ended March 31, 2002 and the eleven months
ended March 31, 2001.





The increase in total dollars spent on research and development activities during the year
ended March 31, 2002 was due to increased average monthly headcount and increased expenditures related to travel, as we increased our focus on sales engineer client site visits during the year ended March 31, 2002. The majority of our engineering
efforts are carried out in the United States and United Kingdom; these locations are responsible for the ongoing development and testing of our products. Engineering efforts in Japan are minimal and relate to creating functionality and interface
capabilities for users in the Asian region.





General and Administrative Expenses





General and administrative expenses totaled $5.7 million and $8.0 million, or 57% and 162% of total revenues, during the year
ended March 31, 2002 and the eleven months ended March 31, 2001, respectively. General and administrative expenses consisted primarily of salary and related costs for our 29 executive and administrative employees throughout our worldwide offices as
of March 31, 2002, which decreased from 32 employees as of March 31, 2001. The headcount and expense decrease was partially attributable to the




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departure from the company of several highly compensated individuals. In addition, during the eleven months ended March 31, 2001, we incurred higher levels of both computer systems and
corporate structure related consulting fees, as well as higher intellectual property related legal fees than we did during the year ended March 31, 2002. During the eleven months ended March 31, 2001, we implemented a new accounting system and
expended significant resources on securing and protecting our intellectual property.





Amortization and
Impairment of Intangibles





Amortization and impairment of intangibles totaled $6.2 million and $3.2
million for the year ended March 31, 2002 and the eleven months ended March 31, 2001, respectively. We recorded intangibles of $8.5 million relating to the acquisition of Tracer in June 2000, $99,000 relating to the 25% minority interest
acquisition of Tracer KK in January 2002, and $3.1 million relating to the 53% minority interest acquisition of BakBone KK in March of 2002. Pursuant to new Canadian GAAP standards, intangibles acquired in a business combination for which the
acquisition date is after June 30, 2001 are not amortized. Intangibles acquired on or after July 1, 2001 are tested for impairment in the same manner as previously recorded intangibles. Intangibles acquired on or before June 30, 2001 are amortized
through the initial adoption date of the new standard, or April 1, 2002 as it relates to the Company. Previously recorded intangibles were recorded at cost and amortized on a straight-line basis over three years. We assess the recoverability of
intangibles by determining whether the amortization of the balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of intangibles impairment, if any, is measured based
on projected future discounted operating cash flows using a discount rate reflecting our average cost of funds. The assessment of the recoverability of intangibles will be impacted if estimated future operating cash flows are not achieved.





In connection with the acquisition of Tracer, we acquired exclusive intellectual property rights to MagnaVault.
Since the initial acquisition date, we have marketed and sold MagnaVault as a stand-alone software product. MagnaVault revenues were flat during the first three quarters of the year ended March 31, 2002, with a notable decrease during the fourth
quarter of the year ended March 31, 2002. Based on MagnaVaults results of operations during the fourth quarter of the year ended March 31, 2002, we performed an impairment analysis of the Tracer intangibles. As of March 31, 2002, we determined
that the carrying value of the Tracer intangibles exceeded fair value as determined by the estimated discounted cash flows expected to be generated by the underlying assets. Therefore, we recorded an impairment charge of $2.5 million in the
accompanying consolidated statement of operations for the year ended March 31, 2002, reflecting the difference between the carrying value and discounted projected future cash flows.





Our operating results for the eleven months ended March 31, 2001 compared to the two months ended April 30, 2000.





Revenues





Revenues for the eleven months ended March 31, 2001 were $5.0 million, consisting of $4.2 million in licensing revenues and $789,000 in service revenues. Comparatively, revenues for the two months ended April 30, 2000
were $337,000, consisting of $242,000 in licensing revenues and $95,000 in service revenues. As the results for the two months ended April 30, 2000 period consist of only two months of operations, total revenues do not provide a comparable basis of
analysis. To provide a basis of comparison, the following analysis of licensing and service revenues focuses on individual revenues as a percent of total revenues for each of the applicable periods as well as an analysis of average monthly revenues.





Licensing Revenues





Asia, North America and Europe contributed $2.5 million, $1.3 million, and $398,000 in licensing revenues during the eleven months ended March 31, 2001, respectively.
Geographic segments during the two months ended April 30, 2000 consisted of Asia and Europe, which provided $213,000 and $29,000 of licensing revenues, respectively.




23




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During the eleven months ended March 31, 2001 and the two months ended April 30,
2000, our Asian operations provided 60% and 88% of total licensing revenues, respectively. The decrease in the revenue mix for the Asian operations is due to strong growth in our European sales of NetVault as well as the addition of the North
American segment during the eleven months ended March 31, 2001. Average monthly licensing revenues for the Asian region for the eleven months ended March 31, 2001 were $228,000 compared to $107,000 for the two months ended April 30, 2000. This
increase in average monthly licensing revenues during the eleven months ended March 31, 2001 is due to increased acceptance of the NetVault Software in Japan as well as expansion into new markets. As of March 31, 2001, Asian sales efforts were
directed from one office in Tokyo, Japan, and covered all of Asia, Australia and New Zealand as opposed to a focus on Japan only during the two months ended April 30, 2000.





During the eleven months ended March 31, 2001 and the two months ended April 30, 2000, our North American operations provided 30% and 0% of total licensing revenues,
respectively. Fiscal 2001 was the Company's first year of sales of both NetVault and MagnaVault in North America. NetVault licensing revenues resulted from the introduction of the NetVault software in North America in August 2000, the growth in our
sales force and the increased acceptance of NetVault within the industry. We began establishing our partner channels for NetVault in North America in July 2000 and as of March 31, 2001, we had executed partner agreements with over 50 VAR / VAD
partners and one OEM partner, Seagate. Licensing revenues for MagnaVault resulted from our acquisition of Tracer in June 2000, which provided us a core set of over 15 new partners and greater than 6,000 end users. Our sales efforts also focused on
the existing MagnaVault customer base as a source of NetVault sales leads.





During the eleven months ended March
31, 2001 and the two months ended April 30, 2000, our European operations provided 10% and 12% of total licensing revenues, respectively. These revenues resulted almost entirely from sales of NetVault and were generated from our sales office in
Poole, Dorset, United Kingdom. Average monthly licensing revenues for the European operations for the eleven months ended March 31, 2001 were $36,000 compared to $15,000 for the two months ended April 30, 2000. The increase in average monthly
licensing revenues is attributable to expansion into new areas of Europe, the Middle East and Africa during the eleven months ended March 31, 2001.





In addition, sales related to our NCR Teradata agreement, dated May 1999, commenced for our European operations in March 2000 after development of the NetVault plug-in application was completed. NCR
sales through March 31, 2001 were predominantly in the European market.





Service Revenues





During the eleven months ended March 31, 2001, service revenues generated in the North America, European
and Asian regions were 40%, 35% and 25% of total service revenues, respectively. During the two months ended April 30, 2000, service revenues generated in the European and Asian regions were 68% and 32%, respectively.





The decline in the percentage of service revenues for the European region during the eleven months ended March 31, 2001 is partially a
result of the June 2000 Tracer acquisition which provided a substantial support base in North America. Average monthly service revenues for the European region for the eleven months ended March 31, 2001 were $25,000 compared to $33,000 for the two
months ended April 30, 2000. The decrease in average monthly service revenues is due to the transfer of support customers located in North America from the European region to the new North America support operations established during the eleven
months ended March 31, 2001.





Asian service revenues have remained constant as a percent of total service
revenues, but have grown in terms of total dollars. Average monthly service revenues during the eleven months ended March 31, 2001 were $18,000 compared to $15,000 for the two months ended April 30, 2000. The increase in average monthly service




24




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revenues is due to the addition of Tracer KK in June 2000 and growing first time sales of support services in the region during the eleven months ended March 31, 2001.





Cost of Revenues





Cost of revenues totaled $782,000 and $37,000 or 16% and 11% of total revenues during the eleven months ended March 31, 2001 and the two months ended April 30, 2000, respectively. The increase in cost
of revenues as a percentage of total revenues during the eleven months ended March 31, 2001 is due to the Companys efforts to improve customer support worldwide by hiring additional support personnel to meet the support demands of growing
sales worldwide.





Sales and Marketing Expenses





Sales and marketing expenses totaled $11.7 million and $301,000 or 235% and 89% of total revenues during the eleven months ended March 31, 2001 and the two months
ended April 30, 2000, respectively. The increase in sales and marketing expenses as a percentage of total revenues was primarily due to costs incurred during the eleven months ended March 31, 2001 necessary to expand our worldwide sales force by 34
personnel to 51 at March 31, 2001 from 17 at April 30, 2000. The additional costs incurred in the expansion of our sales force during the eleven months ended March 31, 2001 included: salary and benefits, commissions, travel and equipment charges.





The increase in headcount was due to the hiring of a substantial number of new sales professionals in
North America during the eleven months ended March 31, 2001. Headcounts for the sales departments in the United Kingdom and Japan increased, although to a lesser extent than in North America, during the same period.





Our efforts to introduce NetVault and promote MagnaVault in North America during the eleven months ended March 31, 2001 led to substantial
spending in advertising and public relations. In addition, we attended an increased number of tradeshows throughout North America, Asia and Europe to promote our products and demonstrate, on a face-to-face basis with potential customers, their ease
of use and speed of backup/restore of data on the many network configurations our products support.





Research and Development Expenses





Research and development expenses totaled $3.6
million and $189,000 or 72% and 56% of total revenues during the eleven months ended March 31, 2001 and the two months ended April 30, 2000, respectively. Dollars spent on research and development efforts increased between the periods due to the
addition of engineers in the North American region during the eleven months ended March 31, 2001.





Our research
and development expenses consist primarily of salary and related costs for our worldwide engineering staff, which grew to 42 personnel as of March 31, 2001 from 24 as of April 30, 2000. Research and development expenses also increased during the
eleven months ended March 31, 2001 due to the set-up and operation of our Interoperability Lab in San Diego, California, developed to test and qualify our software products on various vendor hardware solutions.





General and Administrative Expenses





General and administrative expenses totaled $8.0 million and $759,000, or 162% and 225% of total revenues, during the eleven months ended March 31, 2001 and for the two months ended April 30, 2000,
respectively. The decrease in general and administrative expenses as a percentage of total revenues was a function of revenue growth during the eleven months ended March 31, 2001 as many of the general and administrative costs are fixed costs. Thus,
as revenues increase, general and administrative expenses as a percentage of total revenues decrease.




25




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General and administrative costs increased in total dollars during the eleven
months ended March 31, 2001 due to the addition of executive management and administrative personnel and the related costs of running a worldwide public company.





Furthermore, salary and related costs increased as executive and administrative employees throughout our worldwide offices grew to 32 employees as of March 31, 2001, from 12 employees as of April 30,
2000. In addition, our offices also incurred additional expenses during the eleven months ended March 31, 2001 for: facility rents, build-out and depreciation, maintenance and other related costs.





During the eleven months ended March 31, 2001, we incurred increased legal fees over the two months ended April 30, 2000 related to the
identification and protection of our intellectual property, assimilation of acquired entities, public reporting of our financial results and operational information, and general corporate matters. During this period, professional fees from
accounting and consulting firms were incurred in the areas of annual audit, quarterly public filings, taxes, implementation of our enterprise reporting package and other general areas.





Amortization and Impairment of Intangibles





Amortization of intangibles totaled $3.2 million and $166,000, or 64% and 49% of total revenues, for the eleven months ended March 31, 2001 and the two months ended April 30, 2000, respectively. The Company recorded
intangibles of $2.9 million and $8.5 million relating to the acquisition of NetVault Holdings in March 2000 and Tracer in June 2000, respectively. The Company did not record any intangibles impairment charges during the eleven months ended March 31,
2001.





B.    Liquidity and Capital Resources





We have financed our
operations primarily through private placements and a public offering of equity instruments in the Provinces of British Columbia, Alberta and Ontario, Canada. During the year ended March 31, 2002, we raised gross proceeds of $9.7 million through the
private placement of 3,000,000 Special Warrants at a price of $3.24 per Special Warrant. Additionally, during the year ended March 31, 2002, the Company completed a public offering of 7,170,400 units at a price of $0.80 per unit for gross proceeds
of $5.7 million. Each unit was comprised of one common share and one-quarter common share purchase warrant. During the eleven months ended March 31, 2001, we raised gross proceeds of $4.5 million through the exercise of 3,694,934 warrants at a
weighted average price of $1.23 per warrant, and we entered into a line of credit with a bank that provided us with $2.5 million in net borrowings during the year. During the year ended April 30, 2000, the Company raised gross proceeds of $26.5
million through the private placement of 6,000,000 Series A Special Warrants and 3,000,000 Series B Special Warrants at prices of $1.03 and $6.77, respectively. Net proceeds to the Company after financing costs were $24.4 million.





Net cash used in operating activities was $12.7 million and $18.0 million during the year ended March 31, 2002 and the eleven
months ended March 31, 2001, respectively. Cash used in operating activities during the year ended March 31, 2002 resulted from a net loss of $18.8 million, partially offset by non-cash depreciation and amortization of $4.6 million and impairment of
intangibles of $2.5 million. Other operating activities that contributed to the use of cash during the year ended March 31, 2002 included increases in accounts receivable of $1.9 million and other assets of $10,000, and a decrease in accounts
payable of $723,000. Providing sources of cash were increases in accrued liabilities of $647,000 and deferred revenue of $626,000. Net cash used in operating activities during the eleven months ended March 31, 2001 resulted from a net loss of $21.7
million partially offset by non-cash depreciation and amortization of $3.8 million. Other operating activities providing a significant use of cash during the eleven months ended March 31, 2001 were the increases in accounts receivable of $363,000
and other assets of $568,000, and those providing a source of cash consisted of increases in accounts payable of $190,000, accrued liabilities of $417,000 and deferred revenue of $273,000. The decrease in cash used in operating activities of
$5.3 million from the eleven months ended March 31, 2001 to the year ended March 31, 2002, is due




26




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primarily to a decrease in global headcount from 162 as of March 31, 2001 to 138 as of March 31, 2002 and a decrease in general and administrative costs, including reductions in legal,
accounting and consulting expenditures.





Net cash used in investing activities was $509,000 and $4.6 million
during the year ended March 31, 2002 and the eleven months ended March 31, 2001, respectively. Net cash used in investing activities during the year ended March 31, 2002, consisted partially of capital expenditures of $433,000, which related
primarily to the purchase of computer equipment. Cash expended in connection with the January 2002 minority interest acquisition of Tracer KK contributed $117,000 to cash used in investing activities. Net cash used in investing activities during the
eleven months ended March 31, 2001 consisted partially of $1.6 million for the acquisition of Tracer in June 2000 (net of cash acquired of $800,000). Capital expenditures during the eleven months ended March 31, 2001 of $3.0
million included the purchase of an enterprise resource planning system, a customer relationship management system, a global telecommunications system, equipment and devices for interoperability testing, and the build-out of our corporate
headquarters in San Diego, California and our new offices in Tokyo, Japan.





Net cash provided by financing
activities was $15.1 million and $6.2 million during the year ended March 31, 2002 and the eleven months ended March 31, 2001, respectively. Cash provided by financing activities during the year ended March 31, 2002 consisted primarily of gross
proceeds from special warrants of $9.7 million, gross proceeds from a public warrant offering of $5.7 million, and gross proceeds from a private placement of $332,000. The proceeds were partially offset by cash used in financing activities
consisting mainly of the payment of notes payable of $812,000, the payment of equity offering costs of $507,000, and the payment of capital lease obligations of $177,000. Net cash provided by financing activities during the eleven months ended March
31, 2001 consisted primarily of proceeds of $4.5 million from the exercise of share purchase warrants. In addition, we entered into a line of credit with a bank that provided $2.5 million of net borrowings and we received $570,000 from the exercise
of stock options during the eleven months ended March 31, 2001. Net cash used in financing activities during the eleven months ended March 31, 2001 consisted mainly of an $870,000 increase in restricted cash, $132,000 of capital lease payments,
$288,000 of note payments and an additional $144,000 in offering costs associated with the Special Warrant offering.





The following summarizes BakBones contractual obligations at March 31, 2002 (in thousands).





Total

Less Than One Year

1-3 Years

4-5 Years

After 5 YearsCONTRACTUAL OBLIGATIONS:Long-term debt (1)

$
1,950



1,950



Capital equipment debt

$
255

201

54



Non-cancelable operating lease obligations

$
5,040

1,440

2,434

790

376


---

|(1) |  | Under the long-term debt arrangement, an amount equal to 10% of the net proceeds raised from any of our financings between February 2002 and December 2003 will
be paid to the credit provider in the form of principal reductions.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




We currently expect to
fund expenditures for capital requirements as well as liquidity needs from a combination of available cash balances, internally generated funds and financing arrangements. We believe that existing cash and cash equivalents will be sufficient to meet
our anticipated cash needs through the current fiscal year. If cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek additional sources of funding. We are currently a party to a term note with a bank that
matures on December 31, 2003. We are in compliance with all requirements set forth in the credit agreement. Internally generated funds may not be sufficient to cover the Companys liquidity requirements, and in that case, we may be required to
obtain additional credit facilities from either our existing credit facility provider or others. Additional debt would result in increased interest expenses and could result in covenants that would restrict our operations. Additionally, a decrease
in demand for our products and services could adversely affect our business, which in turn, could adversely affect our ability to renew existing, or obtain access to new credit facilities in the future and could increase the cost of such facilities.
We may also seek additional sources of funding, including the public or




27




---

private issuance of equity instruments, such as warrants; however, there is no guarantee that such sources will be available in amounts or on terms acceptable to us, if available at all. The sale
of additional equity securities would result in immediate and potentially significant dilution to our shareholders.





Estimated future uses of cash in 2003 include capital expenditures for equipment of approximately $400,000.





At March 31, 2002, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for
the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we did not engage in trading activities involving on-exchange traded contracts. As a result, we are not exposed to any
financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. We do not have relationships and transactions with persons or entities that derive benefits from their non-independent relationship with us or our
related parties except as disclosed herein.





Inflation and Changing Prices





Inflation and changing prices have not had a material impact on our operations.





Foreign Currency





Our revenues result mainly from sales made in U.S. dollars,
British pounds and Japanese yen. We will continue to incur operating costs mainly in U.S. dollars, British pounds, Japanese yen and, to a lesser extent, Canadian dollars. Thus, our operations are susceptible to fluctuations in currency exchange
rates. We do not currently engage in hedging or other activities to reduce exchange rate risk but may do so in the future, if conditions warrant.





RECONCILIATION TO U.S. GAAP





In connection with the preparation of this Annual Report on
Form 20-F, we have disclosed in the accompanying notes to the consolidated financial statements a detailed overview of the differences between accounting principles generally accepted (GAAP) in Canada and those of the United States.





The following is a brief discussion of differences between U.S. GAAP and Canadian GAAP that are illustrated in our
reconciliation to U.S. GAAP in Note 14 to the consolidated financial statements, included in Item 17 and should be read in conjunction with Note 14 to the consolidated financial statements.





Stock Based Compensation





During the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year ended April 30, 2000, the Company recorded non-cash charges associated with stock and stock options issued to employees and advisors. The
structure of the related grants is subject to compensation charges under U.S. GAAP and we have recorded compensation charges from the following:





| |  |  | Stock options issued at less than fair market value at the date of grant resulting in intrinsic value that was deferred and is being amortized to compensation
expense over the vesting period of the related stock options;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Employee Benefit Trust (EBT) shares allocated to United Kingdom employees in connection with the NetVault Holdings acquisition in March 2000. The fair value of
these shares as of the date of issuance to the EBT or the date of hire for each related employee, if later, has been deferred and is being amortized to compensation expense over the vesting period of the related stock grant;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



28




---




| |  |  | Incentive shares issued to attract and retain certain North American executive and sales employees. The fair value of these shares as of each related
employees date of hire has been deferred and is being amortized to compensation expense ratably over the vesting period of the related stock;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Stock options granted to compensate our advisors for the related service. We have recorded compensation expense as the advisors earned the related shares,
generally over the vesting period of each individual stock option grant; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | We repriced certain stock options in October 2000 upon the approval from the TSE and our shareholders. As of March 31, 2002, we had recorded no compensation
expense under U.S. GAAP as the fair value of the related stock options had not exceeded the lowest repriced amount of $7.74 per common share. However, there is the potential that future appreciation of our common shares will result in compensation
charges, the extent of which depends on market conditions and cannot be estimated.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The Company
issued stock options with intrinsic value to the principals of Tracer in connection with the Tracer Acquisition in June 2000. The related stock options were one third vested upon grant with the remaining vesting over two years. The immediately
vested stock options were accounted for as a component of the purchase price under U.S. GAAP, resulting in additional intangibles as well as amortization expense during the year ended March 31, 2002 and the eleven months ended March 31, 2001. The
remaining two thirds of the stock options were issued at a price that was less than fair market value on the grant date and the intrinsic value was deferred and is being amortized to compensation expense over the two-year vesting period.





Comprehensive Loss





Under U.S. GAAP, the Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income (SFAS 130), which requires that companies report
comprehensive income as a measure of overall performance. SFAS 130 establishes standards for the reporting and display of comprehensive income and its components.





Amortization and Impairment of Intangibles





U.S. GAAP does not permit the presentation of income before amortization and impairment of intangibles whereas, under Canadian GAAP, such presentation is permitted. Under U.S. GAAP, amortization and impairment of intangibles
is classified in operating expenses in the consolidated statements of operations.





Acquisition of BakBone KK





We acquired 22% of our interest in BakBone KK through the issuance of 375,000 common shares to two
executives in March 2000. Under U.S. GAAP, the Companys purchase of 22% of BakBone KK must be accounted for by using the purchase method of accounting based on the fair value of common shares as of the date both parties agreed to the related
consideration. This value resulted in an increase in the investment in BakBone KK, which is being amortized over three years as the value of the common shares issued exceeded the value of our underlying equity in net assets of BakBone KK. Upon our
acquisition of the remaining 53% interest in BakBone KK in March 2002, the carrying value of our investment in BakBone KK was eliminated and the balance sheet, results of operations and cash flows of BakBone KK were consolidated.





Consolidation of BakBone KK and Tracer KK





Under U.S. GAAP, a company must own or demonstrate voting control of greater than 50% of an acquired entity in order to consolidate that entity. During the year ended March
31, 2002, we acquired the remaining 53% and 50% ownership interests in BakBone KK and Tracer KK, respectively, increasing our ownership interests in both entities to 100%. We effectively owned greater than 50% of Tracer KK and BakBone KK in January
2002 and March 2002, respectively.




29




---




Prior to the acquisition of the remaining interests mentioned above, we were
precluded from consolidating these entities under U.S. GAAP and, as such, for activity prior to the acquisition dates, the results of operations and cash flows of BakBone KK and Tracer KK have been removed from that of the Company for the year ended
March 31, 2002. Furthermore, the balance sheets, results of operations and cash flows of both entities have been removed as of and for the eleven months ended March 31, 2001. The balance sheet, results of operations and cash flows of BakBone KK have
been removed as of and for the year ended April 30, 2000. Under U.S. GAAP, our investments in these subsidiaries, prior to the 2002 minority interest acquisitions, were accounted for under the equity method of accounting.





Share Capital to be Issued





U.S. GAAP does not permit the disclosure of share capital to be issued in the statement of shareholders equity, whereas under Canadian GAAP, such disclosure is permitted. Under U.S. GAAP,
share capital to be issued is classified under long-term liabilities in the consolidated balance sheets as of March 31, 2002.





Marketable Securities





Under U.S. GAAP, available-for-sale securities
are carried at fair market value. Unrealized gains and losses on available-for-sale securities are recorded in comprehensive income, a component of shareholders equity. Under Canadian GAAP, unrealized losses on available-for-sale securities
are recorded in other expense in the statement of operations and unrealized gains are not recorded.





RECENT ACCOUNTING PRONOUNCEMENTS





Canadian GAAP





During fiscal 2003, we will adopt the new Canadian Institute of Chartered Accountants (CICA) Handbook Section 3870, Stock-Based Compensation and Other Stock-Based
Payments. This section establishes standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services. It applies to transactions in which an enterprise
grants shares of common stock, stock options, or other equity instruments, or incurs liabilities based on the price of the common stock or other equity instruments. We anticipate that we will adopt settlement date accounting to account for employee
stock options, whereby their issuance is accounted for at intrinsic value. Options issued to non-employees will be accounted for at fair value.





In July 2001, the CICA issued Handbook Section 3062, Goodwill and Other Intangible Assets (Section 3062). Section 3062 requires that intangible assets with indefinite useful lives acquired
prior to July 1, 2001 no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Section 3062. Furthermore, intangible assets with indefinite useful lives acquired subsequent to June 30, 2001
are not amortized, but are reviewed at least annually for impairment. Section 3062 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives. Upon adoption of Section 3062 on
April 1, 2002, we will perform an evaluation of our identifiable intangible assets as of April 1, 2002 to determine whether any of our intangible assets are impaired, and we will cease amortizing indefinite-lived intangibles acquired prior to July
2001.





U.S. GAAP





The following recent accounting pronouncements, when adopted, will impact our operating results only as they are presented under U.S. GAAP in Note 14 to the accompanying
consolidated financial statements.





In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142,Goodwill and Other Intangible Assets.




30




---




SFAS 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price
allocable to an assembled workforce may not be accounted for separately. Upon adoption of SFAS 142 on April 1, 2002, we will evaluate our existing intangible assets that were acquired in a prior purchase business combination, and will make any
necessary reclassifications in order to conform with the new criteria in SFAS 141 for recognition apart from goodwill. Also, we will reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization
period adjustments. In addition, to the extent an intangible asset is identified as having an indefinite useful life, we are required to perform transitional impairment testing in accordance with the provisions of SFAS 142. Any impairment loss will
be measured as of the April 1, 2002 adoption date and recognized as the cumulative effect of a change in accounting principle.





SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires
that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.





In October 2001, the FASB issued SFAS 144 Accounting for the Impairment or Disposal of
Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, it retains many of the fundamental provisions of SFAS 121, including the recognition and measurement of the impairment of long-lived assets to be held and used, and the measurement of long-lived assets to be disposed of by sale.
SFAS 144 also supersedes the accounting and reporting provisions of Accounting Principles Board (APB) Opinion No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in APB 30 to report separately discontinued operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. SFAS 144 is effective for fiscal years beginning after December 15, 2001.





C.    Research and Development (R&D)





We have established
development divisions in Poole, United Kingdom, Beltsville, Maryland and San Diego, California. We also maintain development in Tokyo, Japan specific to adapting our software for use in the Asia-Pacific Region.





Product development costs related to research, design and development of software applications are charged to expense as incurred. To
date, completion of working models of our applications and the general release of the products have substantially coincided. As a result, the we have not capitalized any application development costs as such costs have been insignificant.





The next planned phases of R&D center around utilizing the core engine of NetVault as a platform for multiple
storage management applications.





D.    Trend information.





Trends in our financial performance
are discussed above in Section 5A, Operating Results. For businesses worldwide, information on customer buying patterns, supply chains, inventory, manufacturing, and every facet of a companys activities are increasingly recorded by
enterprise resource planning (ERP) software, stored in databases, and viewed as a strategic asset. Many of our customers believe that a regular backup strategy, which




31




---

includes copying data and keeping it safe in a location outside the network, is an essential element to protection of key data. The increasing strategic importance of data is complemented by the
increasing amount of data stored.





This has fueled growth in the amount of storage products shipped. We note that
some of our customers are doubling or tripling their overall storage on an annual basis. Growth drivers within the storage management industry include the increasing need to store multimedia data such as voice and video, the continued penetration of
ERP applications, the emerging on-line application processing and decision support market, and the proliferation of email systems in companies of all sizes.





Combined with the increasing amount and importance of data is the complexity of managing data in a heterogeneous, distributed computing environment. Data is stored in different operating systems, on
different forms of media, and on different hardware platforms. And yet, the mandate is for the information to be readily accessible and reliable to an increasingly mobile, geographically scattered workforce.





The type of data being stored on client/server systems is changing. Growth in the Internet and corporate intranet sectors, as well as the
rise of 32-bit/64-bit architectures, give impetus to the changes in data seen in the distributed network. First, the increase in popularity in Web-based applications has resulted in an increase of multimedia data types (including large video
streams) that have significant storage requirements. The ease of use and low cost of ownership of Web-based applications are catalyzing a trend toward publishing data that is content-oriented, versus application-oriented.





Management has targeted the OEM market as an important potential market for our revenue growth. Sales through the OEM channel generally
have a combined impact on revenues. First, the shipment of our products to the OEM for inclusion with their software or hardware solution sold to their end users generally provides nominal per unit revenue to the Company. Our product that is shipped
with the OEMs software or hardware is a 45 day trial version. This trial version gives potential end users exposure to a full version of our products, for a limited time.





OEM sales also provide an opportunity to up-sell an end user a fully functional version of our products that generates a full license fee and generally includes maintenance
revenues associated with a one year service contract. The number of OEM hardware units shipped and the related up-sell rate is not currently available, but these will be key measures of the success as the OEM programs becomes better established.





Demand Outlook for 2002





The demand for additional computer storage capacity and the accompanying requirement for software and hardware products to manage the additional capacity is expected to
continue to grow at a significant rate. International Data Corporation (IDC) expects IT spending to increase by double digits over the next five years, as global companies invest more resources into productivity-enhancing technologies.





Market Size of Storage Management Software





The market for storage management software exceeded $5.6 billion in 2000, and the Gartner Group projects that the market to surpass $14.7 billion in 2004. This market
segment includes disk backup and restoration, disk optimization and compression, disaster recovery, disk utilization reporting, tape management, and storage stimulation. Archive management and storage migration, including hierarchical storage
management, are also in this segment. The storage management market can be partitioned into three segments: desktop, server, and host, representing the low-end, mid-range, and high-end niches, respectively. Within the server or network operating
system niche, Windows NT/2000 is the fastestgrowing segment. IDC forecasts annual growth of 40%-45% through 2003. (Source: Lehman Brothers Technology Sector, Storage Infrastructure & Software, Storage Software: Beacon Through the
Network Fog, March 1, 2001.)




32




---




Item 6.    Directors, Senior Management and Employees





A.    Directors and senior management.





Name

PositionSENIOR MANAGEMENTKeith Rickard

President and Chief Executive OfficerJohn Fitzgerald, CPA

Chief Financial OfficerFabrice Helliker

Executive Vice President of EngineeringPeter Eck

Vice President of MarketingAndrew Unsworth

Managing Director, European OperationsHoward Weiss

Managing Director, Asian OperationsDIRECTORSArchie Nesbitt

DirectorHarry Brayne

DirectorJ.G. (Jeff) Lawson

DirectorNeil MacKenzie

DirectorKeith Rickard

DirectorFred Moore

Director





SENIOR MANAGEMENT





Keith Rickard, President and Chief Executive Officer





Keith Rickard is responsible for leading BakBones overall strategy, vision and aggressive growth. Before joining BakBone as president and CEO in June 2001, he held several leadership positions at
Sterling Software where he drove growth in multiple product divisions. His most recent role was as president of Sterling Softwares Storage Management Division, where he was responsible for all aspects of Sterlings storage management
software product suite, including worldwide sales, marketing, engineering and business development. During his tenure, Mr. Rickard grew overall revenues and profitability significantly and successfully integrated three acquisitions. He possesses a
unique combination of technical expertise and business acumen with over 20 years experience in software and 10 years in computer services industries and brings a wealth of international experience to his role. Mr. Rickard holds a Bachelor of Science
in Mathematics from the University of London.





John Fitzgerald, CPA, Chief Financial Officer





John Fitzgerald was appointed to the position of Chief Financial Officer in January 2002 and is
responsible for executing BakBones financial and operational strategies. Mr. Fitzgerald started with BakBone in January 2001 and held the position of Corporate Controller where he was responsible for all aspects of financial control and
reporting for the Company, including treasury management, tax planning, public reporting, and budget planning. Prior to joining BakBone, Mr. Fitzgerald consulted for several high tech and start-up companies in the areas of SEC reporting, initial
public offerings, and strategic planning. He began his career with Arthur Andersen and holds a Bachelors of Science degree from San Diego State University.





Fabrice Helliker, Executive Vice President of Engineering





Fabrice Helliker joined NetVault Limited (previously known as Willow Corporation) in 1992 to support the existing backup products and to aid in the development efforts with AT&T Bell Labs for NetVault. Mr. Helliker managed the
development team through several major revisions of NetVault during the 1990s. He also led the re-architecture effort for the NetVault 6 product, designing the flexible development methods in use today for NetVaults modular structure. Mr.
Helliker was appointed to the position of Vice President, Engineering of the Company, effective March 2000. He received a Bachelors of Science Degree with Honors in Computer Science from Brighton University.




33




---




Peter Eck, Vice President of Marketing





Peter Eck is responsible for developing, designing and executing BakBones marketing strategies. Mr. Eck joined BakBone in May 2002,
prior to which and most recently he served as the Director of Marketing for BMC Software, where he was responsible for leading managers and teams in all marketing roles for BMCs PATROL Distributed Systems lines of business, including the
storage management software offerings. Mr. Eck has more than seventeen years of senior management experience in the computer software industry. He received a Bachelors of Economics Degree from Australia National University.





Andrew Unsworth, Managing Director, European Operations





Andrew Unsworth has held the position of Managing Director of European operations of BakBone Ltd. (formerly Willow) for over twelve years. He negotiated the joint
venture between AT&T and Willow which resulted in the NetVault development program. Furthermore, in 1996, he negotiated distribution rights for NetVault in the Pacific Rim and set up distribution channels in Europe. He has a Full Technology
Certificate in Telecommunications from Chelmer Institute, Essex and a Diploma in Management Sciences from St. Helens College of Technology, Merseyside.





Howard Weiss, Managing Director, Asian Operations





Howard Weiss is responsible for managing BakBones operations and business development in Asia. Mr. Weiss joined BakBone in October 2000, prior to which he was a Director of Phoenix Technologies, a global system-enabling
solutions provider for PCs and servers. During his eight-year tenure with Phoenix, he grew their Japanese operations tenfold. He also helped to launch the Asian operations of Quidtel, a server software start-up corporation. Mr. Weiss is fluent
in Japanese and holds of Bachelors of Arts degree from the University of Michigan.





DIRECTORS





The biography of director Keith Rickard, who is also a member of senior management, is presented above.





Archie Nesbitt, Director





Archie Nesbitt has more than 30 years of public company management experience and has been a senior officer and director of a number of public and private corporations. Mr. Nesbitt is a lawyer and is a
member of The Law Society of Alberta. He has practiced law as President of A.J. Nesbitt Professional Corporation since 1978. Since 1981, Mr. Nesbitt has been the President, Secretary and a Director of Naneco Minerals Ltd., a mining and exploration
company with an international polymetallic focus, which trades on The Canadian Venture Exchange. During the early 1980s, as Chief Operating Officer and General Counsel for Geomex Development Inc. and Geomex Minerals Inc., Mr. Nesbitt supervised and
administered worldwide mineral and oil and gas exploration and development expenditures by fourteen limited partnerships investing funds raised in the Federal Republic of Germany. Mr. Nesbitt holds a Bachelor of Laws degree from the University of
Western Ontario, and a Bachelors of Commerce degree with Honors from Queens (Ontario) University.





Harry Brayne, Director





Harry Brayne was initially employed in the
civil engineering industry starting as site engineer with an international civil engineering contractor, progressing within the industry to Contracts Manager overseeing civil engineering projects through the South of England. In 1974, he founded the
Civil Engineering Company, undertaking contracts throughout Southern England and Libya. This business was sold in 1983. In 1982, he was appointed director of Willow Ltd., a company specializing in data transfer. He has been the Chairman of NetVault
Limited and Willow Starcom Ltd. since 1997. He was educated at Chivers College Portsmouth, and Petersborough and Southhampton Technical Colleges.




34




---




J.G. (Jeff) Lawson, Director





Jeff Lawson is a Partner at the law firm of Burnet, Duckworth & Palmer, located in Calgary, Alberta. Mr. Lawson specializes in
securities law and has extensive experience in both private and public offerings and merger and acquisitions activities. He acts as counsel to a number of industrial and resource companies, is a director or officer of a number of publicly listed
entities, and serves as a director of certain non-profit and charitable organizations. Mr. Lawson received an LLB from the University of Alberta in 1993.





Neil MacKenzie, Director





Neil MacKenzie is a
Director and the Vice President of Newpark Drilling Fluids Canada Inc., a subsidiary of Newpark Resources Incorporated, (NYSE: NR). Mr. MacKenzie is also a Director of Wireless Matrix Corporation (TSE: WRX). Mr. MacKenzie attended the Southern
Alberta Institute of Technology.





Fred Moore, Director





Fred Moore is the President of Horison Information Strategies, located in Boulder, Colorado. Mr. Moore, a data storage expert with more
than 20 years in the industry, founded Horison Information Strategies as an information technology executive consulting firm specializing in long-range strategic planning. Additionally, Mr. Moore is the Editor-in Chief of Storage for West World
Productions of Hollywood, California. He received a bachelors degree in mathematics and a masters degree in computer applications in physical geography from the University of Missouri. Furthermore, Mr. Moore completed the University of
California, Berkeley Executive Program, Haas School of Business. In addition to his role as a director, Mr. Moore will also serve as chairman of BakBones Strategic Advisory Board.





B.    Compensation.





The following table details the
compensation of our senior management during the most recent fiscal year.





Long-Term CompensationAnnual Compensation

AwardsName and Principal Position

Salary

Bonus

Other Annual Compensation

Securities Under Stock
Options Granted

Restricted Shares or
Restricted Share Units(2)

All Other Compensation ($)Keith Rickard(1), President and Chief Executive Officer

$
132,231










$
4,500John Fitzgerald(3) Chief
Financial Officer

$
30,000






50,000




Fabrice Helliker, Executive Vice President of Engineering

$
121,800

$
23,027



100,000

320,000

$
10,320Peter Eck(4), Vice
President of Marketing














Andrew Unsworth, Managing
Director, European Operations

$
132,684








100,000


Howard Weiss, Managing
Director, Asian Operations

$
165,000

$
20,000



25,000







---

|(1) |  | Mr. Rickard was hired in June 2001 and has a base annual salary of $180,000.
|--- |  | ----------------------------------------------------------------------------



35




---

|(2) |  | Restricted shares represent shares held in an employee benefit trust set up to retain certain key personnel associated with NetVault Ltd. Mr. Helliker and Mr.
Unsworth are two thirds vested in their shares with the remaining one third vesting in March 2003. These shares are currently held in the trust, employees do not have voting rights to these shares.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Mr. Fitzgerald was hired in January 2001 and carried out the position of Corporate Controller until January 2002 when he was appointed Chief Financial Officer.
He has a base annual salary of $120,000.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Mr. Eck was hired in May 2002 and has a base annual salary of $160,000.
|--- |  | -----------------------------------------------------------------------




C.    Board practices.





Each director will serve a one-year
term until either re-elected or replaced. Directors do not receive any fees or other compensation or benefits in respect of their service except for reimbursement of direct expenses related to travel to Board of Directors and other Company meetings
requiring their presence.





The Companys audit committee consists of Mr. Nesbitt, Mr. Lawson, and Mr.
MacKenzie. The audit committee is responsible for oversight of management reporting and internal controls. The committee communicates directly with external auditors.





The Companys compensation committee consists of Mr. Nesbitt, Mr. Lawson, and Mr. MacKenzie. The compensation committee is charged with the periodic review and
approval of compensation of the executive officers of the Company. The committee also provides evaluations and recommendations to the Board of Directors concerning management structure and compensation of key management personnel, based on
managements recommendations.





D.    Employees.





The following table details our employees by
geographic location as well as by functional department. The periods presented consist of the three most recent fiscal year end dates: March 31, 2002, March 31, 2001, and April 30, 2000:





Employees by Geographic Location





March 2002


March 2001


April 2000No.

%


No.

%


No.

%United States

78

57
%

112

69
%

27

51
%United Kingdom

39

28
%

32

20
%

17

32
%Japan

21

15
%

14

9
%

9

17
%Canada






4

2
%



TOTAL

138

100
%

162

100
%

53

100
%





Employees by Department





March 2002


March 2001


April 2000No.

%


No.

%


No.

%Sales and marketing

39

28
%

51

32
%

17

32
%Research and development

70

51
%

70

43
%

24

45
%General and administrative

29

21
%

41

25
%

12

23
%TOTAL

138

100
%

162

100
%

53

100
%





As of March 31, 2002, we do not have any employees who are members
of a labor union.




36




---




E.    Share ownership.





The following table shows the number of
our Common Shares beneficially owned by each director and the named executive officer in subsection 6.B, as of March 31, 2002. The information set forth in the share ownership reflects all of the information available to the Company concerning
beneficial ownership of the Companys equity securities as contemplated by Rule 13d-3, including any indirect or informal arrangements meeting the definition of beneficial ownership.





Name and principal position

Common Shares held directly and
beneficially


% of Outstanding Common Shares as of March
31, 2002


Options outstanding

Exercise Price (US$)

Expiration DateKeith Rickard, President
and Chief Executive Officer

(1
)

(1
)






John Fitzgerald, Chief
Financial Officer

(1
)

(1
)

8,000 8,000 34,000

$ $ $
3.54 3.07 0.74

February 2011 May 2011 January 2012Fabrice Helliker, Executive Vice President of Engineering

(1
)

(1
)

84,000

$
0.60

October 2002Peter Eck, Vice President
of Marketing












Andrew Unsworth, Managing
Director, European Operations

(1
)

(1
)






Howard Weiss, Managing
Director, Asian Operations

(1
)

(1
)

25,000

$
3.07

May 2011Archie Nesbitt, Director

631,900


1.2
%

200,000

$
2.76

June 2002Harry Brayne, Director

1,224,548


2.3
%






J.G. (Jeff) Lawson, Director

(1
)

(1
)






Neil MacKenzie, Director

(1
)

(1
)

40,000

$
2.76

June 2002Fred Moore, Director







100,000

$
0.96

March 2012


---

|(1) |  | Individual beneficially owns less than 1% of our common shares as of March 31, 2002.
|--- |  | ------------------------------------------------------------------------------------




Item 7.    Major Shareholders and Related Party Transactions





A.    Major shareholders.





We are aware of no shareholder who
beneficially owns greater than 5% of our outstanding Common Shares as of March 31, 2002.




37




---




B.    Related party transactions.





Jeff Lawson, a director of
the Company, is a partner of a law firm that provides legal services to the Company. During the year ended March 31, 2002, the Company paid the associated law firm $120,000 relating to the services rendered.





Archie Nesbit, a director of the Company, provided certain consulting and legal advice to the Company. During the year ended March 31,
2002, the Company paid the director $155,000 relating to the services rendered.





It is managements belief
that all transactions with related parties have been entered into on terms that are not more favorable than terms that would have been negotiated with unrelated parties.





C.    Interests of experts and counsel.





Not Applicable.





Item 8.    Financial Information





A.    Consolidated Statements and Other Financial Information.





Refer to Item 17, which contains the following audited financial statements:





BakBone Software
Incorporated Consolidated Financial Statements, as of March 31, 2002 and 2001, and for the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year ended April 30, 2000.





To date, we have not declared dividends. It is our policy to retain all funds as working capital in order to build our business.





We have no plans to pay dividends in the foreseeable future.





B.    Significant Changes.





Since the date of the audited
consolidated financial statements, there have been no significant changes in our capitalization or financial operation.





Item 9.    The Offer and Listing





A.    Offer and listing details.





1.  3.





Not Applicable.




38




---




4.    The following table sets forth information regarding
the price history of the Common Shares on the Toronto Stock Exchange for the periods indicated. Prices quoted on the Toronto Stock Exchange are listed in Canadian dollars; however, for consistency purposes, the per share data below has been
translated into U.S. dollars.





(a)  for the five most recent full financial years: the annual high and
low market prices:





Fiscal year ended3/31/02

3/31/01

4/30/00

4/30/99

4/30/98High

$
4.36

$
14.20

$
38.32

$
0.46

$
0.29Low

$
0.55

$
3.01

$
0.38

$
0.02

$
0.08





(b)  for the two most recent full financial years: the
high and low market prices for each full financial quarter:





Quarter ended3/31/02

12/31/01

9/30/01

6/30/01

3/31/01

12/31/00

9/30/00

6/30/00High

$
1.85

$
1.23

$
3.04

$
4.36

$
6.99

$
8.32

$
14.20

$
20.76Low

$
0.68

$
0.73

$
0.55

$
2.25

$
2.99

$
2.92

$
7.75

$
6.72





(c)  for the most recent six months: the high and low
market prices for each month:





5/02

4/02

3/02

2/02

1/02

12/01High

$
1.72

$
1.43

$
1.85

$
1.02

$
1.03

$
0.97Low

$
1.17

$
1.04

$
0.94

$
0.94

$
0.68

$
0.73





(d)  for pre-emptive issues, the market prices for the
first trading day in the most recent six months, for the last trading day before the announcement of the offering and (if different) for the latest practicable date prior to publication of the document.





Not Applicable.





5.  7.





Not Applicable.





B.    Plan of distribution.





Not Applicable.





C.    Markets.





Our Common Shares are traded on the Toronto
Stock Exchange under the symbol BKB and on pink sheets in the United States under the symbol BKBOF.PK.





D.    Selling shareholders.





Not Applicable.





E.    Dilution.





Not Applicable.




39




---




F.    Expenses of the issue.





Not Applicable.





Item 10.    Additional Information





A.    Share capital.





Not Applicable.





B.    Memorandum and articles of association.





We previously
provided the disclosure related to our memorandum and articles of association in response to Item 10.B of our Registration Statement Form 20-F (File No. 000-12230) and we hereby incorporate that disclosure into this Annual Report by reference.





C.    Material Contracts.





We are not party to any material
contracts outside of the ordinary course of our business. However, refer to the discussion at Item 4.B, Business Overview, for a description of the material distribution and OEM agreements entered into by the Company.





D.    Exchange Controls and Other Limitations Affecting Security Holders.





Other than those described below, there are currently no limitations imposed by Canadian federal or provincial laws on the rights of non-resident or foreign owners of Canadian securities to hold or vote the securities held. There are
also no such limitations imposed by our memorandum and articles of association with respect to our Common Shares.





Investment Canada Act





Under the Investment Canada Act, the acquisition of control
of a Canadian business by a non-Canadian is subject to review by the Investment Review Division of Industry Canada (Investment Canada), a government agency, and will not be allowed unless the investment is found likely to be
of net benefit to Canada. An acquisition of control will be reviewable by Investment Canada if the value of the assets of the Canadian business for which control is being acquired is (1) $5 million or more in the case of a
direct acquisition; (2) $50 million or more in the case of an indirect acquisition, which is a transaction involving the acquisition of the shares of a company incorporated outside of Canada which owns subsidiaries in Canada;
or (3) between $5 million or more but less than $50 million where the Canadian assets acquired constitute more than 50% of the value of all entities acquired, or if the acquisition is not effected through the acquisition of control of a foreign
corporation.





These thresholds have been increased for the purposes of acquisition of control of a Canadian
business by investors from members of the World Trade Organization (WTO), including Americans, or WTO member-controlled companies. A direct acquisition by a WTO investor is reviewable only if it involves the direct acquisition of a
Canadian business with assets of $209 million or more for the year 2001 (this figure is adjusted annually to reflect inflation). Indirect acquisitions by WTO investors are not reviewable unless the Canadian assets acquired constitute more than 50%
of the asset value of all entities acquired, in which case the $209 million threshold applies.





These
increased thresholds applicable to WTO investors do not apply to the acquisition of control of a Canadian business that is engaged in certain sensitive areas such as uranium production, financial services, transportation or culture. In the case of
the acquisition of control of a cultural business, the Minister can elect to review the transaction even where it does not exceed the lower asset threshold test above. Even if the transaction




40




---

is not reviewable, a non-Canadian must still give notice to Investment Canada of the acquisition of control of a Canadian business within 30 days after its completion.





Competition Act





Under the Competition Act (Canada), certain transactions are subject to the pre-notification requirements of the Competition Act whereby notification of the transaction and specific information in
connection therewith must be provided to the Commissioner of Competition. A transaction may not be completed until the applicable statutory waiting periods have expired, namely 14 days for a short-form filing or 42 days for a long-form filing. Where
the parties elect to file a short-form notification, the Commissioner may convert the filing to a long-form, thereby restarting the clock once the parties submit their filing.





A proposed transaction is subject to pre-notification if the parties to the transaction together with their affiliates exceed two thresholds. First, the parties and their
affiliates must have total assets or total revenues from sales in, from or into Canada that exceed $400 million in aggregate value. Having met this first threshold, the parties must then provide pre-notification if any one of the following
additional thresholds is met: (1) for an acquisition of assets in Canada where the aggregate value of the assets or the gross revenues from sales in or from Canada that are being acquired exceeds $35 million (the $35 million threshold);
(2) in the case of an acquisition of shares of a company in Canada, where as a result of the proposed acquisition, the person acquiring the shares, together with its affiliates, would own more than 20% (or, if the person making the acquisition
already owns 20% or more of the voting shares of the target, then 50%) of the voting shares of a corporation that are publicly traded or, in the case of a company of which the shares are not publicly traded, the threshold is 35% of the voting shares
(and 50% if the acquirer owns 35% or more of the voting shares of the subject company prior to making the acquisition) and the $35 million threshold is exceeded; or (3) in the case of a proposed amalgamation of two or more corporations where one or
more of the amalgamating corporations carries on an operating business (either directly or indirectly) where the aggregate value of the assets in Canada that would be owned by the continuing corporation resulting from the amalgamation would exceed
$70 million or the gross revenues from sales in or from Canada generated from the assets of the amalgamated entity would exceed $70 million.





Finally, all merger transactions, regardless of whether they are subject to pre-merger notification, are subject to the substantive provisions of the Competition Act, namely, whether the proposed
merger prevents or lessens, or is likely to prevent or lessen, competition substantially in a relevant market.





E.    Taxation.





In this section we summarize the material U.S.
federal and Canadian federal income tax consequences of the ownership and disposition of our Common Shares. Nothing contained herein shall be construed as tax advise, you must rely only on the advise of your own tax advisor. We make no assurances as
to the applicability of any tax laws with respect to any individual investment. This summary relating to our Common Shares applies to beneficial owners who are individuals, corporations, trusts and estates which:





| |  |  | for purposes of the U.S. Internal Revenue Code of 1986, as amended through the date hereof (the Code), are U.S. persons and, for purposes of the
Income Tax Act (Canada) (the Income Tax Act) and the CanadaUnited States Income Tax Convention (1980), are non-residents of Canada and residents of the United States, respectively, at all relevant times;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | hold Common Shares as capital assets for purposes of the Code and capital property for purposes of the Income Tax Act;
| | - |  | ----------------------------------------------------------------------------------------------------------------------




| |  |  | deal at arms length with us for purposes of the Income Tax Act; and
| | - |  | --------------------------------------------------------------------




| |  |  | do not and will not use or hold the Common Shares in carrying on a business in Canada.
| | - |  | --------------------------------------------------------------------------------------



41




---




We refer to persons who satisfy the above conditions as Unconnected U.S.
Shareholders.





The tax consequences of an investment in Common Shares by persons who are not Unconnected
U.S. Shareholders may differ materially from the tax consequences discussed in this section. The Income Tax Act contains rules relating to securities held by some financial institutions. We do not discuss these rules, and holders that are financial
institutions should consult their own tax advisors.





This discussion is based upon the following, all as currently
in effect:





| |  |  | the Income Tax Act and regulations under the Income Tax Act;
| | - |  | ------------------------------------------------------------




| |  |  | the Code and Treasury regulations under the Code;
| | - |  | -------------------------------------------------




| |  |  | the CanadaUnited States Income Tax Convention (1980);
| | - |  | ------------------------------------------------------




| |  |  | the administrative policies and practices published by the Canada Customs and Revenue Agency, formerly Revenue Canada;
| | - |  | ----------------------------------------------------------------------------------------------------------------------




| |  |  | all specific proposals to amend the Income Tax Act and the regulations under the Income Tax Act that have been publicly announced by or on behalf of the
Minister of Finance (Canada) prior to the date of this report;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the administrative policies published by the U.S. Internal Revenue Service; and
| | - |  | -------------------------------------------------------------------------------




| |  |  | judicial decisions.
| | - |  | -------------------




All of the foregoing are subject to change either prospectively or retroactively. We do not take into account the tax laws of the various provinces or territories of Canada or the tax laws of the various state and local jurisdictions
of the United States or foreign jurisdictions.





This discussion summarizes the material U.S. federal and Canadian
federal income tax considerations of the ownership and disposition of Common Shares. This discussion does not address all possible tax consequences relating to an investment in Common Shares. We have not taken into account your particular
circumstances and do not address consequences peculiar to you if you are subject to special provisions of U.S. or Canadian income tax law (including, without limitation, dealers in securities or foreign currency, tax-exempt entities, banks,
insurance companies or other financial institutions, persons that hold Common Shares as part of a straddle, hedge or conversion transaction, and Unconnected U.S. Shareholders that have a functional
currency other than the U.S. dollar or that own Common Shares through a partnership or other pass-through entity). Therefore, you should consult your own tax advisor regarding the tax consequences of purchasing Common Shares.





Material U.S. Federal Income Tax Considerations





Subject to the discussion below regarding Foreign Personal Holding Company Rules, Passive Foreign Investment Company Rules and Controlled Foreign Corporation Rules, this
section summarizes U.S. federal income tax consequences of the ownership and disposition of the Common Shares.





As
an Unconnected U.S. Shareholder, you generally will be required to include in income dividend distributions, if any, paid by us to the extent of our current or accumulated earnings and profits attributable to the distribution as computed based on
U.S. income tax principles. The amount of any cash distribution paid in Canadian dollars will be equal to the U.S. dollar value of the Canadian dollars on the date of distribution based on the exchange rate on such date, regardless of whether the
payment is in fact converted to U.S. dollars and without reduction for Canadian withholding tax. (For a discussion of Canadian withholding taxes applicable to dividends paid by us, see Material Canadian Federal Income Tax
Considerations.) You will generally be entitled to a foreign tax credit or deduction in an amount equal to the Canadian tax withheld. To the extent distributions paid by us on the Common Shares exceed our current or accumulated earnings and
profits, they will




42




---

be treated first as a return of capital up to your adjusted tax basis in the shares and then as capital gain from the sale or exchange of the shares.


Dividends paid by us generally will constitute foreign source dividend income and passive income for purposes of the foreign tax credit, which could reduce the
amount of foreign tax credits available to you. The Code applies various limitations on the amount of foreign tax credits that may be available to a U.S. taxpayer.





Because of the complexity of those limitations, you should consult your own tax advisor with respect to the availability of foreign tax credits.





Dividends paid by us on the Common Shares generally will not be eligible for the dividends received deduction.





If you sell the Common Shares, you generally will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and your adjusted tax basis in the shares. Any such gain or loss will be long-term or short-term capital gain or loss, depending on whether the shares have been held by you for more than one year, and will generally be
U.S. source gain or loss.





Dividends paid by us on the Common Shares generally will be subject to U.S. information
reporting or the 31% backup withholding tax, unless you furnish the paying agent or middleman with a duly completed and signed Form W-9. You will be allowed a refund or a credit equal to any amount withheld under the U.S. backup withholding tax
rules against your U.S. federal income tax liability, provided you furnish the required information to the Internal Revenue Service.





Foreign Personal Holding Company Rules





Special U.S. tax rules apply to a
shareholder of a foreign personal holding company (FPHC). We would be classified as a FPHC in any taxable year if both of the following tests are satisfied:





| |  |  | five or fewer individuals who are U.S. citizens or residents own or are deemed to own more than 50% of the total voting power of all classes of our stock
entitled to vote or the total value of our stock; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | at least 60% of our gross income consists of foreign personal holding company income, which generally includes passive income such as dividends,
interest, gains from the sale or exchange of stock or securities, rents and royalties.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




We
believe that we are not a FPHC. However, we can not assure you that we will not be classified as a FPHC in the future.





Personal Holding Company Rules





We will not be classified as a personal holding
company a (PHC) for U.S. federal income tax purposes unless at any time during the last half of our taxable year, five or fewer individuals (without regard to their citizenship or residency) own or are deemed to own (pursuant to certain
attribution rules) more than 50% of our stock by value, and at least 60% of our ordinary gross income for the taxable year is personal holding company (generally passive income such as dividends and interest). We should not meet the PHC
tests, and even if we were to become a PHC, we do not expect to have material undistributed PHC income. However, we cannot assure you that we will not become a PHC because of uncertainties regarding the application of the constructive ownership
rules and the possibility of changes in our shareholder base and income or other circumstances that could change the application of the PHC rules to us. In addition, if we become a PHC we cannot assure that the amount of our PHC income will be
immaterial.




43




---




Passive Foreign Investment Company Rules





The passive foreign investment company (PFIC) provisions of the Code can have significant tax effects on Unconnected U.S.
Shareholders. We could be classified as a PFIC if, after the application of certain look through rules, for any taxable year, either:





| |  |  | 75% or more of our gross income is passive income, which includes interest, dividends and certain rents and royalties; or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------




| |  |  | the average quarterly percentage, by fair market value of our assets that produce or are held for the production of passive income, is 50% or more
of the fair market value of all our assets.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




To the extent we own at least 25% by value of the
stock of another corporation, we are treated for purposes of the PFIC tests as owning our proportionate share of the assets of such corporation, and as receiving directly our proportionate share of the income of such corporation.





Distributions which constitute excess distributions from a PFIC and dispositions of Common Shares of a PFIC are
subject to the following special rules: (1) the excess distributions (generally any distributions received by an Unconnected U.S. Shareholder on the shares in any taxable year that are greater than 125% of the average annual distributions received
by such Unconnected U.S. Shareholder in the three preceding taxable years, or the Unconnected U.S. Shareholders holding period for the shares, if shorter) or gain would be allocated ratably over an Unconnected U.S. Shareholders holding
period for the shares, (2) the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we are a PFIC would be treated as ordinary income in the current taxable year and (3) the amount allocated to
each of the other taxable years would be subject to the highest rate of tax on ordinary income in effect for that year and to an interest charge based on the value of the tax deferred during the period during which the shares are owned.





Subject to specific limitations, Unconnected U.S. Shareholders who actually or constructively own marketable
shares in a PFIC may make an election under section 1296 of the Code to mark those shares to market annually, rather than being subject to the above-described rules. Amounts included in or deducted from income under this mark-to-market election and
actual gains and losses realized upon disposition, subject to specific limitations, will be treated as ordinary gains or losses. For this purpose, we believe that our shares will be treated as marketable securities within the meaning of
Section 1296(e)(1) of the Code.





We believe that we will not be a PFIC for the current fiscal year and we do not
expect to become a PFIC in future years. Whether we are a PFIC in any year and the tax consequences relating to PFIC status will depend on the composition of our income and assets, including cash. You should be aware, however, that if we are or
become a PFIC we may not be able or willing to satisfy recordkeeping requirements that would enable you to make a qualified electing fund election.





You should consult your tax advisor with respect to how the PFIC rules affect your tax situation.





Controlled Foreign Corporation Rules





If more than 50% of the voting power or total value of all classes of our shares is owned, directly or indirectly, by U.S. shareholders, each of which owns 10% or more of the total combined voting power of all classes of our shares,
we could be treated as a controlled foreign corporation (CFC) under Subpart F of the Code. This classification would require such 10% or greater shareholders to include in income their pro rata shares of our Subpart F Income,
as defined in the Code. In addition, under Section 1248 of the Code, gain from the sale or exchange of shares by an Unconnected U.S. Shareholder who is or was a 10% or greater shareholder at any time during the five year period ending with the sale
or exchange will be ordinary dividend income to the extent of our earnings and profits attributable to the shares sold or exchanged.





We believe that we are not a CFC, however, we can not assure you that we will not become a CFC in the future.




44




---




Material Canadian Federal Income Tax Considerations





In this section, we summarize the material anticipated Canadian federal income tax considerations relevant to the ownership and
disposition of the Common Shares.





Under the Income Tax Act, assuming you are an Unconnected U.S. Shareholder, and
provided the Common Shares are listed on a prescribed stock exchange, which includes the Toronto Stock Exchange and the AMEX, you will generally not be subject to Canadian tax on a capital gain realized on an actual or deemed disposition of the
Common Shares unless you alone or together with persons with whom you did not deal at arms length owned or had rights to acquire 25% or more of our issued shares of any class at any time during the sixty (60) month period before the actual or
deemed disposition.





Dividends paid, credited or deemed to have been paid or credited on the Common Shares to
Unconnected U.S. Shareholders will be subject to a Canadian withholding tax under the Income Tax Act at a rate of 25% of the gross amount of the dividends. Under the CanadaUnited States Income Tax Convention (1980), the rate of withholding tax
on dividends generally applicable to Unconnected U.S. Shareholders who beneficially own the dividends is reduced to 15%. In the case of Unconnected U.S. Shareholders that are corporations that beneficially own at least 10% of our voting shares, the
rate of withholding tax on dividends generally is reduced to 5%. United States limited liability companies (LLCs) will not be entitled to these reduced rates. Shareholders that are partnerships will be subject to the 25% rate unless the
partnership applies for and receives written authority for us to reduce the withholding tax rate.





Canada does not
currently impose any federal estate taxes or succession duties. However, if you die, there is a deemed disposition of the Common Shares held at that time for proceeds of disposition generally equal to the fair market value of the Common Shares
immediately before the death. Capital gains realized on the deemed disposition, if any, will have the income tax consequences described above.





F.    Dividends and paying agents.





Not Applicable.





G.    Statement by experts.





Not Applicable.





H.    Documents on display.





You may read and copy the
documents to which we refer at the Public Reference Room maintained by the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at certain of the SECs regional offices at 7 World Trade Center, Suite 1300, New York, NY 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. In addition, the SEC maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file
electronically with the SEC at http://www.sec.gov. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.





We are required to file reports and other information with the securities commission in all provinces of Canada. You are invited to read and copy any reports, statements or
other information, other than confidential filings, that we file with the provincial securities commissions. These filings are also electronically available from the Canadian System for Electronic Document Analysis and Retrieval (SEDAR)
(http://www.sedar.com), the Canadian equivalent of the SECs electronic document gathering and retrieval system.





We will provide without charge to each person, including any beneficial owner, on the written or oral request of such person, a copy of any or all documents referred to above which have been or may be incorporated




45




---

by reference in this report (not including exhibits to such incorporated information that are not specifically incorporated by reference into such information). Requests for such copies should be
directed to us at the following address: BakBone Software Incorporated, 10145 Pacific Heights Blvd., Suite 900, San Diego, California 92121, Attention: Investor Relations, telephone number: 858-450-9009.





I.    Subsidiary Information.





Not Applicable.





Item 11.    Quantitative and Qualitative Disclosures About Market Risk.





We hold no material financial instruments for trading purposes. We hold debt instruments bearing fixed interest rates.





We are exposed to foreign currency exchange rate risk by virtue of our operations in Japan, United Kingdom and Canada. As we currently earn revenues and incur expenses in United States dollars, British pounds, Euros,
Japanese yen and Canadian dollars, exchange rates for these and other local currencies in countries where we may operate in the future may have an adverse effect on our earnings or assets when British pounds, Euros, Japanese yen or Canadian dollars
are exchanged for United States dollars. We have not entered into forward foreign exchange contracts in an attempt to mitigate this risk. To date, losses and gains resulting from foreign exchange transactions have been included in our results of
operations. Further discussion of foreign currency risk is set forth in Item 5.B under the heading, Foreign Currency.





Item 12.    Description of Securities Other than Equity Securities.





Not Applicable.





PART II





Item 13.    Defaults, Dividend Arrearages and Delinquencies.





We
are not currently in a default or delinquent status with regards to our term loan.





Item 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds.





We have not made any material modifications to the rights of security holders.





Item 15.    [Reserved]





Item 16.    [Reserved]




46




---




Item 17.    Financial Statements.





The following financial
statements are filed as part of this Annual Report:





Independent Auditors ReportConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statements of Shareholders EquityConsolidated Statements of Cash FlowsNotes to Consolidated Financial Statements





Item 18.    Financial Statements





See Item 17 for a list of the financial statements that are filed as part of this Annual Report.





Item 19.    Exhibits





Exhibit

Description1.1

Articles of Continuance*1.2

Bylaws*4.1

Form of Domestic Reseller Agreement*8.1

List of subsidiaries10.1

Consent of KPMG LLP


---

|* |  | Previously filed as an exhibit to the Registrants Registration Statement on Form 20-F filed on February 4, 2002 (Commission File No. 00-12230).
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------



47




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SIGNATURES





The Registrant, BakBone Software, Incorporated, a corporation organized and existing under the laws of the Province of Alberta, Canada, hereby certifies that it meets all of the requirements for filing on Form 20-F and that
it has duly caused and authorized the undersigned to sign this Annual Report on its behalf, thereunto duly authorized on June 17, 2002





BAKBONE SOFTWARE INCORPORATEDBy:

/s/    KEITH
RICKARDKeith Rickard President and Chief
Executive Officer




48




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FINANCIAL STATEMENTS INDEX





PageIndependent Auditors Report

50Consolidated Balance Sheets

51Consolidated Statements of Operations

52Consolidated Statement of Shareholders Equity

53Consolidated Statements of Cash Flows

54Notes to Consolidated Financial Statements

55




49




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INDEPENDENT AUDITORS REPORT





The Board of Directors and Shareholders


BakBone Software Incorporated:





We have audited the consolidated balance sheets of BakBone
Software Incorporated and subsidiaries (the Company) as of March 31, 2002 and 2001, and the related consolidated statements of operations, shareholders equity, and cash flows for the year ended March 31, 2002, the eleven months ended March 31,
2001, and the year ended April 30, 2000. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.





We conducted our audits in accordance with auditing standards generally accepted in Canada and 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 the Company as of March 31, 2002 and 2001, and the results of its operations and its cash flows for the year ended March 31, 2002, the eleven months
ended March 31, 2001, and the year ended April 30, 2000, in conformity with accounting principles generally accepted in Canada.





Accounting principles generally accepted in Canada vary in certain significant respects from accounting principles generally accepted in the United States of America. Application of accounting principles generally accepted in the
United States of America would have affected results of operations and cash flows for the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year ended April 30, 2000, and assets, liabilities and shareholders equity as
of March 31, 2002 and 2001, to the extent summarized in Note 14 to the consolidated financial statements.





KPMG LLP





San Diego, California


United States of America


June 5, 2002







50




---

BAKBONE SOFTWARE INCORPORATED





CONSOLIDATED BALANCE SHEETS





March 31, 2002 and 2001





(in thousands, except share data)


(in U.S. dollars)





2002


2001ASSETSCurrent assets:Cash and cash equivalents

$
5,502


$
3,815Restricted cash (Note 7)


804



90Accounts receivable, net of allowance for doubtful accounts of $72 and $28, respectively


3,289



1,404Other assets


588



500Total current assets


10,183



5,809Capital assets, net (Notes 3 and 12)


2,762



3,736Restricted cash (Note 7)






780Intangibles, net (Notes 2 and 12)


4,784



7,831Other assets


567



602Total assets

$
18,296


$
18,758LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
645


$
1,368Accrued liabilities


1,938



1,121Deferred revenue


1,297



671Current portion of capital lease obligations (Note 11)


201



192Current portion of notes payable (Note 9)






2,574Loans from related parties (Note 10)


63



75Total current liabilities


4,144



6,001Capital lease obligations, excluding current portion (Note 11)


54



240Notes payable, excluding current portion (Note 9)


1,950



188Total liabilities


6,148



6,429Minority interest






100Shareholders equity:Share capital, no par value, unlimited shares authorized, 53,121,681 and 41,747,922 shares issued and outstanding,
respectively


51,861



35,843Share capital to be issued


2,877



Share capital held by subsidiary


(66
)


(66
)Accumulated deficit


(41,379
)


(22,588
)Cumulative exchange adjustment


(1,145
)


(960
)Total shareholders equity


12,148



12,229Commitments and contingenciesTotal liabilities and shareholders equity

$
18,296


$
18,758








See accompanying notes to
consolidated financial statements.




51




---

BAKBONE SOFTWARE INCORPORATED





CONSOLIDATED STATEMENTS OF OPERATIONS





Year ended March 31,
2002,


the eleven months ended March 31, 2001,


and the year
ended April 30, 2000





(in thousands, except per share and share data)


(in U.S. dollars)





2002


2001


2000Revenues (Note 12)

$
9,863


$
4,975


$
337Cost of revenues


1,244



782



37Gross margin


8,619



4,193



300Operating expenses:Sales and marketing


11,149



11,672



301Research and development


4,122



3,584



189General and administrative


5,659



8,044



759Total operating expenses


20,930



23,300



1,249Operating loss


(12,311
)


(19,107
)


(949
)Interest (expense) income, net


(108
)


396



156Amortization and impairment of intangibles (Note 2)


(6,235
)


(3,203
)


(166
)Foreign exchange gains, net


110



5



Other (expense) income, net


(359
)


177



63Minority interest


112



40



Net loss

$
(18,791
)

$
(21,692
)

$
(896
)Loss per sharebasic and diluted (Note 2)

$
(0.46
)

$
(0.87
)

$
(0.11
)Weighted-average common shares (Note 2)


40,869,526



24,903,458



8,044,711














See accompanying notes to consolidated financial statements.







52




---

BAKBONE SOFTWARE INCORPORATED





CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY





Year ended
March 31, 2002,


the eleven months ended March 31, 2001,


and
the year ended April 30, 2000





(in thousands, except share data)


(in U.S. dollars)





Share Capital


Share Capital to be
Issued

Share Capital Held by Subsidiary


Accumulated Deficit


Special Warrants


Cumulative Exchange Adjustment


Total Shareholders EquityShares

Amount


Shares

AmountBALANCE, MAY 1, 1999

5,662,429

$
17,460




$


$



$




$    


$



$
17,460Issued in private placements, net of issuance costs

2,860,000


496
























496Exercise of stock options

550,600


159
























159Exercise of warrants

2,350,001


201
























201Sale of special warrants, net of issuance costs





















24,357







24,357Issued to acquire NVS

15,625,000


(209
)























(209
)NVS share capital




9
























9Issued to acquire BakBone KK

375,000


(31
)























(31
)Elimination of Net Resources share capital




(18,025
)























(18,025
)Cumulative exchange adjustment

























(285
)


(285
)Net loss

















(896
)










(896
)BALANCE, APRIL 30, 2000

27,423,030


60












(896
)


24,357



(285
)


23,236Exercise of stock options

303,958


570
























570Conversion of special warrants and remaining issu ance costs

9,726,000


24,213
















(24,357
)






(144
)Exercise of warrants

3,694,934


4,536
























4,536Issued to acquire Tracer

600,000


6,464
























6,464Share capital held by subsidiary













(66
)














(66
)Cumulative exchange adjustment

























(675
)


(675
)Net loss

















(21,692
)










(21,692
)BALANCE, MARCH 31, 2001

41,747,922


35,843








(66
)


(22,588
)






(960
)


12,229Exercise of stock options

13,000


9
























9Sale of special warrants, net of issuance costs





















9,706







9,706Conversion of special warrants

3,000,000


9,706
















(9,706
)






Issued in public share offering, net of issuance costs

7,170,400


5,212
























5,212Issued in private placement, net of issuance costs

440,834


322
























322Exercise of warrants

749,525


769
























769Issued to acquire remaining interest in BakBone KK







2,100,000


2,877


















2,877Cumulative exchange adjustment

























(185
)


(185
)Net loss

















(18,791
)










(18,791
)BALANCE, MARCH 31, 2002

53,121,681

$
51,861


2,100,000

$
2,877

$
(66
)

$
(41,379
)

$



$
(1,145
)

$
12,148








See accompanying notes to
consolidated financial statements.




53




---

BAKBONE SOFTWARE INCORPORATED





CONSOLIDATED STATEMENTS OF CASH FLOWS





Year ended March 31,
2002,


the eleven months ended March 31, 2001,


and the year
ended April 30, 2000





(in thousands)


(in U.S. dollars)





2002


2001


2000Cash flows from operating activities:Net loss

$
(18,791
)

$
(21,692
)

$
(896
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


4,637



3,788



185Impairment of intangibles


2,508







Minority interest


(112
)


(40
)


Loss on disposal of capital assets


443



13



Gain on sale of non-operating subsidiaries


(119
)






Unrealized loss on investment


76







Changes in assets and liabilities, net of effects of acquisitions:Accounts receivable, net


(1,885
)


(363
)


72Other assets


(10
)


(568
)


(148
)Accounts payable


(723
)


190



(221
)Accrued liabilities


647



417



444Deferred revenue


626



273



(1
)Net cash used in operating activities


(12,703
)


(17,982
)


(565
)Cash flows from investing activities:Capital expenditures


(433
)


(3,011
)


(193
)Cash expenditures related to acquisitions, net of cash acquired


(117
)


(1,614
)


(2,454
)Proceeds from sale of capital assets


41



26



Net cash used in investing activities


(509
)


(4,599
)


(2,647
)Cash flows from financing activities:Payments of capital lease obligations


(177
)


(132
)


(2
)Proceeds from notes payable






2,500



Payments of notes payable


(812
)


(288
)


Proceeds from issuance of special warrants


9,734







26,095Proceeds from public offering


5,681







Proceeds from private placement


332







Offering costs related to equity financings


(507
)


(144
)


(2,099
)Proceeds from exercise of stock options


9



570



129Proceeds from exercise of warrants


769



4,536



162Payments of related party loans


(12
)






(53
)Decrease (increase) in restricted cash


66



(870
)


Net cash provided by financing activities


15,083



6,172



24,232Effect of exchange rate changes on cash and cash equivalents


(184
)


(511
)


(285
)Net (decrease) increase in cash and cash equivalents


1,687



(16,920
)


20,735Cash and cash equivalents, beginning of period


3,815



20,735



Cash and cash equivalents, end of period

$
5,502


$
3,815


$
20,735Cash paid during the period for:Interest

$
291


$
77


$
Income taxes

$



$



$
Supplemental disclosures of cash flow information-businesses acquired:Fair value of assets acquired, net of cash acquired

$



$
688


$
1,423Liabilities assumed

$



$
970


$
1,777Acquisition consideration classified in accrued liabilities

$
170


$



$
Non-cash investing and financing activities:Equipment acquired under capital leases

$



$
555


$
Investment received from sale of non-operating subsidiaries

$
126


$



$
Share capital issued in connection with acquisitions

$



$
6,509


$
240Share capital to be issued in connection with acquisitions

$
2,877


$



$






See accompanying notes to consolidated financial statements.




54




---

BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





March 31, 2002 and 2001





(in U.S. dollars)


(1)    The Company and Business Combinations





BakBone Software
Incorporated (BakBone or the Company) is an international storage management software company that develops and globally distributes storage management solutions to the open systems markets, providing data protection and management solutions
scalable from workgroup to enterprise. The Companys corporate headquarters are located in San Diego, California.





The Company, formerly Net Resources Incorporated (Net Resources), was originally incorporated in the Canadian Province of British Columbia under the Company Act. In November 1992, the Company continued from British Columbia to the
Province of Alberta where it engaged in mineral exploration activities. These exploration activities were ceased during 1999 due to declining prices in the mineral markets, and the mining assets were written off. On March 13, 2000, the Company
changed its name to BakBone Software Incorporated.





In August 2000, the Board of Directors approved a change in
the fiscal year-end of the Company for financial reporting purposes from April 30 to March 31, effective with the fiscal year beginning May 1, 2000.





On March 16, 2000, the Company acquired 100% of NVS Holdings Inc. (NVS). This acquisition resulted in a reverse takeover of the Company by NVS as the greater proportion of the voting shares of the
Company were held by NVS shareholders after the acquisition. Concurrent with the reverse takeover of the Company, the merged entity acquired NetVault Holdings Limited, NetVault Limited and an aggregate 47% of NetVault Corporation (BakBone KK). At
the time of this acquisition, NetVault Holdings Limited was a non-operating private shell while NetVault Limited and NetVault Corporation had substantive operations. In regards to these acquisitions, the Company determined that the operations of the
acquired companies were not material during the period from March 1, 2000 through the actual date of the acquisition and as such assigned a convenience date of March 1, 2000 for accounting purposes.





On June 9, 2000, the Company acquired all of the issued and outstanding common shares of Tracer Technologies, Inc. and its 50% ownership
of the common shares of Tracer Technologies Japan Corporation (collectively Tracer), for cash and acquisition costs totaling $1.6 million (net of cash acquired of $800,000) and 600,000 common shares of the Company valued at $6.5 million on the date
of acquisition. Of the 600,000 shares issued, 122,340 shares were issued to a trust beneficially owned by the family of a former director of the Company. The acquisition was accounted for by the purchase method of accounting, and accordingly, the
operating results of Tracer have been included in the accompanying consolidated financial statements of the Company from the date of acquisition. The excess of purchase price over the fair value of the net assets acquired of $400,000 was
$8.5 million and is being amortized on a straight-line basis over three years, the expected useful life (Note 2(e)). In order to retain certain principals of Tracer as employees, the Company issued stock options to acquire 250,000 common shares
at an exercise price of $4.06 ($6.00 Canadian) per share. One of the principals is a relative of a former director of the Company and received options to acquire 62,500 common shares. The former director also indirectly received 3,060 common shares
of the Company through his ownership in Tracer Technologies Japan Corporation (Tracer KK), one of the former shareholders of Tracer. (See Note 2(e) for discussion related to Tracer intangibles impairment).





In January 2002, the Company acquired an additional 25% of Tracer KK in exchange for $100,000 in cash and contingent consideration,
consisting of $100,000 in cash and 30,000 shares of the Companys common stock. The issuance of contingent consideration is dependent upon the seller maintaining employment with the Company, as defined in the acquisition
agreement.    The excess of purchase price over the fair value of net assets




55




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)




acquired was $99,000. In March 2002, the Company acquired the remaining 25% of Tracer KK for nominal consideration. Both acquisitions were accounted for by the purchase method of accounting.
Following the March 2002 acquisition, Tracer KK is a wholly-owned subsidiary of the Company.





In March 2002, the
Company acquired the remaining 53% of BakBone KK for 2,100,000 common shares of the Company, valued at $2.9 million at the time of acquisition, and $170,000 in cash, of which $120,000 will be paid in twelve equal monthly installments commencing
April 1, 2002, and the remaining $50,000 upon the earlier of the Companys next financing or March 31, 2004. The 2,100,000 shares will be issued during fiscal 2003. The acquisition was accounted for by the purchase method of accounting and the
excess of purchase price over the fair value of the net assets acquired was $3.1 million.





(2)    Significant
Accounting Policies





The accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Canada, which conform in all material respects with those in the United States, except as outlined in Note 14.





The Company has reviewed the currency used for financial reporting purposes and has determined U.S. dollars to be the reporting currency, as the majority of the Companys revenues and expenses for
the year ended March 31, 2002 are denominated in U.S. dollars. In the opinion of management, U.S. dollars will remain the reporting currency as operations in the U.S. are expected to continue to represent the majority of revenues and expenses in
future periods. As a result of this change in reporting currency from Canadian dollars and for comparison purposes, the consolidated financial statements for all prior periods have been translated to U.S. dollars.





(a)  Principles of Consolidation





The consolidated financial statements include the accounts of the Company and its subsidiaries, BakBone Software, Inc., NVS, BakBone Software Ltd. (formerly NetVault
Holdings Ltd.), BakBone Acquisition Corp. (formerly Tracer Technologies, Inc.), BakBone KK and Tracer KK. All intercompany transactions and accounts have been eliminated in
consolidation.





Prior to the March 2002
acquisitions, upon which BakBone KK and Tracer KK became wholly-owned subsidiaries of the Company, the Company recorded entries to account for the minority interests in the net income or loss of BakBone KK and Tracer KK. As the minority interest
parties were not legally liable to fund BakBone KK and Tracer KKs net losses, the Company did not record their minority interest share of BakBone KK and Tracer KKs net losses to the extent it would result in a minority interest
receivable. In conjunction with the March 2002 acquisitions, all minority interest liabilities were eliminated.





(b)  Foreign Currency





The accounts of the Companys foreign
subsidiaries are translated into U.S. dollars using the current rate method whereby monetary items are translated at the rate of exchange in effect at the balance sheet date, and revenue and expense items are translated at the average exchange rate
during the reporting period. Foreign currency translation gains and losses are included as a separate component of shareholders equity.





Certain transactions of the Companys foreign subsidiaries are carried out in currencies other than the subsidiaries local currency. Gains or losses resulting from these transactions are
included in results of operations as incurred.




56




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)







(c)  Cash and Cash Equivalents





Cash and cash equivalents consist of money market instruments, commercial paper and other highly liquid investments with
original maturities of three months or less from the date of purchase. Cash and cash equivalents subject to restriction are classified as restricted cash (Note 7).





(d)  Capital Assets





Capital assets are recorded at cost and depreciated using the straight-line basis over the assets useful lives as follows:





Computer equipment and software

35 yearsFurniture and fixtures

57 yearsLeasehold improvements

Shorter of estimated useful life or life of lease





(e)  Intangibles and Impairment





Pursuant to a new Canadian GAAP standard (Canadian Institute of Chartered Accountants Handbook Section
3062, Goodwill and Other Intangible Assets), intangibles acquired in business combinations for which the acquisition date is after June 30, 2001 are not amortized. Intangibles acquired on or after July 1, 2001 are tested for impairment in the
same manner as previously recorded intangibles. Intangibles acquired on or before June 30, 2001 are amortized through the initial adoption date of the new standard, or April 1, 2002 as it relates to the Company. The Company assesses the
recoverability of intangibles by determining whether the amortization of the balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of intangibles impairment, if any,
is measured based on projected discounted future operating cash flows using a discount rate reflecting the Companys average cost of funds. The assessment of the recoverability of intangibles will be impacted if estimated future operating cash
flows are not achieved. Previously recorded intangibles were recorded at cost and amortized on a straight-line basis over three years.





Intangibles, net of accumulated amortization, were $4.8 million and $7.8 million as of March 31, 2002 and 2001, respectively.





During the quarter ended March 31, 2002, the Company determined the carrying value of certain intangibles were impaired. The impaired intangibles were originally recorded in connection with the
Companys acquisition of Tracer. In recent months, the operating results of Tracers core product have declined to a level indicating potential impairment. The Company determined that the carrying value of the Tracer intangibles exceeded
the fair value. The Company used the present value of estimated cash flows in order to assess the fair value of the intangible. An impairment loss was recorded for the amount by which the carrying value of the intangible exceeded the fair value of
the intangibles. The Company recorded an impairment charge of $2.5 million as a component of amortization and impairment of intangibles in the accompanying consolidated statement of operations for the year ended March 31, 2002.





(f)  Revenue Recognition





The Company derives revenue from licensing its software and from the sale of customer support services (maintenance) and professional services. Professional services
include training and consulting services. The




57




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)




Company sells almost exclusively through a network of partners and all sales are based on a published master price list with set discounts given to partners based on their specific contract with
the Company.





Vendor specific objective evidence exists for the software element and the professional services
element in that the Company sells each element separately, based on the established prices in the master price list. The prices for professional services are based on set hourly rates. Vendor specific objective evidence exists for the maintenance
element in that the maintenance agreements include technical support for a one year period, with an option to renew the agreements for a period of one or more years, and the annual renewal fee ranges generally from 18% to 22% of the software license
fee. As vendor specific objective evidence exists for each element, the Company uses separate element accounting. The Company has standard payment terms, which it offers to all of its customers, and does not offer any extended payment terms. In
addition, the Companys sales agreements do not contain stock balancing rotation rights.





The Company
recognizes software license revenue upon meeting certain defined criteria including: the receipt of an executed written contract or purchase order, delivery of the product to the customer, determination that the software license fees are fixed and
determinable, and determination that collection of the software license fees is probable. If any of the criteria are not met, the Company defers recognition of the software license revenue until the criteria are met. The Company recognizes revenue
from professional services as the services are performed. The Company recognizes revenue from maintenance contracts ratably over the related contract period.





(g)  Cost of Revenue





Cost
of revenue includes material, packaging, shipping and other production costs. Cost of revenue also includes salaries, benefits and overhead costs associated with employees providing support services.





(h)  Product Development Costs





Product development costs related to research, design and development of software applications are charged to expense as incurred. To date, completion of working models of
the Companys applications and the general release of the products have substantially coincided. As a result, the Company has not capitalized any application development costs as such costs have been insignificant.





(i)  Loss per Share





During the year ended March 31, 2002, the Company retroactively adopted the new Canadian standard relating to the computation of earnings per share (Canadian Institute of Chartered Accountants Handbook
Section 3500, Earnings Per Share). Under the new standards, contingently issuable shares are considered outstanding common shares and included in the computation of basic earnings per share only as of the date that all conditions
necessary for their issuance have been satisfied. Previously, all contingently issuable shares were included in the computation of basic earnings per share, regardless of contingency satisfaction. All earnings per share calculations for prior
periods have been retroactively restated to reflect the new standards.





Basic earnings or loss per share is
calculated using the weighted-average number of common shares outstanding. Diluted earnings or loss per share is calculated similar to basic earnings or loss per share except that the weighted-average shares outstanding are increased to include
additional shares from the assumed exercise of potential common shares, if dilutive. For the year ended March 31, 2002, the eleven months ended March 31,




58




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)




2001, and the year ended April 30, 2000, 10,561,095, 14,579,746 and 25,727,066 potential common shares, respectively, were excluded from the computations of diluted loss per share as their effect
was anti-dilutive.





(j)  Stock-Based Compensation





The Companys stock-based compensation arrangements are described in Note 5. No compensation expense is recognized for these plans
when stock options are issued to employees and consultants for services rendered.





(k)  Income
Taxes





The Company applies the asset and liability method of accounting for deferred income taxes, under
which future income tax assets and liabilities are determined based on temporary differences and are measured using the current, or substantially enacted, tax rates and laws expected to apply when these differences reverse. A valuation allowance is
recorded against deferred income tax assets if it is more likely than not that the assets will not be realized.





(l)  Financial Instruments and Market Risk





Cash and cash equivalents,
restricted cash, accounts receivable, accounts payable, accrued liabilities, notes payable and loans from related parties constitute financial instruments. The carrying value of cash and cash equivalents, restricted cash, accounts receivable,
accounts payable and accrued liabilities approximates their fair value given the relatively short periods to maturity. The carrying value of notes payable approximates its fair value because its interest rates and other terms are comparable to those
currently available to the Company in the marketplace. The fair value of loans from related parties cannot be ascertained due to the related party nature of the debt.





The Company is exposed to the risks that arise from fluctuations in foreign exchange rates and the volatility of those rates. The Company does not use derivative
instruments to reduce its exposure to foreign currency exchange risk.





During the year ended March 31, 2002 and
the eleven months ended March 31, 2001, no single customer represented more than 10% of total revenues. During the year ended April 30, 2000, the Company had sales to four customers that represented 13%, 12%, 11% and 11% of total revenues,
respectively.





(m)  Use of Estimates





The preparation of consolidated financial statements in conformity with accounting principles generally accepted in Canada requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting
periods. Areas where significant judgment are made include, but are not limited to: allowance for doubtful accounts, deferred income tax asset valuation allowance, revenue recognition, capital assets and intangibles valuation, and contingencies.
Actual results could differ from those estimates.




59




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)







(3)    Capital Assets





Capital assets consisted of the following at March 31, 2002 and 2001 (in thousands):





Cost

Accumulated depreciation

Net book valueMarch 31, 2002:Computer equipment and software

$
2,833

$
959

$
1,874Furniture and fixtures


523


154


369Leasehold improvements


620


101


519$
3,976

$
1,214

$
2,762March 31, 2001:Computer equipment and software

$
3,126

$
452

$
2,674Furniture and fixtures


468


46


422Leasehold improvements


684


44


640$
4,278

$
542

$
3,736





(4)    Equity





Public Offering





In December 2001, the Company completed a public offering of 7,170,400 units at a price of $0.80 per unit for gross proceeds of $5.7 million, excluding issuance costs of $469,000. Each unit was
comprised of one common share and one-quarter common share purchase warrant. Each full share purchase warrant entitled the holder to purchase one common share at $1.04 and expires 120 days from the closing of this offering. As of March 31, 2002,
612,025 of the purchase warrants had been exercised, resulting in gross proceeds of $637,000. In connection with the offering, the Company issued 250,000 Agent Options to a third party who assisted in the offering. The Agent Options entitle the
holder thereof to purchase, at a price of $0.99, one common share and expire in December 2002.





Private
Offerings





In February 2002, the Company completed a private offering of 440,834 units at a
price of $0.75 per unit for gross proceeds of $332,000; excluding issuance costs of $10,000. Each unit was comprised of one common share and one common share purchase warrant. Each common share purchase warrant entitles the holder to purchase one
common share at $0.75 and expires one year from the closing of the offering. The parties to the offering consisted of various members of Company management and employees.





In May 2001, the Company completed a private placement of 3,000,000 Special Warrants at a price of $3.24 per Special Warrant for proceeds of $9.7 million, excluding
issuance costs of $28,000. Each Special Warrant was exercisable, for no additional consideration, into one common share and one-half share purchase warrant upon receipt of the final prospectus filed in the provinces of Alberta and British Columbia.
Each full share purchase warrant entitled the holder to purchase one common share at $4.84. All of the 1,500,000 purchase warrants, which resulted from this private placement, expired unexercised in November 2001.





During the year ended April 30, 2000, the Company raised $6.2 million and $20.3 million through a private placement of 6,000,000 Series A
Special Warrants, at a price of $1.03 per warrant, and 3,000,000 Series B Special Warrants, at a price of $6.77 per warrant, respectively, excluding issuance costs of $2.1 million. Each




60




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)




Series A Special Warrant was exercisable, for no additional consideration, into one common share and one-half Series A Warrant upon receipt of the final prospectus in each of the respective
provinces in Canada. Each Series B Special Warrant was exercisable, for no additional consideration, into 1.1 common shares and 0.55 Series B Warrant upon receipt of the final prospectus in each of the respective provinces in Canada. Each full
Series A Warrant and Series B Warrant entitled the holder to purchase one common share of the Company at a price of $1.23 and $10.23 per common share, respectively. In addition, the Company issued 250,000 Series A Broker Warrants and 260,995 Series
B Broker Warrants in conjunction with the Series A and B Special Warrants issuance. Of the Series A Broker Warrants, 200,000 were exercisable, at no cost, into one Series A Broker Option entitling the holder thereof to purchase one common share at a
price of $1.09. The remaining 50,000 Series A Broker Warrants were exercisable, at no cost, into one Series A Broker Option entitling the holder thereof to purchase, at a price of $1.09, one common share and one-half Series A Warrant. Each Series B
Broker Warrant was exercisable, at no cost, into one Series B Broker Option entitling the holder thereof to purchase, at a price of $6.75, one common share and one-half Series B Warrant. The Company did not receive any proceeds from the issuance of
the Series A Broker Warrants and Series B Broker Warrants.





On March 16, 2000, 426,000 Series C Special Warrants
were issued to a third-party consultant for services rendered prior to the issuance date. Of the total Series C Special Warrants, 300,000 were issued directly to the consultant with the balance issued to two former directors of the Company in
repayment of an aggregate of 126,000 common shares owed by the consultant to those individuals. Each Series C Special Warrant was exercisable, at no cost, into one common share upon receipt of the final prospectus in each of the respective provinces
in Canada. The Company did not receive any proceeds from the issuance of the Series C Special Warrants.





The
Company received receipt of the final prospectus in each of the provinces of Alberta and British Columbia in July 2000, and receipt of the final prospectus from the province of Ontario in December 2000. Upon receipt, the Company allocated the net
proceeds from the Special Warrants to share capital. In connection with the receipt of the final prospectus, the Company issued, upon exercise of the Series A and Series B Special Warrants, 3,000,000 Series A Warrants and 1,650,000 Series B
Warrants, respectively. In addition, the Series A Broker Warrants and Series B Broker Warrants were exercised and the Company issued 250,000 Series A Broker Options and 260,995 Series B Broker Options, respectively. During the year ended March 31,
2001, the Company issued 50,000 Series A Warrants and 39,000 Series B Warrants in connection with the exercise of 250,000 Series A Broker Options and 78,000 Series B Broker Options, respectively.




61




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)







Warrant activity is summarized as follows:





Number of special warrants


Number of other warrants


Total warrants


Weighted-average exercise priceBalance at May 1, 1999




2,735,000


2,735,000


$
0.13Issued

9,936,995





9,936,995



Exercised for cash




(2,350,001
)

(2,350,001
)


0.08Expired




(62,499
)

(62,499
)


0.12Balance at April 30, 2000

9,936,995


322,500


10,259,495



0.02Issued




5,249,995


5,249,995



4.39Exercised for no consideration

(9,936,995
)




(9,936,995
)


Exercised for cash




(3,694,934
)

(3,694,934
)


1.23Expired




(35,566
)

(35,566
)


8.82Balance at March 31, 2001




1,841,995


1,841,995



9.88Issued

3,000,000


3,983,434


6,983,434



1.39Exercised for no consideration

(3,000,000
)




(3,000,000
)


Exercised for cash




(749,525
)

(749,525
)


1.03Expired




(3,341,995
)

(3,341,995
)


7.62Balance at March 31, 2002




1,733,909


1,733,909


$
0.97





All warrants outstanding as of March 31, 2002 were exercisable.





Escrowed Shares





In March 2000, in connection with the NVS acquisition, 10,425,000 common shares were deposited in escrow, of which one-third were scheduled to be released on September 16,
2000, March 16, 2001 and September 16, 2001. In July 2000, in order to obtain receipt of the final prospectus from the Province of Ontario, the Company entered into an additional escrow agreement covering 5,285,686 common shares, of which 4,956,686
related to March 2000 escrowed shares and were re-deposited under this escrow agreement. These common shares were to be released in three equal installments on July 13, 2001, July 13, 2002 and July 13, 2003.





In January 2002, in connection with the acquisition of 25% of the minority interest in Tracer KK, 30,000 shares were deposited in escrow,
of which one-third are to be released on January 15, 2003, January 15, 2004 and January 15, 2005. The release of shares is contingent upon the seller of the shares maintaining employment with the Company, as defined in the acquisition agreement.





The total common shares released during the year ended March 31, 2002 and the eleven months ended March 31, 2001
were 3,584,667 and 3,645,542, respectively. As of March 31, 2002, 3,553,791 common shares remained in escrow.





(5)    Stock-Based Awards





The
Company has a stock option plan (the Plan) pursuant to which the Board of Directors of the Company may grant nontransferable stock options to purchase common shares of the Company to directors, officers, employees, advisors and consultants. As of
March 31, 2002, March 31, 2001 and April 30, 2000, 4,596,042,




62




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)




3,809,042 and 3,328,704 common shares, respectively, have been reserved for issuance under this plan. The maximum number of common shares which may be reserved for issuance to any one person
under the Plan is 5% of the common shares outstanding at the time of grant (calculated on a non-diluted basis). The options vest generally over four years and are exercisable for a maximum term of ten years.





The Companys options are denominated in Canadian dollars as the underlying stock is listed on the Toronto Stock Exchange (TSE). Per
share amounts stated below have been translated to U.S. dollars at the rate of exchange in effect at the balance sheet date unless otherwise noted.





On August 17, 2001, the Company announced a voluntary Option Cancel and Regrant Program (Program) for its employees. Under the Program, the Companys employees were given the opportunity, if they
so chose, to cancel outstanding stock options previously granted to them in return for an equal number of replacement options at a later date. The replacement options were granted on March 1, 2002 at the then fair market value. As the replacement
options were not granted within six months of the cancellation date, variable plan accounting is not required for the replacement options.





In October 2000, the Company repriced 1,698,000 stock options from $11.82 to $7.74.





A summary of the status of the Companys stock option plan is as follows:





Number of options


Weighted-average exercise
priceOutstanding at May 1, 1999

490,667


$
0.24Granted

2,472,504



7.62Exercised

(550,600
)


0.29Cancelled

(71,667
)


1.12Outstanding at April 30, 2000

2,340,904



8.00Granted

2,059,000



9.35Exercised

(303,958
)


1.88Cancelled

(760,908
)


9.00Outstanding at March 31, 2001

3,335,038



8.40Granted

2,716,464



2.26Exercised

(13,000
)


0.69Cancelled

(3,282,689
)


6.68Outstanding at March 31, 2002

2,755,813


$
2.62Exercisable at March 31, 2002

1,940,064


$
2.84




63




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)







The following table summarizes information regarding stock options
outstanding and exercisable at March 31, 2002:





Options outstandingNumber outstanding

Average remaining contractual life (years)

Weighted-average exercise price

Options exercisableExercise prices




Number exercisable

Weighted-average exercise price$0.60 to $0.75

432,400

3.2

$
0.68

363,817

$
0.67$0.96 to $1.06

1,030,108

9.8


0.97

517,404


0.96$2.76 to $3.07

547,400

2.0


2.82

457,135


2.77$3.54 to $4.33

450,501

4.2


3.72

376,909


3.75$7.74 to $8.90

295,404

5.3


7.86

224,799


7.892,755,813



$
2.62

1,940,064

$
2.84





During the year ended March 31, 2002, the Company granted 2,664
stock options to a consultant with a per share price of $4.33. These options were fully vested upon grant and related to past services rendered.





During the eleven months ended March 31, 2001, the Company granted 475,000 stock options to advisors at prices ranging from $3.86 to $8.15 per share. Of the stock options granted, 25,000 were fully
vested upon grant, 350,000 vest generally over one year based on the terms of the consulting agreements and 100,000 were to vest based on specified performance milestones. However, these milestones were not met, and none of the 100,000 stock options
vested.





During the year ended April 30, 2000, in order to attract and retain certain sales and executive
employees, NVS issued 675,000 restricted common shares (the incentive shares) as additional compensation to existing and targeted employees. Upon the acquisition of NVS on March 16, 2000, the incentive shares were exchanged for restricted common
shares of the Company. The incentive shares are subject to vesting over a three to four-year period and will be distributed to each employee only if employed on each of the associated vesting dates.





During the year ended April 30, 2000, as consideration for services rendered, the Company granted 722,000 advisor options to advisors and
consultants (the advisors options) at prices ranging from $0.60 to $8.90 per share. Of the advisor options granted, 572,000 were fully vested upon grant and related to past services rendered, with the remaining 150,000 advisor options vesting based
on performance milestones specified in the consulting agreement. The related milestones were not met by the end of the contractual period and none of the 150,000 advisor options vested.




64




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)







(6)    Income Taxes





For the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year ended April 30, 2000, there was no provision for
current or deferred income taxes. The income tax effects of the temporary differences that give rise to significant portions of the Companys deferred tax assets as of March 31, 2002 and 2001 are presented below by tax jurisdiction (in
thousands):





Canada


United States


United Kingdom


Japan


TotalMarch 31, 2002:Deferred tax assets:Accruals

$
507


$
264


$
1


$
28


$
800Net operating losses


542



10,929



1,205



135



12,8111,049



11,193



1,206



163



13,611Less valuation allowance


(1,049
)


(11,193
)


(1,206
)


(156
)


(13,604
)Deferred tax assets














7



7Deferred tax liabilitiescapital assets














(7
)


(7
)Net deferred tax assets

$



$



$



$



$
March 31, 2001:Deferred tax assets:Accruals

$



$
117


$



$



$
117Net operating losses


234



6,493



812



71



7,610234



6,610



812



71



7,727Less valuation allowance


(234
)


(6,610
)


(812
)


(65
)


(7,721
)Deferred tax assets














6



6Deferred tax liabilitiescapital assets














(6
)


(6
)Net deferred tax assets

$



$



$



$



$






The Company has established a valuation allowance against its
deferred tax assets due to the uncertainty surrounding the realization of such assets. Management periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that the
deferred tax assets are realizable, the valuation allowance will be reduced.





A reconciliation of the expected
income tax benefit to the actual income tax expense reported in the consolidated statements of operations is as follows (in thousands):





2002


2001


2000Computed expected income tax benefit at Canadian statutory income tax rate of 41.1%, 41.7% and 43.2% for 2002, 2001 and
2000, respectively

$
(7,727
)

$
(9,053
)

$
(387
)Foreign tax rate differential


518



1,039



54Permanent differences


(867
)


13



Nondeductible intangibles


2,193



652



Unrecognized recoveries from losses


5,883



7,349



333Actual income tax expense

$



$



$








65




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)







The net change in the total valuation allowance for the year ended
March 31, 2002, the eleven months ended March 31, 2001, and the year ended April 30, 2000, was an increase of $6.0 million, $7.3 million and $390,000, respectively. In assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of deferred taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected deferred taxable income, and tax planning strategies in making this assessment. Based on the level of historical operating
results and projections of deferred taxable income, management has determined that it is more likely than not that the portion of deferred tax assets not utilized through the reversal of deferred tax liabilities will not be realized. Accordingly,
the Company has recorded a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized.





The Company has Canadian non-capital losses of CDN$2.1 million at March 31, 2002 that are available to apply against future Canadian taxable income. These losses begin to expire in 2007.





BakBone Software, Inc. has net operating loss carryforwards of $27.5 million at March 31, 2002 that are available as reductions to its
taxable income in future years. These carryforwards will begin to expire in 2020.





NetVault Holdings Ltd. has
trade loss carryforwards of UK£2.8 million at March 31, 2002 that are available as reductions to its taxable income in future years. These carryforwards generally have an indefinite carryforward period.





BakBone KK has net operating loss carryforwards of ¥42.6 million at March 31, 2002 that are available as reductions to its taxable
income in future years. These carryforwards will begin to expire in 2003.





(7)    Restricted Cash





During the eleven months ended March 31, 2001, in conjunction with a facility lease, the Company entered into
a standby letter of credit with a bank whereby $650,000 was deposited into an investment account to collateralize the letter of credit. The letter of credit has a loan-to-value ratio of 1.2 to 1, and as a result, the restricted cash amount related
to the letter of credit has been adjusted to $780,000. As the lease requires the Company to maintain the letter of credit until January 2003, the related restricted cash amount has been classified as short-term as of March 31, 2002.





The Company maintains credit cards for use by certain executives for businessrelated expenses. In order to obtain the
credit cards, the issuing bank required the Company to cash-secure the total credit limits. As of March 31, 2002 and 2001, $24,000 and $90,000 were deposited into an investment account at the issuing bank. As the Company may terminate the
credit card agreement at any time, the related restricted cash amounts have been classified as short-term.





(8)    Retirement Plans





During the eleven months ended March 31, 2001,
the Company established a voluntary deferred contribution plan for employees in the United States (the U.S. Plan) in accordance with the provisions of the Internal Revenue Code Section 401(k). The U.S. Plan allows participants to contribute up to
15% of their annual salary, subject to certain limitations, as provided by federal law. Each year, the Companys Board of Directors determines the amount, if any, of the Companys matching contributions. There were no matching
contributions to the U.S. Plan during the year ended March 31, 2002 or the eleven months ended March 31, 2001.




66




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)







The Company maintains a voluntary defined contribution plan for
employees in the United Kingdom (the U.K. Plan). The U.K. Plan allows participants to defer a minimum of 3% of their annual salary with a maximum contribution ranging from 17.5% to 40% of salary, depending on the age of the participant. In addition,
the U.K. Plan calls for the Company to annually match 5% of each participants salary; these matching contributions vest immediately. During the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year ended April
30, 2000, the Company contributed $149,000, $76,000 and $5,000, respectively, to the U.K. Plan.





The Company
currently maintains no retirement plans for employees working in Japan.





(9)    Line of Credit and Notes Payable





The Company has entered into credit agreements with banks in the ordinary course of business. In February
2001, the Company obtained an unsecured line of credit, which bore interest at 10%. In February 2002, the Company renegotiated and executed an agreement modifying its existing line of credit. Under the modified agreement, the line of credit was
converted to a term loan, maturing December 31, 2003, and the interest rate was reduced to 7.5%. Furthermore, the Company agreed to principal reductions in amounts equal to 10% of the net proceeds raised from any financings from the date of the
agreement until maturity. Upon execution of the modified agreement, the Company paid $781,000 in principal and interest to the lender.





During February and March of 2002, the Company paid all principal and interest due under notes, which were entered into between Tracer KK and a Japanese bank between February 1997 and March 2000. The notes, payable in
Japanese yen, were paid in two installments of $146,000 and $43,000, made in February and March 2002, respectively. As of March 31, 2002, the Company has no further commitments to the Japanese bank.





As of March 31, 2002, the amount due under the Companys credit facilities was $1.95 million, all of which was classified as
long-term.





(10)    Related Party Transactions





A director of the Company is a partner of a law firm that provides legal services to the Company. During the year ended March 31, 2002, the eleven months ended March 31,
2001, and the year ended April 30, 2000, the Company paid the associated law firm $120,000, $270,000 and $190,000, respectively, relating to the services rendered.





A director of the Company has provided certain consulting and legal advice to the Company. During the year ended March 31, 2002, the eleven months ended March 31, 2001, and
the year ended April 30, 2000, the Company paid the director $155,000, $62,000 and $68,000, respectively, relating to the services rendered.





A former director of the Company provided certain consulting and investor relation services to the Company. During the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year
ended April 30, 2000, the Company paid the former director $41,000, $70,000 and $88,000, respectively, relating to the services rendered.





Prior to the acquisition of BakBone KK, two former directors and officers of the Company provided loans to BakBone KK. The loans have no maturity date and are interest-free. At March 31, 2002 and March 31, 2001, the balance
owed to these individuals totaled $63,000 and $75,000, respectively.




67




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)







(11)    Commitments and Contingencies





(a)  Litigation





The Company is involved in litigation and claims, which arise from time to time in the normal course of business. In the opinion of management, based in part on the advice of legal counsel, any
liability that may arise from such contingencies would not have a significant adverse effect on the consolidated financial position, results of operations or liquidity of the Company.





(b)  Leases





The Company leases certain facilities and equipment under noncancelable operating and capital leases. Future minimum lease payments for years ending March 31 are as follows (in thousands):





Capital leases


Operating leases2003

$
224


$
1,4402004


55



1,4032005






1,0312006






5402007






250Thereafter






376Total minimum lease payments


279


$
5,040Less amount representing interest


(24
)Present value of net minimum lease payments, including current portion of $201

$
255





Rent expense for the year ended March 31, 2002, the eleven months
ended March 31, 2001 and the year ended April 30, 2000 approximated $1.6 million, $1.2 million and $30,000, respectively.





The Company has an operating lease for a facility that is currently idle. The Company plans to utilize the facility to support the growth of its operations and headcount during the year ended March 31, 2003. However, as the facility
will most likely remain idle through at least October 2002, the Company recorded a liability and a corresponding expense in the accompanying statement of operations during the year ended March 31, 2002 in the amount of $212,000, representing the
present value of the future lease payments up to and including October 2002.




68




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)







(12)    Segment Information





Management has determined that the Company operates in two segments, which are the Companys two product lines, NetVault and
MagnaVault. Revenues are generated from the licensing of software and sale of support services. Total assets, capital expenditures, depreciation and amortization, interest income and operating expenses are not disclosed by operating segment as they
are not specifically related to a particular product line. The following table represents a summary of revenues of the product line operating segments for the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year ended
April 30, 2000 (in thousands):





2002

2001

2000RevenuesLicensing:NetVault

$
6,894

$
2,378

$
242MagnaVault


1,201


1,808


Total


8,095


4,186


242Service:NetVault


1,218


530


95MagnaVault


550


259


Total


1,768


789


95Total revenues

$
9,863

$
4,975

$
337





The following table represents a summary of revenues by major
geographic region for the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year ended April 30, 2000 (in thousands):





2002

2001

2000RevenuesLicensing:Europe

$
1,355

$
398

$
29Asia


3,714


2,512


213North America


3,026


1,276


Total


8,095


4,186


242Service:Europe


379


278


65Asia


359


198


30North America


1,030


313


Total


1,768


789


95Total revenues

$
9,863

$
4,975

$
337




69




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)







The following table represents a summary of capital assets and
intangibles by major geographic region as of March 31, 2002 and 2001 (in thousands):





Europe

Asia

North America

TotalIdentifiable assets as of March 31, 2002:Capital assets, net

$
431

$
261

$
2,070

$
2,762Intangibles, net

$
821

$


$
3,963

$
4,784Identifiable assets as of March 31, 2001:Capital assets, net

$
508

$
339

$
2,889

$
3,736Intangibles, net

$
1,706

$


$
6,125

$
7,831





(13)    Subsequent Events





In April 2002, 1,177,075 purchase warrants, which were issued in connection with the December 2001 public offering, were exercised at
$1.04 per share, resulting in gross proceeds of $1.2 million. Of the 1,792,600 purchase warrants issued in connection with the December 2001 public offering, 612,025 were exercised during the year ended March 31, 2002 and 3,500 expired unexercised
in April 2002.





(14)    Differences between Accounting Principles Generally Accepted in Canada and in the United
States





These consolidated financial statements have been prepared in accordance with accounting principles
generally accepted (GAAP) in Canada, which differ in certain respects from GAAP in the United States. The material differences between Canadian and United States GAAP affecting the Companys consolidated financial statements are summarized as
follows:





(a)    Accounting for Stock-Based Compensation





For U.S. GAAP purposes, the Company accounts for stock-based compensation in accordance with Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), Emerging Issues Task Force 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees (EITF 96-18), and FASB Interpretation Number
44, Accounting for Certain Transactions Involving Stock Compensation (FIN 44). In addition, SFAS 123 allows entities to apply the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25), to stock options granted to employees.





Stock Options Issued with Exercise Prices Less Than Fair Market
Value





During the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year ended
April 30, 2000, certain stock options were granted to employees at prices less than the market value of the Companys stock per the TSE on the date of grant. In accordance with APB 25, the excess of the market value over the grant price,
the intrinsic value, was recorded as share capital and the related deferred compensation is being amortized on a straight-line basis over the vesting period of the related stock options, generally four years.




70




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)







Under U.S. GAAP, the Company recorded share capital and deferred
compensation of $142,000, $1.1 million and $9.7 million related to the intrinsic value of stock options granted during the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year ended April 30, 2000,
respectively. The Company recorded compensation expense from the amortization of deferred compensation of $915,000, $4.3 million and $835,000 during the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year ended April
30, 2000, respectively. In addition, during the year ended March 31, 2002 and the eleven months ended March 31, 2001, certain employees terminated service or participated in the August 2001 Option Cancel and Regrant Program, resulting in the
forfeiture or cancellation of options. Accordingly, share capital and deferred compensation of $4.0 million and $540,000 were reversed during the year ended March 31, 2002 and the eleven months ended March 31, 2001, respectively. Deferred
compensation remaining to be amortized as of March 31, 2002 and March 31, 2001 was approximately $442,000 and $5.2 million, respectively.





Employee Benefit Trust (EBT)





During the eleven months ended March 31, 2001 and
the year ended April 30, 2000, the Company issued 9,000 and 1,961,000 EBT shares to employees, respectively. Under U.S. GAAP, the EBT shares are accounted for in accordance with APB 25, which requires compensation expense to be recorded based on the
intrinsic value of the shares issued. The intrinsic value was determined using the closing price per the TSE on the date the related shares were allocated to each employee. The resulting value of the shares was recorded as share capital and the
related deferred compensation is being amortized over the related vesting period, generally three years, for shares subject to vesting provisions. For those shares which vested immediately, the associated value was recorded directly to compensation
expense on the date of grant. No EBT shares were issued during the year ended March 31, 2002.





Under U.S. GAAP,
the Company recorded share capital and deferred compensation of $84,000 and $57.3 million related to the value of the EBT shares allocated to employees during the eleven months ended March 31, 2001 and the year ended April 30, 2000,
respectively. The Company recorded compensation expense of $9.8 million, $9.0 million and $29.7 million from the amortization of deferred compensation during the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year ended
April 30, 2000, respectively. The Company reversed $21,000 of previously recorded compensation expense during the year ended March 31, 2002 due to forfeited shares. Deferred compensation remaining to be amortized as of March 31, 2002 and
March 31, 2001 was $8.9 million and $18.6 million, respectively.





As of March 31, 2002 and 2001, there were
132,000 and 130,000 unallocated shares in the EBT, respectively. The Company recorded the aggregate value of the unallocated shares of $176,000 and $412,000 as of March 31, 2002 and 2001, respectively, in share capital and in employee benefit trust,
a contra equity account. The Company used the closing price per share on the TSE on March 31, 2002 and 2001 in order to calculate the aggregate value of unallocated shares.





Incentive Shares





Under U.S.
GAAP, the 675,000 unvested incentive shares issued to employees during the year ended April 30, 2000 are accounted for in accordance with APB 25, which requires compensation expense to be recorded based on the intrinsic value of the shares
issued. As such, the value of the underlying restricted incentive shares was determined using the closing price per the TSE on the date the incentive shares were




71




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)




allocated to each employee. The resulting value of the incentive shares was recorded as share capital and the related deferred compensation is being amortized over the related vesting period,
generally four years.





The Company recorded deferred compensation and share capital of $361,000 and $15.4 million
related to the value of the incentive shares issued during the eleven months ended March 31, 2001 and the year ended April 30, 2000, respectively. In addition, the Company recorded compensation expense of $6.5 million, $4.6 million and
$800,000 related to the amortization of deferred compensation during the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year ended April 30, 2000, respectively. In addition, during the year ended March 31, 2002 and the
eleven months ended March 31, 2001, certain employees holding incentive shares terminated service with the Company, resulting in a reversal of share capital and deferred compensation of $226,000 and $1.7 million, respectively, representing the
carrying value of the unvested shares. Deferred compensation remaining to be amortized as of March 31, 2002 and 2001 was $1.9 million and $8.6 million, respectively.





Advisors Stock Options





During the year ended April 30, 2000, the Company granted 722,000 stock options to advisors, of which 572,000 were immediately vested upon grant. Under U.S. GAAP, the fair value of the fully vested stock options is measured on the
grant date. However, all of the fully vested options were granted prior to the acquisition of NVS and the related compensation was recorded in the results of operations of Net Resources, having no effect on the results of operations of the Company
after applying reverse takeover accounting. The remaining 150,000 stock options granted during the year ended April 30, 2000 had contingent vesting provisions, and as the related milestones were never met, no compensation expense was recorded.





The Company recorded $19,000 and $671,000 of compensation expense during the year ended March 31, 2002 and the
eleven months ended March 31, 2001, respectively, related to 475,000 stock options granted to advisors during the eleven months ended March 31, 2001. This charge resulted from 350,000 stock options that generally vest over one year and 25,000 stock
options that vested immediately. The fair value of these options was determined using the BlackScholes optionpricing model, and is being recorded to share capital and compensation expense over the vesting period. The remaining 100,000
stock options granted during the eleven months ended March 31, 2001 had contingent vesting provisions, and as the related milestones were never met, no compensation expense was recorded.





During the year ended March 31, 2002, the Company granted 2,664 stock options to a consultant with an exercise price of $4.33 per share. These options were fully vested
upon grant and related to past services rendered. The fair value of these options was determined using the Black-Scholes option-pricing model and no compensation expense was recorded as the fair value was de minimis.





Options Repricing





In October 2000, the Company repriced 1,698,000 stock options from $11.82 to $7.74 per share. From the date of the repricing through March 31, 2002, the Companys stock price did not exceed the lowest repriced amount of
$7.74. In accordance with FIN 44, the Company has not recorded compensation expense related to the repricing.




72




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)







(b)    Comprehensive Loss





Under U.S. GAAP, the Financial Accounting Standards Board issued Statement No. 130, Reporting
Comprehensive Income (SFAS 130), which requires that companies report comprehensive income as a measure of overall performance. SFAS 130 establishes standards for the reporting and display of comprehensive income and its components. The
following table sets forth comprehensive loss for the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year ended April 30, 2000 (in thousands):





2002


2001


2000Net loss under U.S. GAAP

$
(37,405
)

$
(41,076
)

$
(32,411
)Unrealized loss on marketable securities


(13
)






Cumulative exchange adjustment


(30
)


(839
)


(263
)Comprehensive loss

$
(37,448
)

$
(41,915
)

$
(32,674
)





(c)    Amortization and Impairment of
Intangibles





U.S. GAAP does not permit the disclosure of income before amortization and impairment of
intangibles, whereas under Canadian GAAP, such disclosure is permitted. Under U.S. GAAP, amortization and impairment of intangibles is classified under operating expenses in the consolidated statements of operations.





(d)    Tracer Acquisition





In connection with the acquisition of Tracer, the Company issued 250,000 stock options to principals of Tracer at a price of $3.76 per share. Of the stock options granted,
one-third vested immediately and two-thirds vest over a period of two years. Under U.S. GAAP, the fair value of the immediately vested stock options is included in the acquisition cost of Tracer and was determined using the Black-Scholes
option-pricing model resulting in a value of $637,000. The additional value resulted in an increase to intangibles, of which $212,000 and $177,000 was amortized during the year ended March 31, 2002 and the eleven months ended March 31, 2001,
respectively, under U.S. GAAP. The options that vest over a period of two years are discussed in Note 14(a), Stock Options Issued with Exercise Prices Less Than Fair Market Value.





During the year ended March 31, 2002, the Company determined the carrying value of Tracer intangibles to be impaired. The aforementioned increase in intangibles under U.S.
GAAP increased the carrying value of the Tracer KK related intangibles by $281,000 as of March 31, 2002. As the impairment charge is recorded for the amount by which the carrying value of the intangibles exceeds the fair value of the intangibles,
the Company recorded an additional $281,000 impairment charge during the year ended March 31, 2002 under U.S. GAAP.





(e)    Series C Special Warrants





In connection with the Special
Warrant financing in March 2000, the Company issued 426,000 Series C Special Warrants to a consultant who provided services during 1999 pertaining primarily to the Special Warrant financing. Under U.S. GAAP, the fair value of the warrants is
included in share capital as a cost of the financing and, therefore, has no net effect on the Companys stockholders equity.







73




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)




(f)    Acquisition of BakBone KK





Under U.S. GAAP, in order to use the carryover basis for an acquisition involving an entity under common control, a company must
demonstrate control of greater than 50% of the voting interests of the acquired entity prior to the acquisition. Although as of March 31, 2002, the Company has effective control of BakBone KK through its 100% direct ownership interest, it did not
control greater than 50% of the voting rights of BakBone KK until the Companys acquisition of the minority interests of BakBone KK in March 2002. Therefore, under U.S. GAAP, the Companys purchase of 22% of BakBone KK on March 1, 2000 was
accounted for using the purchase method of accounting based on the fair value of the consideration. Accordingly, the Company recorded an investment in affiliate and share capital of $2.6 million for the fair value of the shares issued to consummate
the transaction. The investment in affiliate is being amortized over three years as the value of the common shares issued exceeded the value of the Companys underlying equity in net assets of BakBone KK. The fair value of the shares was
determined on the date the Company and BakBone KK reached agreement on the purchase price and the transaction was announced.





(g)    Consolidation of BakBone KK and Tracer KK





Under U.S.
GAAP, a company must own or demonstrate control of greater than 50% of an acquired entitys voting shares in order to consolidate the entity. As of March 31, 2002, the Company has effective control over BakBone KK and Tracer KK through its
respective 100% ownership interest in each of the entities. Under U.S. GAAP, as the Company did not control greater than 50% of the voting interests in BakBone KK until the March 2002 minority interest acquisition and in Tracer KK until the January
2002 minority interest acquisition, the Company must use the equity method of accounting up to the respective acquisition dates. Accordingly, up to the respective acquisition dates, the results of operations of BakBone KK and Tracer KK have been
removed from the consolidated financial statements of the Company. The financial position and results of operations of BakBone KK have been removed from the consolidated financial statements of the Company as of and for the eleven months ended March
31, 2001 and the year ended April 30, 2000. Furthermore, the financial position and results of operations of Tracer KK have been removed from the consolidated financial statements of the Company as of and for the eleven months ended March 31, 2001.





As of March 31, 2001, the Company recorded an investment in affiliate in the amount of $1.5 million, representing
the carrying value of its investment in BakBone KK. During the years ended March 31, 2002 and April 30, 2000, the Company recorded its 47% share of BakBone KKs net earnings of $82,000 and $25,000, respectively. During the eleven months ended
March 31, 2001, the Company recorded its 47% share of BakBone KKs net loss of $152,000. In addition, as the carrying value of the Companys investment in BakBone KK exceeded the underlying equity in net assets of BakBone KK, the Company
recorded amortization expense of $854,000, $783,000 and $142,000 during the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year ended April 30, 2000, respectively, related to the excess carrying value.





As of March 31, 2001, the Company recorded an investment in affiliate in the amount of $109,000, representing the carrying
value of its investment in Tracer KK. During the nine months ended December 31, 2001, the Company recorded equity in loss of Tracer KK of $100,000. Upon the 25% acquisition of minority interest shares in January 2002, the Company began consolidating
Tracer KK under U.S. GAAP, as the Companys direct ownership percentage in Tracer KK equaled 75%. During the period from January 1, 2002 through the final 25% minority acquisition on March 31, 2002, minority interest in Tracer KK is reflected
in the consolidated statement of operations. During the eleven months ended March 31, 2001, the Company recorded equity in loss of Tracer KK of $21,000, representing the Companys 50% share of Tracer KKs net loss.




74




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)







Summarized financial information for BakBone KK and Tracer KK is as
follows:





BakBone KK & Tracer KK Combined March 31, 2002 (1)

BakBone KK & Tracer KK Combined March 31, 2001Current assets

$
2,437

$
1,583Noncurrent assets


672


781Total assets


3,109


2,364Current liabilities


1,131


651Noncurrent liabilities


2,078


1,762Total liabilities

$
3,209

$
2,413


---

|(1) |  | All balance sheet accounts of BakBone KK and Tracer KK are included in the accompanying consolidated balance sheet of the Company as of March 31, 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------




BakBone KK & Tracer KK Combined Year ended March 31,
2002


BakBone KK & Tracer KK Combined Eleven months ended March 31, 2001


BakBone KK Year
ended April 30, 2000Net sales

$
3,254


$
1,742


$
168Gross profit

$
3,168


$
1,590


$
149Operating (loss) income

$
(51
)

$
(454
)

$
30Net (loss) income

$
(26
)

$
(290
)

$
53





(h)    Share Capital to be Issued





U.S. GAAP does not permit the disclosure of share capital to be issued in the statement
of shareholders equity, whereas under Canadian GAAP, such disclosure is permitted. Under U.S. GAAP, share capital to be issued is classified under long-term liabilities in the consolidated balance sheet as of March 31, 2002.





(i)    Marketable Securities





Under U.S. GAAP, available-for-sale securities are carried at fair market value. Unrealized gains and losses on available-for-sale securities are recorded in comprehensive
income, a component of shareholders equity, Under Canadian GAAP, unrealized losses on available-for-sale securities are recorded in other expense in the statement of operations and unrealized gains are not recorded.




75




---



BAKBONE SOFTWARE INCORPORATED AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





March 31, 2002 and 2001





(in U.S. dollars)







(j)    Reconciliation of Net Loss





The application of U.S. GAAP as described above had the following effects on the Companys net loss
for the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year ended April 30, 2000:





2002


2001


2000Net loss as reported

$
(18,791
)

$
(21,692
)

$
(896
)Options issued at less than fair market value


(915
)


(4,277
)


(834
)EBT shares


(9,780
)


(8,973
)


(29,711
)Incentive shares


(6,548
)


(4,642
)


(800
)Options issued to advisors


(19
)


(671
)


Options issued to principals of Tracer


(212
)


(177
)


Amortization of investment in affiliate


(854
)


(783
)


(142
)Unrealized changes in fair market value of marketable securities


76







Additional impairment of intangibles


(281
)






Change from consolidation method to equity method of accounting


(81
)


139



(28
)Net lossU.S. GAAP

$
(37,405
)

$
(41,076
)

$
(32,411
)





(k)    U.S. GAAP Financial Statements





The application of generally accepted accounting principles in the United States of America, as described
above, has the following effects on the consolidated financial statements as of and for the year ended March 31, 2002, the eleven months ended March 31, 2001, and the year ended April 30, 2000:




76




---

BAKBONE SOFTWARE INCORPORATED





CONSOLIDATED BALANCE SHEETS





March 31, 2002 and 2001





(in thousands)


(in
U.S. dollars)





2002


2001Canadian GAAP (as
reported)


Differences


Notes


U.S. GAAP


Canadian GAAP (as
reported)


Differences


Notes


U.S. GAAPAssetsCurrent assets:Cash and cash equivalents

$
5,502








$
5,502


$
3,815


(700
)

(1
)

$
3,115Restricted cash


804









804



90









90Accounts receivable


3,289









3,289



1,404


(738
)

(1
)


666Other assets


588









588



500


(145
)

(1
)


355Total current assets


10,183









10,183



5,809


(1,583
)





4,226Capital assets, net


2,762









2,762



3,736


(339
)

(1
)


3,397Restricted cash
















780









780Intangibles, net


4,784


687


(2
)


5,471



7,831


299


(2
)


8,130Receivable from affiliates



















1,575


(1
)


1,575Investment in affiliates



















1,510


(3
)


1,510Other assets


567


63


(8
)


630



602


(442
)

(1
)


160Total assets

$
18,296


750





$
19,046


$
18,758


1,020





$
19,778Liabilities and Shareholders EquityCurrent liabilities:Accounts payable

$
645








$
645


$
1,368


(173
)

(1
)

$
1,195Accrued liabilities


1,938









1,938



1,121


(181
)

(1
)


940Deferred revenue


1,297









1,297



671


(148
)

(1
)


523Current portion of capital lease obligations


201









201



192









192Current portion of notes payable
















2,574


(74
)

(1
)


2,500Loans from related parties


63









63



75


(75
)

(1
)


Total current liabilities


4,144









4,144



6,001


(651
)





5,350Capital lease obligations, excluding current portion


54









54



240









240Notes payable, excluding current portion


1,950









1,950



188


(188
)

(1
)


Share capital to be issued





2,877


(7
)


2,877













Total liabilities


6,148


2,877






9,025



6,429


(839
)





5,590Minority interest
















100


(100
)

(1
)


Shareholders equity:Share capital


51,861


81,631


(4
)


133,492



35,843


85,872


(4
)


121,715Share capital to be issued


2,877


(2,877
)

(7
)
















Share capital held by subsidiary


(66
)








(66
)


(66
)

66


(1
)


Employee benefit trust





(176
)

(5
)


(176
)





(412
)

(5
)


(412
)Deferred compensation





(11,192
)

(5
)


(11,192
)





(32,526
)

(5
)


(32,526
)Unrealized loss on marketable securities





(13
)

(8
)


(13
)












Accumulated deficit


(41,379
)

(69,513
)

(6
)


(110,892
)


(22,588
)

(50,899
)

(6
)


(73,487
)Cumulative exchange adjustment


(1,145
)

13


(1
)


(1,132
)


(960
)

(142
)

(1
)


(1,102
)Total shareholders equity


12,148


(2,127
)





10,021



12,229


1,959






14,188Total liabilities and shareholders equity

$
18,296


750





$
19,046


$
18,758


1,020





$
19,778


---

|(1) |  | see Note 14(g)
|--- |  | --------------

|(2) |  | see Notes 14(d) and 14(g)
|--- |  | -------------------------

|(3) |  | see Notes 14(d), 14(f) and 14(g)
|--- |  | --------------------------------

|(4) |  | see Notes 14(a), 14(f), and 14(g)
|--- |  | ---------------------------------

|(5) |  | see Note 14(a)
|--- |  | --------------

|(6) |  | see Notes 14(a), 14(d), 14(f), and 14(g)
|--- |  | ----------------------------------------

|(7) |  | see Note 14(h)
|--- |  | --------------

|(8) |  | see Note 14(i)
|--- |  | --------------



77




---




BAKBONE SOFTWARE INCORPORATED





CONSOLIDATED STATEMENTS OF OPERATIONS





Year ended March 31, 2002,


the eleven months ended March 31, 2001,


and the year ended April 30, 2000





(in
thousands, except per share and share data)


(in U.S. dollars)





2002


2001


2000Canadian GAAP (as reported)


Differences


Notes


U.S. GAAP


Canadian GAAP (as reported)


Differences


Notes


U.S. GAAP


Canadian GAAP (as reported)


Differences


Notes


U.S. GAAPRevenues

$
9,863


(3,254
)

(1
)

$
6,609


$
4,975


(1,742
)

(1
)

$
3,233


$
337


(169
)

(1
)

$
168Cost of revenues


1,244


(86
)

(1
)


1,158



782


(153
)

(1
)


629



37


(19
)

(1
)


18Gross margin


8,619


(3,168
)





5,451



4,193


(1,589
)





2,604



300


(150
)





150Operating expenses:Sales and marketing


11,149


(429
)

(2
)


10,720



11,672


1,552


(2
)


13,224



301


414


(2
)


715Research and development


4,122


8,713


(2
)


12,835



3,584


9,309


(2
)


12,893



189


1,711


(2
)


1,900General and administrative


5,659


5,672


(2
)


11,331



8,044


5,658


(2
)


13,702



759


29,100


(2
)


29,859Amortization and impairment of intangibles





6,728


(6
)


6,728






3,380


(4
)


3,380






166


(3
)


166Amortization of investment in affiliate





854


(5
)


854






783


(5
)


783






142


(5
)


142Total operating expenses


20,930


21,538






42,468



23,300


20,682






43,982



1,249


31,533






32,782Operating loss


(12,311
)

(24,706
)





(37,017
)


(19,107
)

(22,271
)





(41,378
)


(949
)

(31,683
)





(32,632
)Interest (expense) income, net


(108
)

39


(1
)


(69
)


396


38


(1
)


434



156









156Amortization and impairment of intangibles


(6,235
)

6,235


(3
)






(3,203
)

3,203


(3
)






(166
)

166


(3
)


Foreign exchange gains, net


110









110



5


(6
)

(1
)


(1
)





(23
)

(1
)


(23
)Other (expense) income, net


(359
)

(75
)

(7
)


(434
)


177


(156
)

(1
)


21



63





(1
)


63Equity (loss) income of affiliate





(7
)

(1
)


(7
)





(152
)

(1
)


(152
)





25


(1
)


25Minority interest


112


(100
)

(1
)


12



40


(40
)

(1
)
















Net loss

$
(18,791
)

(18,614
)




$
(37,405
)

$
(21,692
)

(19,384
)




$
(41,076
)

$
(896
)

(31,515
)




$
(32,411
)Loss per share

$
(0.46
)

(0.46
)




$
(0.92
)

$
(0.87
)

(0.78
)




$
(1.65
)

$
(0.11
)

(3.92
)




$
(4.03
)Weighted-average common shares


40,869,526









40,869,526



24,903,458









24,903,458



8,044,711









8,044,711


---

|(1) |  | see Note 14(g)
|--- |  | --------------

|(2) |  | see Notes 14(a) and 14(g)
|--- |  | -------------------------

|(3) |  | see Note 14(c)
|--- |  | --------------

|(4) |  | see Notes 14(c) and 14(d)
|--- |  | -------------------------

|(5) |  | see Note 14(f)
|--- |  | --------------

|(6) |  | see Notes 14(c), 14(d), and 14(f)
|--- |  | ---------------------------------

|(7) |  | see Note 14(g) and 14(i)
|--- |  | ------------------------



78




---




BAKBONE SOFTWARE INCORPORATED





CONSOLIDATED STATEMENTS OF CASH FLOWS





Year ended March 31, 2002,


the eleven months ended March 31, 2001,


and the year ended April 30, 2000





(in
thousands)


(in U.S. Dollars)





2002


2001


2000Canadian GAAP (as reported)


Differences


U.S. GAAP


Canadian GAAP (as reported)


Differences


U.S. GAAP


Canadian GAAP (as reported)


Differences


U.S. GAAPCash flows from operating activities:Net loss

$
(18,791
)

(18,614
)

$
(37,405
)

$
(21,692
)

(19,384
)

$
(41,076
)

$
(896
)

(31,515
)

$
(32,411
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


4,637


1,066



5,703



3,788


960



4,748



185


142



327Impairment of intangibles


2,508


281



2,789





















Minority interest


(112
)

100



(12
)


(40
)

40














Loss on disposal of capital assets


443






443



13






13










Gain on sale of non-operating subsidiaries


(119
)





(119
)




















Unrealized loss on investment


76


(76
)
























Equity in loss (gain) of affiliate





7



7






152



152






(25
)


(25
)Amortization of deferred compensation





17,236



17,236






18,563



18,563






31,345



31,345Changes in assets and liabilities, net of effects of acquisitions:Accounts receivable, net


(1,885
)





(1,885
)


(363
)

336



(27
)


72


(28
)


44Other assets


(10
)





(10
)


(568
)

415



(153
)


(148
)

72



(76
)Accounts payable


(723
)





(723
)


190


173



363



(221
)

(35
)


(256
)Accrued liabilities


647






647



417


(49
)


368



444


(12
)


432Deferred revenue


626






626



273


(153
)


120



(1
)

10



9Net cash used in operating activities


(12,703
)





(12,703
)


(17,982
)

1,053



(16,929
)


(565
)

(46
)


(611
)Cash flows from investing activities:Capital expenditures


(433
)





(433
)


(3,011
)

340



(2,671
)


(193
)





(193
)Acquisitions of businesses, net of cash acquired


(117
)





(117
)


(1,614
)

(699
)


(2,313
)


(2,454
)

(224
)


(2,678
)Cash acquired through acquisitions





700



700





















Proceeds from sale of capital assets


41






41



26






26










Net cash used in investing activities


(509
)

700



191



(4,599
)

(359
)


(4,958
)


(2,647
)

(224
)


(2,871
)Cash flows from financing activities:Reduction of capital lease obligations


(177
)





(177
)


(132
)





(132
)


(2
)





(2
)Proceeds from notes payable













2,500






2,500










Payments on notes payable


(812
)





(812
)


(288
)





(288
)









Advances to affiliates
















(1,650
)


(1,650
)









Proceeds from issuance of special warrants


9,734






9,734














26,095






26,095Proceeds from public offering


5,681






5,681





















Proceeds from private placement


332






332





















Offering costs related to equity financings


(507
)





(507
)


(144
)





(144
)


(2,099
)





(2,099
)Proceeds from exercise of stock options


9






9



570






570



129






129Proceeds from exercise of warrants


769






769



4,536






4,536



162






162Payments on related party loans


(12
)





(12
)













(53
)

53



Restricted cash


66






66



(870
)





(870
)









Net cash provided by financing activities


15,083






15,083



6,172


(1,650
)


4,522



24,232


53



24,285Effect of exchange rate changes on cash and cash equivalents


(184
)





(184
)


(511
)

481



(30
)


(285
)

(8
)


(293
)Net (decrease) increase in cash and cash equivalents


1,687


700



2,387



(16,920
)

(475
)


(17,395
)


20,735


(225
)


20,510Cash and cash equivalents, beginning of period


3,815


(700
)


3,115



20,735


(225
)


20,510










Cash and cash equivalents, end of period

$
5,502





$
5,502


$
3,815


(700
)

$
3,115


$
20,735


(225
)

$
20,510




79