** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-K/A**

**AmendmentNo. 2**

** **

| **(Mark One)**                                                                                                                                                                                     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý****   ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE****SECURITIES EXCHANGE ACT OF 1934**                                                                                |
|                                                                                                                                                                                               |   |   |
| **For the  fiscal year ended December 31, 2002**                                                                                                                                                   |
|                                                                                                                                                                                               |   |   |
| **OR**                                                                                                                                                                                             |
|                                                                                                                                                                                               |
| **o****   TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                    |
|                                                                                                                                                                                               |   |   |
| **For the  transition period  from             to             ** |

 

**Commission filenumber 0-21421**

 

**VCAMPUSCORPORATION**

(Exact name of registrant as specified in itscharter)

** **

| **Delaware**                                                    |   | **54-1290319**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **1850  Centennial Park Drive**                                 |   |                                  |
| **Suite 200**                                                   |   |                                  |
| **Reston,  Virginia**                                           |   | **20191**                             |
| (Address of principal executive offices)                        |   | (Zip Code)                            |

 

Registrant’s telephone number, including areacode: **703-893-7800**

 

Securities registered pursuant to Section 12(b)of the Act:

**None**

 

Securities registered pursuant to Section 12(g)of the Act:

 

**Common Stock($0.01 par value per share)**

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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  ý   No  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.  o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 126-2 of the Act)Yes  o  No  ý

 

The aggregate market value of the common stock held bynon-affiliates of the registrant based upon the closing price of the CommonStock on June 30, 2002, on the Nasdaq SmallCap Market System was approximately$4,468,611 as of such date. Shares of Common Stock held by each executiveofficer and director and by each person who owns 10% or more of the outstandingCommon Stock have been excluded in that such persons may be deemed to beaffiliates. This determination of affiliate status may not be conclusive forother purposes.

 

As of June 30, 2003, theregistrant had outstanding 4,593,531 shares of Common Stock.

 

 

----

 

NOTE REGARDING FORWARD-LOOKINGSTATEMENTS

 

*Statements in this Annual Report on Form 10-K that arenot descriptions of historical facts are forward-looking statements that aresubject to risks and uncertainties. Actual events or results could differmaterially from those currently anticipated due to a number of factors,including those set forth herein and in the Company’s other SEC filings, andincluding, in particular: limited operating history in targeted markets; lossesand negative operating cash flows; future capital needs and uncertainty ofadditional funding; difficulties in managing rapid growth; risks associatedwith acquisitions and integration of acquired operations; competition;developing market, rapid technological changes and new products; dependence ononline distribution; substantial dependence on courseware and third partycourseware providers; substantial dependence on third party technology; andlimited marketing experience and substantial dependence on third partydistribution. All references to the “Company” or “VCampus” herein shall meanVCampus Corporation and its subsidiaries: Cognitive Training Associates, Inc.,a Texas corporation (“CTA”); Cooper & Associates, Inc., an Illinoiscorporation, d/b/a Teletutor (“Teletutor”); HTR, Inc., a Delaware corporation(“HTR”); and UOL Leasing, Inc., a Delaware corporation.*

 

##### **PARTI**

 

**Item 1.  Business.**

 

VCampus Corporation (orthe “Company”)  is a leading provider ofoutsourced e-learning solutions. The Company manages and hosts Internet-basedlearning environments for corporations, government agencies, institutions ofhigher education, and associations. The Company’s services cover a broad rangeof e-learning programs, from enrollment and payment to course development anddelivery, as well as tracking of students’ progress and reporting of results.

 

Through its proprietarysoftware the Company provides customers with comprehensive solutions on anoutsourced, or hosted, basis.  TheCompany believes that its outsourced hosting approach to web-based e-learningservices provides significant business advantages to its customers. The Companycharges customers a relatively low upfront fee to establish a customizedvirtual campus, or “vcampus”, and then charges customers on either asubscription or usage basis for the service on an ongoing basis.  The Company believes this model creates aconsistent revenue stream, as well as a “backlog” of revenue for theCompany.  The Company believes thatthese factors, particularly when combined with the relatively high switchingcosts customers incur to change e-Learning service providers, provide a solidrevenue base for the Company.  TheCompany believes its market strengths to be:

 

•                  arapid, non-time-consuming implementation, achieved in a matter of days;

•                  minimalupfront investment required for the service;

•                  ready-to-golibrary of over 7,200 online courses;

•                  consistentdelivery of high-quality courseware;

•                  provensystem performance and scalability;

•                  deliveryof content from virtually any source; and

•                  systemcompliance with industry standards (SCORM (Shareable Content Object ReferenceModel), Section 508 (of the Federal Rehabilitation Act), AICC (AviationIndustry Computer-based Training Committee – established standards ofinteroperability) and SOAP (Simple Object Access Protocol).

 

VCampus believes that itholds several key advantages in the e-learning marketplace:

 

**Diversecustomer list**. VCampus has a diverse set ofcustomers, including relationships with the Company that have extended for asmany as six years. VCampus’ customer base is noteworthy for representing a widerange of sectors, including corporations, government agencies, institutes ofhigher education, professional associations and retail-oriented training sites.

 

**Diversifiedbusiness base**. VCampus serves customers from a widevariety of market sectors – including corporations, associations, governmentagencies, and institutes of higher education. As such, the Company is able toprovide its customers with a unique ability to participate in communities oflearning. The VCampus platform enables VCampus customers to share content,thereby creating

 

1

----

 

cross-sale opportunitiesfrom customer to customer. Several VCampus customers successfully sell theircontent to other VCampus customers simply by offering their content on theadvanced Vcampus platform.

 

**Open technology.**The VCampus technology affords customers a number of advantages in terms of itsability to rapidly and cost-effectively implement a comprehensive and securee-learning and training environment. The Company’s content-neutral, open architecture platform allows foraccess to a wide range of aggregated content, the ability to quickly add newfunctionality, leverage new technology and to support a vast number of users.The Company’s recently introduced web services capabilities enable customers toeasily integrate VCampus technology with other existing systems (includingenterprise resource planning systems and human resource information systems).

 

**Expansivelibrary of content aggregated from leading sources.** UsingVCampus’s proprietary course development technology, known as its CourseConstruction Set, a customer’s own training materials may be combined with theCompany’s off-the-shelf, third-party content library consisting of thousands ofcourses, on subjects including management skills, information technology,telecommunications and personal development, to design a comprehensive trainingcurriculum.  The Company’s existingcontent library, marketed as ContentMattersä,includes over 2,500 publicly-available online courses from approximately 25leading providers, including SkillSoft, NETg, Element K, American Media,Dearborn Financial Publishing, NIIT and Crisp Learning. The Company also hasagreements to distribute some courseware that has been developed by itscustomers, such as the New York Institute of Finance, to other VCampuscustomers. VCampus’ wholly-owned library of telecommunications and desktoppublishing courses are marketed under the Teletutor and VCampus brand names.

 

**Extensiveexperience**. The Company has delivered over 2.6 millioncourses over the past seven years. Currently the Company has over 740,000 enrolled users.  The Company has operated in the e-learningspace for more than seven years. VCampus maintains solid, long-termrelationships with established customers and benefits from a highly experiencedand knowledgeable management team.

 

**Flexibility***.*The Company’s technology and implementation process is flexible to respond todiverse customer needs. The Company offers rapid implementation on acontent-neutral platform that allows access to both off-the-shelf andproprietary courseware. The Company offers customization of its products andservices for each customer, as well as rapid incorporation of new technologies.The Company’s technology and services are designed to be scaleable on demand tomeet customer needs.

 

**Comprehensive Solution*.***VCampus offers a completely hosted solution, accessible by virtually any webbrowser. The VCampus solution includes a leading edge Learning ManagementSystem, Course Construction Set TM and Courseware Delivery Engine. Thetechnology and service have been proven and tested through successfulimplementations for scores of customers, where thousands of students haveexperienced VCampus-based e-Learning for up to seven years.

 

**Industry Background**

 

The Company believes themarket for e-learning, with a 2002 market size of approximately $10.3 billionin the U.S. according to Brandon-Hall, is continuing to grow, in spite of the“dot com” crash and the current downturn in the economy.  Both the research firm International DataCorporation, or IDC, and Brandon-Hall expect an increase in corporate andgovernment e-learning spending in 2003 and beyond, with IDC predicting acompound average growth rate (CAGR) of 36.7 percent between 2001 and 2006.  Management believes this steady increaseprovides the Company with significant opportunity for growth.  Additionally, the Company expectssignificant industry growth in content revenues.

 

IDC updated itsprojections for the corporate e-learning market worldwide in January 2003 inits study entitled “Market Analysis: Begin Act II:  Worldwide and U.SCorporate e-learning Forecast 2002-2006.” This study predicts the market will grow from $6.6 billion in 2002 to$23.7 billion in 2006.  The US marketrepresents the largest national e-learning market for vendors and IDC predictsit will grow 36.5% over the next five years. IDC reports that corporate e-learning remains one of the fastest growingmarkets it tracks and presents vendors with the opportunity for financialsuccess.

 

Overall findings bymultiple organizations show an increase in the e-learning market in 2002, withan increase again in 2003 and beyond.  Astudy by Brandon-Hall, entitled “The Growth of e-learning in 2002:  Profile of Industries and Departments,”found that of the 112 responses from corporate users, 89 percent said at leastone department within their organization had started using or expanded its useof e-learning since the beginning of the year. Additionally, 94 percent of the respondents said they plan to expand theuse of e-learning in at least one area of their company in 2003.

 

In spite of the economicdownturn and the slow recovery of corporate training budgets, e-learningcontinues to gain share against its mainstay education and trainingcounterparts.  Buyers in 2001 and 2002became more educated about e-learning as a solution and a process.  Purchasers in this dynamic market are moreeducated than the earliest adopters of e-learning.  The Company believes corporate buyers will drive longer salescycles, rigorous sets of requirements in requests for proposals (RFPs), and willbe

 

2

----

 

focused on addressingbusiness needs.  Additionally, theCompany has observed that sales cycles have lengthened in both the governmentand commercial markets, averaging between 8 and 12 months.

 

**Company Strategy**

 

The Company’s mission isto be the leading service provider of integrated e-learning solutions byhelping customers improve their performance and achieve their goals. TheCompany’s strategies to achieve this objective include continuing to: focus onhigh-revenue opportunities, develop strategic relationships, develop strategiccontent, provide superior customer service, and develop new and upgradeexisting technologies. The Company’s strategy also includes increasing revenuefrom each customer by converting more of each customer’s proprietary content toonline distribution through the VCampus platform.  The Company also intends to grow the cross-selling of contentbetween various customers. The intended result is increased penetration and enhancedcustomer loyalty.

 

*Focus on High-Revenue Opportunities*

 

VCampus is focused onfinding and developing new opportunities for significant revenue based on threefactors. The Company seeks sales opportunities in which: 1. training is for a *largeaudience* (e.g., employeebase of government institution or corporation or students of distance educationschool); 2. training is *required* (e.g., mandatory for employees, required certification, academicdegree); and 3. training is *paid for by a third party*, not by thestudent (e.g., paid directly by employer or through tuition assistanceprograms).

 

The Company believes thatthe highest-growth segment of the e-learning market is the service of onlinedistance education programs for institutions of higher education. Although theCompany maintains customers in this segment, management believes the Company’stechnology needs to become more competitive for this segment. Consequently, theCompany is currently developing upgraded technology designed to attract and maintainhigher education customers. Additionally, the Company is working to developsignificant new customer relationships with institutions of higher educationoffering significant distance learning programs online.

 

*Develop Strategic Relationships*

 

Based on successwith  past and current relationshipswith several customers, the Company targets organizations that provide theopportunity for mutual benefit from a multi-faceted relationship. Typically,target partners provide classroom-based training to a wide audience but havenot yet incorporated online training into their training model. VCampus enablesorganizations to add online learning quickly, efficiently and inexpensively.Collaboration opportunities include online delivery of content the customer converts,conversion and online delivery of courses by the Company and development ofcourses for online delivery which would be owned, at least partially, by theCompany.

 

*DevelopStrategic Content*

 

The Company invests inthe development of courses deemed strategic in nature to attract customers withstrong revenue prospects. Typically, these courses are developed incollaboration with a recognized subject matter expert. Content considered forco-development must lend itself a large, reachable audience and offer theaudience a powerful reason to attend the course (e.g., compliance with laws,certification, Continuing Professional Education credits (CPEs) or ContinuingEducation Units (CEUs)). Examples of strategically-developed courses at VCampusinclude Information Security and several HIPPA (Health Insurance Portabilityand Accountability Act) courses. Courses so developed may be owned, at leastpartially, by the Company.

 

*Provide Superior Customer Service*

 

VCampus’ core customerservice principle is to deliver uniquely superior service through creative,committed and well-trained employees who work as a team.  The Company utilizes TeamCareSM,a service methodology grounded upon developing relationships between keyplayers from both VCampus and each customer. The partnership includes an executive member, a project manager, anaccount manager and the customer care center. Each member of the team has adefined series of roles and responsibilities for monitoring and supporting thehealth and growth of the customer relationship. Furthermore, the team isresponsible for continuous review of the customer’s content needs, introductionof existing and new VCampus services, recommendation of suitable additionalcontent, identification of the potential need for custom coursewaredevelopment, pedagogy and instructional design and the recommendation ofplatform configurations for customer-specific business processes.

 

3

----

* *

*Developand Upgrade Proprietary Technology*

 

The Company intends tomaintain its position as a leader in online courseware delivery technology bycontinuing to develop and enhance the features and functionality of itsproprietary technology. VCampus’s system is designed to accommodate users onboth low and high bandwidth connections, enabling the Company to serve a widerange of end users without requiring a large investment on their part.Additionally, the VCampus system is a completely outsourced system; noinvestment in software or hardware is required of customers or students (otherthan access to the Internet via a web browser).

 

During 2002, VCampus announcedthe Launch of VNexusTM, a next generation platform making VCampus the firste-learning company to launch a fully SOAP-compliant Learning Managementplatform with superior web services capabilities. By standardizing on the SOAPprotocol, VNexus employs XML, a recognized universal standard, to communicatewith an organization’s information technology infrastructure. XML providesinherent flexibility because it can operate across any operating system orplatform, thereby reducing possible barriers to integration. Recognizing thatsome organizations have not standardized on XML, VCampus also offers othercommunication formats with VNexus.

 

VCampus plans to releasemajor upgrades of its technology during 2003 as well. The Company believesthese upgrades will lower the cost of course delivery, increase the scalabilityand reliability of the system and improve the ease of use for both learners andcontent courseware authors. The Company plans major platform upgrades designedto dramatically increase the technology’s applicability to the higher educationdistance learning market.

 

**Products and Services**

 

VCampus offers a widerange of products and services, the majority of which center around a virtualcampus or “vcampus.” The vcampus mimics the functions of a university campus onthe Internet – handling student admissions, registrations, course delivery,grading and tracking. Customers are able to choose from the Company’s extensiveoff-the-shelf library, convert existing courses to an online format, or use coursesprovided by another vendor, all for use within their vcampus.

 

The Company’s technologyallows customers to use a variety of content on an open, internet-basedarchitecture, on an outsourced hosting basis. The system displays eachcustomer’s graphical “look and feel.” Management believes this open architecture makes VCampus’ hostedtechnology more flexible than that of many of its competitors.

 

The Company’s vcampus isa centrally-hosted e-Learning delivery and tracking system accessible byvirtually any Internet-ready PC. Students generally enroll in the Company’scourses online through a VCampus, but have the option to enroll in person, bytelephone or through the mail. Customers also have the ability to registerstudents in bulk. Once registered,  studentscan access the courseware online, typically through a PC connected to theInternet or through a corporate intranet or extranet. When a student hascompleted the course, he or she will receive credit or certification, ifappropriate. The VCampus technology is a proven system, having servedapproximately 2.6 million courses since introduction.

 

The VCampus environmentis customizable and designed for ease of administration and access to students,instructors and training administrators. In addition, by using any combinationof courses from the Company’s courseware library and the customer’s owninternal training libraries, customers can offer a variety of distance learningoptions.

 

The VCampus supports awide variety of tools and utilities supplied by third parties, such as NetscapeNavigator/Communicator, Microsoft Internet Explorer, Macromedia Shockwave andFlash, Real Networks Streaming, and other browser-based plug-ins.  In addition, the Company has developed thefollowing proprietary software tools that facilitate the functionality of theVCampus:

 

*The Courseware Delivery Engine*— a proven system for presenting the total e-learning experience. This productwas designed and built to serve as an integrated, Web-based coursewareconstruction and delivery tool. First delivered in August 1997, the product hasbeen used to build and deliver the Company’s courseware library of more than7,200 online courses as of December 31, 2002. The VCampus Courseware DeliveryEngine provides a simple, easy-to-use environment for instructors and studentscapable of assessing, tracking and testing students as they complete a course.

 

*The Course Construction Set*— is designed to be simple to use yet rich in possibilities and performance.The courseware developer has access to a complete suite of Web-based toolsnecessary to construct and deliver highly interactive, online courses. The“PointPage” functionality of the product provides a choice of methods fordisplaying content. The “Activity Studio” enables non-programmers to constructand include multimedia-rich (animation, sound and student interactivity)activities by answering a few simple questions. Courseware developers can alsotake advantage of the testing system, which includes many advanced featuressuch as question randomization and pooling. Additionally, courseware developerscan

 

4

----

 

choose to link selectedtest questions and PointPages to learning objectives, which allows a coursewaredeveloper to group content and assess a student’s progress based onperformance.

 

*The Curriculum Group Manager*— allows training managers to create an enterprise-wide individualized trainingprogram by facilitating the grouping of students with similar education needsand abilities to appropriate groups of courses within a VCampus. The result isa specific student “Training Plan” designed to guide students to courses thatmatch the student’s ability. Additionally, the Training Plan can evaluate astudent’s performance in each course against standards established for testscores and attendance.

 

*Batch/Mass Enrollment Tools*— facilitate the enrollment of large groups into the vcampus and/or courses.Organizations with a large population of students can use this tool to importdemographic data from legacy enterprise resource planning or human resourcessystems, thus streamlining the implementation process.

 

To provide a completelearning experience for customers, the Company also provides threadeddiscussions (*VDiscussion*), live virtual meetings (*VMeeting*), online surveys (*VSurvey*),platform administrator training, Course Construction Set training, e-Learningconsulting on strategy and overall programs, custom courseware development andintegration with other systems through VNexus.

 

**ExistingCourseware Library**

 

The Company currentlyoffers approximately 7,200 courses real-time on its e-learning system and hasthe rights to offer an additional 2,600 which can be promptly added in responseto customer requests.  The Company’s2,500 publicly-available courses are marketed under the name****ContentMattersTM.The Company’s courseware strategy involves the provision of the following threecomponents:  (1) strategically-developedcourses from VCampus; (2) COTS, or commercial off-the-shelf, courses from a varietyof leading third-party course vendors; and (3) custom courseware developmentfor the proprietary training needs of the Company’s customers.

 

*Strategically Developed Courses*

 

The Company invests inthe development of courses which management deems strategic in nature toattract customers with strong revenue prospects. Typically, this type of courseis developed in partnership with a leading expert in the field. Contentconsidered for co-development must target a large, reachable audience and offerthe audience some compelling reason to attend the course (e.g., compliance withlaws, certification, CPEs or CEUs). Examples of strategically-developed coursesinclude Information Security and several HIPPA courses. Courses so developedmay be owned, at least partially, by the Company.

 

*COTSLibrary*

 

The Company currentlyoffers approximately 2,500 online courses real-time on its e-learning systemand has the rights to offer an additional 2,600 which can be promptly added inresponse to customer requests.  Thecurrent library was built from a combination of acquisitions, the Company’s owndevelopment efforts and relationships with leading content providers such asSmartForce, NETg, NIIT, Infosource, Vital Learning, Crisp Publications Inc.,Marcom, Aztec Software and American Media Inc. Although the Company does not provide accreditation or certificationitself, a number of its current courses provide either accreditation orcertification through its content providers.

 

*CustomLibrary*

 

The Company’s existingcustom courseware library includes approximately 4,700 online courses built byVCampus corporate, higher education and government customers for their ownproprietary use.  The Company believesthese courses provide more long-term revenue potential than commercialoff-the-shelf courses, which are beginning to become commoditized and mightcontinue to become so over time.  TheCompany believes the growth of this custom library is evidence of customersatisfaction with the Company’s authoring and delivery products.

 

5

----

 

**Customers**

 

The Company’s primarytarget markets are the government, corporate training and higher educationdistance learning markets. As a result of the telecommunications market“melt-down,” the Company experienced high customer turnover due to its heavyexposure to telecommunications customers. Since 2001, Management hasintentionally broadened the customer base of the Company to reduce thevulnerability to a downturn in any one particular market. The Company’s onlinetuition revenues were balanced fairly equally among the three segments in 2002.In 2002, two customers, Park University and the U.S. Department of VeteransAffairs accounted for approximately 31% and 11% of the Company’s revenues, respectively.**** The Company currently anticipates that futurerevenues may be derived from sales to a limited number of customers.Accordingly, the cancellation, non-renewal or deferral of a small number ofcontracts could have a material adverse effect on the Company.

 

**Sales and Marketing**

 

The Company’s primarymarketing goals are to identify and attract organizations that offer largepotential relationships with the Company. VCampus is targeting industries andorganizations that require mandatory training, reach a large potential audienceand are well served by the Company’s e-Learning solutions. Primary marketsinclude the federal government, the healthcare, insurance, financialservices/banking, pharmaceuticals and manufacturing industries, and institutesof higher education offering extensive adult distance learning.

 

In addition to directsales efforts, the Company markets its products and services through a varietyof means, including the Web, public relations, trade shows, direct mail, tradepublications, customers, resellers and strategic partners. The Company believesthat forming strategic marketing alliances with parties who will sell, promoteand market the Company’s products and services will be important for growth.

 

**Competition**

 

The market for online educationaland training products and services is highly competitive and will likelyintensify. Although VCampus believes it was the first company to offerWeb-based, interactive, on-demand content, there are no substantial barriers toentry in the online education and training market. Competition in thedeveloping market for online training and education is based upon variousfactors, including quality, breadth and depth of content, marketing and thirdparty relationships, quality, flexibility, reliability of delivery system andpricing.

 

A number of companies,including SkillSoft, Click2learn, DigitalThink, Saba and Docent compete in thismarket, as well as many others. In addition to traditional classroom anddistance learning providers, other institutions such as Apollo Group (throughUniversity of Phoenix Online) offer their own accredited courses online or inan e-mail-based format. They, and many other education providers, use some ofthe Company’s methods, including e-mail, bulletin boards, threaded discussionand electronic conferencing, as well as other delivery methods such assatellite communications and audio and videotapes.

 

Management believes thatit is becoming increasingly apparent that e-learning providers must not onlyremain technologically advanced but also, more importantly, offer “complete”solutions. This “complete solution” approach includes offering customers accessto a large library of high quality, off-the-shelf courses; the ability toproduce customized courses quickly and effectively; and value-added featuresthat allow flexibility and scalability, thereby maintaining the learner as thenumber one proponent. Additionally, successful e-learning solutions must beaffordable, convenient and easy to use and administer.

 

Although there is a broadrange of approaches to the e-learning marketplace, most can be generallycategorized as follows, though several companies are active in more than onesegment:

 

ASP HostedServices: Provide consolidated access to learning andtraining from multiple sources by aggregating, hosting and distributingcontent.

Examples:  VCampus, GeoLearning, Docent, Saba,Click2learn and KnowledgePlanet.

 

Technology,Software, Learning Management System (LMS): Provide specificsoftware tools and infrastructure to companies that typically implementtechnology and applications behind a corporate firewall.  These are usually sold under a one-time,non-annuity license/maintenance model.

Examples: Saba, Docent,WBT Systems, Pathlore and Plateau Systems.

 

Content:Create the e-learning courses used to train corporate employees. Contenttypically falls into one of the three generic categories: informationtechnology, soft skills and customized content.  Leading content providers often provide support services inconjunction with their content.

Examples:  SkillSoft, DigitalThink, Element K,ExecuTrain, Learning Tree International and New Horizons.

 

6

----

 

ProfessionalServices and Consulting: Provide consulting, implementationand support services, contract content development and distribution.

Examples:  Intellinex, DigitalThink and Collegis.

 

Most of the Company’scompetitors have significantly greater financial, technical and marketingresources than the Company. The Company will require financing to competeeffectively in this rapidly evolving market. In addition, any of thesecompetitors may be able to respond more quickly than the Company to new oremerging technologies and to devote greater resources to the development,promotion and sale of their services. A number of the Company’s currentcustomers and partners have also established relationships with certain of theCompany’s competitors, and future customers and partners may establish similarrelationships. In addition, the Company’s partners could use informationobtained from the Company to gain an additional competitive advantage over theCompany. The Company’s competitors may develop products and services that aresuperior to those of the Company or that achieve greater market acceptance thanthe Company’s products and services.

 

**Government Regulation and Legal Uncertainties**

 

The Company is notcurrently subject to direct regulation by any government agency, other thanregulations generally applicable to businesses, and there are currently fewlaws or regulations directly applicable to access or to commerce on onlinenetworks. Due to the increasing popularity and use of online networks, it ispossible that a number of laws and regulations may be adopted with respect toonline networks, covering issues such as user privacy, pricing, taxation and/orthe characteristics and quality of products and services. The adoption of anysuch laws or regulations may decrease the growth of online networks, whichcould in turn decrease the demand for the Company’s products and increase theCompany’s cost of doing business or otherwise have an adverse effect on theCompany. Moreover, the applicability to online networks of existing lawsgoverning issues such as intellectual property ownership, sales taxes, libeland personal privacy is uncertain. Furthermore, as a publisher of educationalmaterials, the Company could be subject to accreditation or other governmentalregulations. Any new legislation or regulation applicable to online networks, theCompany or its products or services could have a material adverse effect on theCompany.

 

Because materials may bedownloaded by the online or Internet services operated or facilitated by theCompany or the Internet access providers with which it has a relationship andbe subsequently distributed to others, there is a potential that claims will bemade against the Company for copyright or trademark infringement or based onother legal theories. Such claims have been brought against online services inthe past. Although the Company carries general liability insurance, theCompany’s insurance may not cover claims of this type, or may not be adequateto cover all liability that may be imposed. Any imposition of liability that isnot covered by insurance or is in excess of insurance coverage could have amaterial adverse effect on the Company.

 

**Trademarks and Proprietary Rights**

 

The Company regards itscopyrights, trademarks, trade dress, trade secrets and similar intellectualproperty as critical to its success, and the Company relies upon federalstatutory as well as common law copyright and trademark law, trade secretprotection and confidentiality and/or license agreements with its employees,customers, partners and others to protect its proprietary rights. The Companyowns registered trademarks in the United States for The e-Learning SolutionProvider, Teletutor, The Chalkboard, VCampus, the VCampus logo, VCampus.com,Take It Online, Point Page, and Course Construction Set.  Additionally, the Company has applied forregistration in the United States for certain of its other trademarks,including ContentMatters.

 

**Employees**

 

As of December 31, 2002,the Company had 48 employees, consisting of 12 full-time employees in generalbusiness operations, 15 full-time employees in sales and marketing, 13full-time employees in product development, and eight full-time employees ingeneral and administrative. None of the Company’s employees is represented by aunion and there have been no work stoppages. The Company believes that its employee relations are good.

 

7

----

 

**Risksand Uncertainties**

 

                You should be aware that thereare various risks to an investment in our common stock, including thosedescribed below. You should carefully consider these risk factors, togetherwith all of the other information included in this prospectus, before youdecide to invest in shares of our common stock.

 

                If any of the following risks,or other risks not presently known to us or that we currently believe to not besignificant, develop into actual events, then our business, financialcondition, results of operations or prospects could be materially adverselyaffected. If that happens, the market price of our common stock could decline,and you may lose all or part of your investment.

 

                This prospectus contains forward-lookingstatements that involve risks and uncertainties. Our actual results coulddiffer materially from those discussed in this prospectus. Factors that couldcause or contribute to these differences include, but are not limited to, thosediscussed below and elsewhere in this prospectus, and in any documentsincorporated in this prospectus by reference.

 

***   We have incurred losses and anticipate future losses, which could havean adverse impact on your investment.***  We haveincurred significant losses since our inception in 1984, including net lossesattributable to common stockholders of $14.0 million, $6.6 millionand $7.1 for the years ended December 31, 2000, 2001 and 2002. We alsoincurred a net loss attributable to common stockholders of approximately$1.6 million for the quarter ended March 31, 2003. As ofMarch 31, 2003, we had an accumulated deficit of $85.8 million,stockholders’ equity of $1.5 million and a working capital deficit of$0.9 million. We expect losses from operations to continue until ouronline revenue stream matures. For these and other reasons, we cannot assureyou that we will ever operate profitably, which could have an adverse impact onyour investment.

 

***   If we do not have the resourcesto meet our business objective, we might not survive or be successful.***  Our keyobjective is to be the leading service provider of integrated e-learningsolutions. Pursuing this objective may significantly strain our administrative,operational and financial resources. We cannot assure you that we will have theoperational, financial and other resources to the extent required to meet ouronline business objective, which means we might not survive or be successful.

 

***   Failure to raise additional capital, as and when needed, could preventus from executing our business strategy and could prevent us from maintainingcompliance with Nasdaq listing standards.***  If we arenot able to generate sufficient cash for ongoing operations, we will need toraise additional funds through public or private sale of our equity or debtsecurities or from other sources for the following purposes:

 

                •              to build our core online business;

 

                •              to fund our operating expenses;and

 

                •              to maintain compliance with Nasdaqlisting requirements.

 

                We cannot assure you thatadditional funds will be available if and when we need them, or that if fundsare available, they will be on terms favorable to us and our stockholders. Ifwe are unable to obtain sufficient funds or if adequate funds are not availableon terms acceptable to us, we may be unable to meet our business objectives. Alack of sufficient funds could also prevent us from taking advantage ofimportant opportunities or being able to respond to competitive conditions. Anyof these results could have a material adverse effect on our business,financial condition and results of operations.

 

                Our need to raise additionalfunds could also directly and adversely affect your investment in our commonstock in another way. When a company raises funds by issuing shares of stock,the percentage ownership of the existing stockholders of that company isreduced, or diluted. If we raise funds in the future by issuing additionalshares of stock, you may experience significant dilution in the value of yourshares. Additionally, certain types of equity securities that we have issued inthe past and may issue in the future do have and could have rights, preferencesor privileges senior to your rights as a holder of our common stock.

 

8

----

 

***   If we fail to maintain compliance with our Nasdaq SmallCap Marketlisting, the value and liquidity of your shares could be impaired.***  Ourcommon stock is currently listed on the Nasdaq SmallCap Market. Nasdaq hascertain requirements that a company must meet in order to remain listed on theNasdaq SmallCap Market. In February 2002, Nasdaq notified us that we werenot in compliance with the minimum bid price requirement for continued listingon the Nasdaq SmallCap Market. In June 2002, we implemented a 1-for-10reverse stock split in an effort to regain compliance with the minimum bidprice requirement. After effecting the reverse stock split, Nasdaq notified usthat we had regained compliance with the minimum bid price requirement. On June30, 2003, the closing bid price of our common stock was $2.37 per share.Nevertheless, we may be unable to maintain our bid price above the minimum bidprice requirement required for continued listing on the Nasdaq SmallCap Market.In addition, if we continue to experience losses from our operations or if weare unable to raise additional funds as needed, we may not be able to maintaincompliance with the minimum $2.5 million stockholders’ equity requirementfor continued listing on the Nasdaq SmallCap Market. At March 31, 2003,our stockholders’ equity was $1.5 million and $3.3 million on a proforma basis as of March 31, 2003 after giving effect to the Series Hfinancing completed in May of 2003.

 

                The Nasdaq SmallCap Market andthe Nasdaq Over-the-Counter Bulletin Board are significantly less activemarkets than the Nasdaq National Market. You could find it more difficult todispose of your shares of our common stock than if our common stock were listedon the Nasdaq National Market.

 

                If our common stock weredelisted from the Nasdaq SmallCap Market, it could be more difficult for us toobtain other sources of financing in the future. Moreover, if our common stockwere delisted from the Nasdaq SmallCap Market, our stock could be subject towhat are known as the “penny stock” rules. The “penny stock” rules placeadditional requirements on broker-dealers who sell or make a market insuch securities. Consequently, if we were removed from the Nasdaq SmallCap Market,the ability or willingness of broker-dealers to sell or make a market inour common stock could decline. As a result, your ability to resell yourshares, and the price at which you could sell your shares, of our common stockcould be adversely affected. At March 31, 2003, VCampus had total equityof approximately $1.5 million, which is below the minimum Nasdaq SmallCapMarket listing requirement of $2.5 million.

 

                If our common stock weredelisted from the Nasdaq SmallCap Market, it could be more difficult for us toretain existing and obtain new customers. The ability to continue and form newstrategic relationships may be negatively impacted. As a result, delistingcould result in a negative impact our customer base and revenue, and,consequently, a negative impact on your investment.

 

***   The large number of our shares eligible for future sale could have anadverse impact on the market price of our common stock.***  A largenumber of shares of common stock already outstanding, along with shares issuableupon exercise of options or warrants or conversion of preferred stock andconvertible notes, is eligible for resale, which may adversely affect themarket price of our common stock. As of June 9, 2003, we had 4,590,579shares of common stock outstanding, another 64,285 shares were issuable uponconversion of convertible notes and another 2,168,397 shares upon exercise ofoutstanding warrants and options. Substantially all of the shares subject tooutstanding warrants and options will, when issued upon exercise, be availablefor immediate resale in the public market pursuant to currently effectiveregistration statements under the Securities Act of 1933, as amended, orpursuant to Rule 701 or Rule 144 promulgated thereunder. Some of theshares that are or will be eligible for future sale have been or will be issuedat discounts to the market price of our common stock on the date of issuance.In June 2003, we issued approximately 3,000,000 shares of common stock andwarrants to purchase a total of 20% of that number in connection with theconversion of all of the outstanding shares of preferred stock. Resales or theprospect of resales of these shares may have an adverse effect on the marketprice of our common stock.

 

***   Our substantial dependence on third-party relationships couldimpair our ability to achieve our business objectives and serve our customers.***  We relyon maintaining and developing relationships with customers, academic andgovernment institutions and businesses that provide content for our productsand services and with companies that provide the Internet and relatedtelecommunications services used to distribute our products and services tocustomers.

 

                We have relationships with anumber of customers, academic institutions and businesses that provide us withcourse content for our online products and services. Some of the agreements wehave entered into with these content providers limit our use of their coursecontent, some do not cover use of any future course content and most may be terminatedby either party upon breach or bankruptcy. Our ASP-based business model is notcompatible with the business models of certain content providers which may leadthem to terminate the future licensing of existing and new course content to usor fail to

 

9

----

 

makethis content available to us at commercially reasonable rates or termsnecessary for success under our business model. Given our plans to introduceadditional online courses in the future, we will need to license new coursecontent from existing and prospective content providers. However we might notbe able to maintain and modify, if necessary, our existing agreements withcontent providers, or successfully negotiate agreements with prospective contentproviders. If the fees we pay to acquire or distribute content increase, ouroperating costs and results of operations could be adversely affected. We mightnot be able to license course content at commercially reasonable rates or atall.

 

                We depend heavily on third-partyproviders of Internet and related telecommunications services. In order toreach customers, our products and services have to be compatible with the webbrowsers they typically use. Our customers have access to us through theirarrangements with Internet service providers.

 

                For the customers, academic andgovernment institutions and businesses that provide content for our productsand services, the companies that provide the Internet and relatedtelecommunications services used to distribute our products and services tocustomers, and the web-site operators that provide links to our companyweb-sites, we cannot assure you that:

 
| • |   | they  regard their relationships with us as important to their own businesses and  operations;                                                        |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                  |
| • |   | they  will not reassess their commitment to our products or services at any time in  the future;                                                      |
|   |   |                                                                                                                                                  |
| • |   | they  will not develop their own competitive products or services;                                                                                    |
|   |   |                                                                                                                                                  |
| • |   | the  products or services by which they provide access or links to our products or  services will achieve market acceptance or commercial success; or |
|   |   |                                                                                                                                                  |
| • |   | our  relationships with them will result in successful product or service  offerings or generate significant revenues.                                |

 

                If one or more of these entitiesfail to achieve or maintain market acceptance or commercial success, or if oneor more of the entities that do succeed decide to end their relationship withus, we might not be able to generate sufficient revenues to be successful andyour investment would be impaired.

 

***   We operate in a highly competitive industry and may not be able tocompete effectively.***  The market for educational and trainingproducts and services is highly competitive and we expect that competition willcontinue to intensify. There are no substantial barriers to entry into ourbusiness, and we expect that established and new entities will enter the marketfor online educational and training products and services in the near future.

 

                A number of our existingcompetitors, as well as a number of potential new competitors (including someof our strategic partners), have longer operating histories, greater namerecognition, larger customer bases, more diversified lines of products andservices and significantly greater resources than we do. Such competitors maybe able to undertake more extensive marketing campaigns, adopt more aggressivepricing policies and make more attractive offers to potential customers. In thepast few years, a number of our customers have demanded upgrades to ourtechnology platform. Our relatively limited capital resources might not affordus a full opportunity to meet these demands. Recently, we have noticed thatsome of the more widely available online course offerings, particularly thosetargeted to the corporate training market, are increasingly competing primarilyon price, which commoditization drives down margins for all competitors in ourindustry. In competing against us, our strategic partners could use informationobtained from us to gain an additional competitive advantage over us. Ourcurrent and potential competitors might develop products and services that aresuperior to ours or that achieve greater market acceptance than ours. We mightnot compete effectively and competitive pressures might prevent us fromacquiring and maintaining the customer base necessary for us to be successful.

 

                As the revenue potential foronline delivery of educational and training courses continues to grow, themarket is likely to attract a number of large, well capitalized competitorsseeking to diversify their revenue streams into this market. Not only will someof these potential competitors be well capitalized and be willing to operate inthe market at a loss to build market share, they may also acquire and/orsubstantially fund our other competitors which could weaken demand for ourproducts and make it more difficult to reach or even prevent us from reachingprofitability.

 

10

----

 

***   The loss of services of any member of our key personnel could prevent usfrom adequately executing on our business strategy.***  Ourfuture success depends on the continued contributions of our key seniormanagement personnel, consisting of Narasimhan Kannan, Chief Executive Officer,Christopher Nelson, Chief Financial Officer, Daniel Neal, Chief of StrategicPartnerships, and Ron Freedmen, Senior Vice President of Worldwide Sales andMarketing, some of whom have worked together for only a short period of time.We do not maintain “key man” life insurance on any of our executive officers.The loss of services of any of our key management personnel, whether throughresignation or other causes, or the inability to attract qualified personnel asneeded, could prevent us from adequately executing on our business strategy.

 

***   Our results of operations have fluctuated significantly from period toperiod, and a failure to meet the expectations of investors or the financialcommunity at large could result in a decline in our stock price.***  Ourexpense levels are based in part on our expectations as to future revenues.Quarterly sales and operating results generally depend on the online revenuesand development and other revenues, which are difficult to forecast. Inaddition, past results have shown our business to be subject to a material adverseseasonality associated with the large number of holidays in the calendar fourthquarter. We may not be able to adjust spending in a timely manner to compensatefor any unexpected revenue shortfall. Accordingly, any significant revenueshortfall would have an immediate adverse impact on our business and financialcondition.

 

                Our operating results mayfluctuate significantly in the future as a result of a variety of factors, someof which are outside of our control. These factors include:

 

                •              demand for online education;

 

                •              the budgeting cycles of customers,particularly in the government sector;

 

                •              seasonality of revenuescorresponding to academic calendars;

 

                •              capital expenditures and othercosts relating to the expansion of operations;

 

                •              the introduction of new productsor services by us or our competitors;

 

                •              the mix of the products andservices sold and the channels through which those products and services aresold;

 

                •              pricing changes; and

 

                •              general economic conditions.

 

                As a strategic response to achanging competitive environment, we may elect from time to time to makecertain pricing, service or marketing decisions that could have a materialadverse effect on us. We believe that period-to-period comparisons of ouroperating results should not be relied upon as an indication of futureperformance. Due to all of the foregoing factors, it is possible that in somefuture quarter, our operating results will be below the expectations of publicmarket analysts and investors. In such event, the price of our common stockwould likely decline.

 

***   We rely on significant customers, and if we fail to maintain and developrelationships with such customers, we might not generate revenues necessary toachieve our business objectives.***  A significant portion of ourrevenues is generated by a limited number of customers. We expect that we willcontinue to depend on large contracts with a limited number of significantcustomers through the near future. This situation can cause our revenue andearnings to fluctuate between quarters based on the timing of contracts. Mostof our customers have no obligation to purchase additional products or servicesfrom us. Furthermore, VCampus has been notified that the GSA (General ServicesAdministration of the United States) will be terminating its VCampus contractin April 2003. This termination decision was reached to enable GSA tocomply with a request from the OPM (Office of Personnel Management) and the OMB(Office of Management and Budget) that GSA consolidate its e-learning withe-learning campus hosted by a competitor. Revenues from the terminated GSAcontract represented 4.5% and 9.8% of our total revenues in 2001 and 2002,respectively. As of the date of this report, no other federal governmentcustomers of VCampus have indicated that they intend to move their business tothis government-approved competitor; however, VCampus could face similarloss of government customers due to the attempts by OPM and OMB to centralizethe federal government’s e-learning purchases with this competitor.Consequently, if we fail

 

11

----

 

tomaintain and develop relationships with significant customers, we might not beable to generate revenues necessary to achieve our business objectives.

 

***   System failures and capacity constraints could interfere with ourefforts to attract customers and attain market acceptance of our products andservices.***  A key element of our strategy is to generatea high volume of online traffic to our products and services. Accordingly, theperformance of our products and services is critical to our reputation, ourability to attract customers and attain market acceptance of our products andservices. Any system failure that causes interruptions in the availability orincreases response time of our products and services would result in less usageof our products and services and, especially if sustained or repeated, wouldreduce the attractiveness of our products and services. An increase in thevolume of use of our products and services could strain the capacity of thesoftware or hardware we use or the capacity of our network infrastructure,which could lead to slower response time. Any failure to expand the capacity ofour hardware or network infrastructure on a timely basis or on commerciallyreasonably terms would reduce the attractiveness of our products and services.We also depend on web browsers and Internet service providers for access totheir products and services, and users may experience difficulties due tosystem failures unrelated to our systems, products and services.

 

***   If the security of information stored in and transmitted throughcomputer systems of VCampus and its end-users is not adequately secured,we could incur significant liability and potential customers might be deterredfrom using our products and services.***  Weinclude in our products certain security protocols that operate in conjunctionwith encryption and authentication technology. Despite these technologies, ourproducts may be vulnerable to break-ins and similar disruptive problems causedby online users. Such computer break-ins and other disruptions would jeopardizethe security of information stored in and transmitted through our computersystems and the computer systems of end-users, which may result in significantliability for us and may also deter potential customers. For example, computer“hackers” could remove or alter portions of our online courseware. Persistentsecurity problems continue to plague the Internet, the Web and other public andprivate data networks. Alleviating problems caused by third parties may requireus to make significant expenditures of capital and other resources and maycause interruptions, delays or cessation of service to our customers and to us.Moreover, our security and privacy concerns and those of existing and potentialcustomers, as well as concerns related to computer viruses, may inhibit thegrowth of the online marketplace generally, and our customer base and revenuesin particular. We attempt to limit our liability to customers, includingliability arising from a failure of the security features contained in ourproducts, through contractual provisions limiting warranties and disallowingdamages in excess of the price paid for the products and services purchased.However, these limitations might not be enforceable. We maintain liabilityinsurance to protect against these risks however this insurance may beinadequate or may not apply in certain situations.

 

***   We might not be successful in responding to the undeveloped and rapidlychanging market for our products and services.***  Themarket for our products and services is rapidly evolving in response to recentdevelopments relating to online technology. The market is characterized byevolving industry standards and customer demands and an increasing number ofmarket entrants who have introduced or developed online products and services.It is difficult to predict the size and growth rate, if any, of this market. Asis typical in the case of a rapidly evolving industry, demand and marketacceptance for recently introduced products and services are subject to a highlevel of uncertainty. Our future success will depend in significant part on ourability to continue to improve the performance, features and reliability of ourproducts and services in response to both evolving demands of the marketplaceand competitive product offerings, and we cannot assure that we will besuccessful in developing, integrating or marketing such products or services. Inaddition, our new product releases may contain undetected errors that requiresignificant design modifications, resulting in a loss of customer confidence.

 

***   We might not be able to adequately protect our intellectual propertyrights.***  We regard our copyrights, trademarks, tradedress, trade secrets and similar intellectual property as critical to oursuccess, and we rely upon trademark and copyright law, trade secret protectionand confidentiality and/or license agreements with our employees, customers,partners and others to protect our proprietary rights.

 

                We have had certain trademarkapplications denied and may have more denied in the future. We will continue toevaluate the need for registration of additional marks as appropriate. Despiteour efforts to protect our proprietary rights, unauthorized parties may attemptto copy aspects of our products or services or to obtain and use informationthat we regard as proprietary. In addition, the laws of some foreign countriesdo not protect proprietary rights to as great an extent as do the laws of theUnited States. Litigation may be necessary to protect our proprietarytechnology. Any such litigation may be time-consuming and costly, cause productrelease delays, require us to redesign our products or services or require usto enter into royalty or licensing agreements, any of which could have amaterial adverse effect upon us. These royalty or

 

12

----

 

licensingagreements, if required, may not be available on terms acceptable to us or atall. Our means of protecting our proprietary rights might not be adequate andour competitors might independently develop similar technology, duplicate ourproducts or services or design around patents or other intellectual propertyrights we have. In addition, distributing our products through online networksmakes our software more susceptible than other software to unauthorized copyingand use. For example, online delivery of our courseware makes it difficult toensure that others comply with contractual restrictions, if any, as to theparties who may access such courseware. If, as a result of changing legalinterpretations of liability for unauthorized use of our software or otherwise,users were to become less sensitive to avoiding copyright infringement, wemight not be able to realize on the full value of our intellectual propertyrights.

 

***   Government regulation of the business conducted on the Internet coulddecrease the demand for our products and services or increase our cost of doingbusiness.***  There are currently few laws or regulationsthat directly apply to activities on the Internet. We believe that we are notcurrently subject to direct regulation by any government agency in the UnitedStates, other than regulations that are generally applicable to all businesses.A number of legislative and regulatory proposals are under consideration byfederal and state lawmakers and regulatory bodies and may be adopted withrespect to the Internet and/or online delivery of course content. Some of theissues that these laws and regulations may cover include user privacy, pricingand characteristics and quality of products and services. The adoption of anysuch laws or regulations may decrease the growth of the Internet, which couldin turn decrease the projected demand for our products and services or increaseour cost of doing business. The applicability to the Internet of existing U.S.and international laws governing issues such as property ownership, copyright,trade secret, libel, taxation and personal privacy is uncertain and developing.Any new legislation or regulation, or application or interpretation of existinglaws, could decrease online demand for our products and services or increaseour costs.

 

***   We could issue preferred stock and take other actions that mightdiscourage third parties from acquiring us.***  Our boardof directors has the authority, without further action by the stockholders, toissue up to 10,000,000 shares of preferred stock and to fix the rights,preferences, privileges and restrictions, including voting rights, of suchshares. We recently converted all outstanding shares of our preferred stockinto common stock. The rights of the holders of the common stock will besubject to, and may be adversely affected by, the rights of the holders of anypreferred stock that we may issue in the future. Issuing preferred stock couldhave the effect of making it more difficult for a third party to acquire amajority of our outstanding voting stock, thereby delaying, deferring orpreventing a change in control of our company. Furthermore, the preferred stockmay have other rights, including economic rights, senior to our common stock,and as a result, issuing preferred stock could decrease the market value of ourcommon stock.

 

                Certain provisions of ourcertificate of incorporation and our bylaws could make it more difficult for athird party to acquire, and could discourage a third party from attempting toacquire, control of VCampus. Some of them eliminate the right of stockholdersto act by written consent and impose various procedural and other requirementswhich could make it more difficult for stockholders to undertake certaincorporate actions. These provisions could limit the price that certaininvestors might be willing to pay in the future for shares of our common stockand may have the effect of delaying or preventing a change in control ofVCampus. We may in the future adopt other measures that may have the effect ofdelaying, deferring or preventing a change in control of VCampus. Certain ofthese measures may be adopted without any further vote or action by thestockholders, although we have no present plans to adopt any such measures. Weare also afforded the protections of Section 203 of the Delaware GeneralCorporation Law, which could delay or prevent a change in control of VCampus,impede a merger, consolidation or other business combination involving ourcompany or discourage a potential acquirer from making a tender offer orotherwise attempting to obtain control of VCampus.

 

***   We might not be able to use net operating loss carryforwards.***  As ofDecember 31, 2002, we had net operating loss carryforwards for federalincome tax purposes of approximately $56 million, which will expire atvarious dates through 2022. Our ability to use these net operating loss andcredit carryforwards to offset future tax obligations, if any, may be limitedby changes in ownership. Any limitation on the use of net operating losscarryforwards, to the extent it increases the amount of federal income tax thatwe must actually pay, may have an adverse impact on our financial condition.

 

***   We do not presently anticipate paying cash dividends on our commonstock.***  We intend to retain all earnings, if any,for the foreseeable future for funding our business operations. In addition,our outstanding preferred stock contains restrictions on our ability to declareand pay dividends on our common stock. Consequently, we do not anticipatepaying any cash dividends on our common stock for the foreseeable future, whichcould deter some investors from seeking to acquire our common stock.

 

13

----

 

**Item 3.  Legal Proceedings*.***

 

The Virginia Departmentof Taxation recently completed an audit of VCampus' sales and use tax paymentsfrom August 1998 through October 2001. In July 2002, the Company received a draft assessment which contemplateda payment of taxes, penalties and interest by VCampus of $212,719, primarilyassociated with the alleged failure of VCampus to assess use tax on third-partyroyalties paid by VCampus to content providers for courses delivered online bythe Company.  This preliminaryassessment was not yet a formal, binding assessment by the Virginia Departmentof Taxation.  The Company paid the salesand use tax, and interest on non-contested items, which amounted to $18,928 outof the $212,719.  The Company hasformally contested the remaining items covered by the draft assessment, includingthe assessment of use tax on the royalties paid by VCampus to content providersfor courses delivered online by the Company. The Company is also contesting the methodology used by the VirginiaDepartment of Taxation to estimate the royalties.  The Company does not have a firm estimate of the probability ofliability for this issue or the amount of anticipated legal costs, but hasreason to believe that the potential liability will be reduced to the pointwhere it will not be considered material. Accordingly, the Company cannot estimate at this time the amount ofliability to be incurred, if any.  Noamounts have been accrued in the financial statements for this potentialliability.

 

In June 2002, a formeremployee (separated in June 1998) filed suit against the Company in DallasCounty, Texas.  The suit alleged damagesin the following amounts: an allegedly earned unpaid bonus of $56,250, $231,250based on an alleged change of control in the Company and $360,000 for theCompany's alleged failure to allow him to exercise stock options.  To avoid further litigation expenses and therisk of an adverse ruling, in June 2003 VCampus reached a preliminary agreementwith the employee to pay him $99,999 in full settlement of all the claims,including the plaintiff's attorney's fees. The preliminary settlement is subject to the parties' mutual agreementon final terms.  VCampus had previouslyaccrued a liability on its balance sheet of $60,000 in connection with thisdispute.

 

In June 2003, VCampus andthe landlord at its Rockville, Maryland facility agreed to terminate the leaseagreement, effective immediately. VCampus had vacated the leased premises at Rockville in December 2000 aspart of its announced transition to an exclusive online business model.  As part of the settlement and withoutadmitting any liability for default alleged by the landlord, VCampus agreed topay the landlord a total of $300,000 (plus a $24,000 security deposit retainedby the landlord) to terminate the lease agreement and vacate the court's orderto pay $95,453 of back rent and all future rents of approximately $500,000through the original lease term of 2005. Accordingly, VCampus is relieved of all liabilities under the lease,including approximately $300,000 for lease payments otherwise due during 2004and 2005.  VCampus had already accrued$253,051 for this potential liability on its balance sheet.

 

Although VCampus is notcurrently involved in any other material pending legal proceedings, VCampuscould be subject to legal proceedings and claims in the ordinary course of itsbusiness or otherwise, including claims relating to license agreements,royalties or claims of alleged infringement of the trademarks and otherintellectual property rights of third parties by VCampus and its licensees.

 

14

----

 

**PART III**

 

**Item 11. Executive Compensation.**

 

                Aside from the Report of the Compensation Committeeon Executive Compensation and the Report of the Audit Committee set forthbelow, the other information required by Item 11 of Form 10-K is incorporatedby reference to the information under the headings "Proposal No. 1 —Election of Directors — Information Concerning the Board of Directors and itsCommittees", " Other Information — Executive Compensation","— Compensation of Directors", "— Compensation CommitteeInterlocks and Insider Participation" and "— Performance Graph"in the Proxy Statement.

 

**Report of the Compensation Committee on ExecutiveCompensation**

 

                The Compensation Committee ofthe Board of Directors is responsible for establishing compensation policy andadministering the compensation programs of our executive officers. The purposeof this report is to inform stockholders of our compensation policies forexecutive officers and the rationale for the compensation paid to executiveofficers in 2002.

 

                The Compensation Committee ofthe Board of Directors, consisting entirely of non-employee directors, approvesall policies under which compensation is paid or awarded to our executiveofficers. The Compensation Committee is currently composed ofMessrs. deCastro and Fischer. Mr. Kannan served as a member of thecompensation committee following his termination of employment inDecember 2001 until his reappointment as Chief Executive Officer inDecember 2002. The members of the Compensation Committee also administerour stock plans.

 

                For compensation paid to theChief Executive Officer and other Named Executive Officers in 2002, noreference was made to the data for comparable companies included in theperformance graph included in this proxy statement under theheading—”Performance Graph.”

 

                *CompensationPhilosophy.*  Our executivecompensation program has three objectives: (1) to align the interests ofthe executive officers with the interest of our stockholders by basing asignificant portion of an executive’s compensation on our performance;(2) to attract and retain highly talented and productive executives; and(3) to provide incentives for superior performance by our executives. Toachieve these objectives, the Compensation Committee has crafted a program thatconsists of base salary, short-term incentive compensation in the form of cashbonuses and long-term incentive compensation in the form of stock options.These compensation elements are in addition to the general benefits programsthat we offer to all of our employees.

 

                Each year, the CompensationCommittee reviews our executive compensation program. In its review, theCompensation Committee studies the compensation packages for executives ofcompanies at a comparable stage of development and in our geographical area,assesses the competitiveness of our executive compensation program and reviewsour financial and operational performance for the previous fiscal year. TheCompensation Committee also gauges the success of the compensation program inachieving its objectives in the previous year, and considers our overallperformance objectives.

 

                Each element of our executivecompensation program is discussed below.

 

                *BaseSalaries.*  The CompensationCommittee annually reviews the base salaries of our executive officers. Thebase salaries for our executive officers for 2002 were established at thebeginning of that fiscal year, or when the executive joined us, as the case maybe. In addition to considering the factors listed in the foregoing section thatsupport our executive compensation program generally, the CompensationCommittee reviews the responsibilities of the specific executive position andthe experience and knowledge of the individual in that position. The CompensationCommittee also measures individual performance based upon a number of factors,including measurement of our historic and recent financial and operationalperformance and the individual’s contribution to that performance, theindividual performance on non-financial goals and other contributions of the

 

15

----

 

individualto our success, and gives each of these factors relatively equal weight withoutconfining its analysis to a rigorous formula. As is typical of mostcorporations, the actual payment of base salary is not conditioned upon theachievement of any predetermined performance targets.

 

                *IncentiveCompensation.*  Cash bonusesestablished for executive officers are intended to motivate the individual towork hard to achieve our financial and operational performance goals or tootherwise incent the individual to aim for a high level of achievement on ourbehalf in the coming year. The Compensation Committee does not have an exactformula for determining bonus payments, but has established general targetbonus levels up to a maximum of 50% of base salary for executive officers basedin relatively equal measures upon the Compensation Committee’s subjectiveassessment of our achievement of projected revenues and net income, customerservice metrics and other operational and individual performance factors. TheCommittee may adjust these targets during the year.

 

                *Long-TermIncentive Compensation.*  Ourlong-term incentive compensation plan for our executive officers is based uponour stock plans. We believe that placing a portion of our executives’ totalcompensation in the form of stock options achieves three objectives. It alignsthe interest of our executives directly with those of our stockholders, givesexecutives a significant long-term interest in our success and helps us retainkey executives. Options generally vest over a three to five-year period basedupon continued employment. In the past five years, we granted performance-basedoptions to the Chief Executive Officer and various other executive officers. Asmodified in April 2001, these grants vest ratably over four yearsbeginning five years from the date of grant, subject to accelerated vesting infull during the first four years after the grant date if we record quarterlyearnings before taxes of not less than $400,000 on net quarterly revenue of notless than $3,000,000 for two consecutive quarters. The vesting ofMr. Neal’s 12,500 performance-based options are accelerated at suchtime as we record quarterly earnings before interest, depreciation,amortization and taxes of not less than $250,000 on net quarterly revenue ofnot less than $2,500,000 for two consecutive quarters. In December 2001,we granted an option to Mr. Neal to purchase 50,000 shares at fair marketvalue on the date of grant, vesting one fourth upon grant and the remaindervesting equally over the four quarters thereafter, based upon continuedemployment. In January 2003, we granted a performance option toMr. Kannan to purchase 35,000 shares of common stock that vests ratablyover three years, subject to acceleration in the event certain revenue,profitability and EBITDA milestones are achieved.

 

                In determining the number ofoptions to grant an executive, the Board primarily considered the executive’spast performance and the degree to which an incentive for long-term performancewould benefit us, as well as the number of shares and options already held bythe executive officer. It is the Compensation Committee’s policy to grantoptions at fair market value unless particular circumstances warrant otherwise.

 

                In June 2001, we initiatedan employee option exchange program designed to incent our employees byoffering to exchange their existing options, many of which had exercise pricesconsiderably higher than the recent trading price of our common stock, for theopportunity to receive new options in December 2001 for an identicalnumber of shares and with an exercise price equal to fair market on the newgrant date. Mr. Neal and Mr. Kannan participated in this program andreceived 30,000 and 41,250 new options, respectively, at $2.70 per share inDecember 2001 in exchange for an equal number of options that werecancelled in June 2001. The new options vest on the same terms as thecancelled options for which they were exchanged.

 

                *Benefits.*  We believe that we must offer a competitivebenefit program to attract and retain key executives. During fiscal 2002, weprovided the same medical and other benefits to our executive officers that aregenerally available to our other employees.

 

                *Compensationof the Chief Executive Officer.* The Chief Executive Officer’s compensation is based upon the sameelements and measures of performance as is the compensation for our otherexecutive

 

16

----

 

officers.The Compensation Committee approved a base salary for Mr. Kannan of$23,333 per month beginning in January 2003 and for Mr. Neal of$160,000 per year beginning in December 2002. In structuring thecompensation of Messrs. Kannan and Neal, the Compensation Committeeconsidered the alignment of their compensation packages with our financialperformance to be essential. As discussed above under the subheading"Incentive Compensation," because cash bonuses are paid based on theCompensation Committee's subjective assessment of our achievement of selectedperformance criteria and each individual's performance, and because VCampusmost notably did not achieve its targeted revenues and net income for 2002, nocash bonus was paid to Messrs. Kannan and Neal for 2002.  Base salaries for Messrs. Neal and Kannanwere determined and paid pursuant to the terms of their employmentcontracts.  Mr. Neal's $160,000 basesalary reflects his agreement to reduce his prior base salary by $60,000 aspart of VCampus' efforts to reduce costs and achieve profitability.  Base salaries for Messrs. Neal and Kannanwere determined based on the criteria and measures of performance outlinedunder the subheading "Base Salaries" above without confining theanalysis to a rigorous formula. Finally, in addition to tying cash bonuses to performance, theCompensation Committee has structured long-term incentive compensation toMessrs. Neal and Kannan in the form of performance stock options, the qualitativemeasurement terms of which are described generally above under the subheading"Long-Term Incentive Compensation."

 

                *Section 162(m)of the Code.*  It is theresponsibility of the Compensation Committee to address the issues raised bySection 162(m) of the Code. This Section makes certain non-performancebased compensation in excess of $1,000,000 to executives of public companiesnon-deductible to such companies. The Compensation Committee has reviewed theseissues and has determined that it is not necessary for us to take any action atthis time with regard to these issues.

 

                The material in this report isnot soliciting material, is not and will not be deemed filed with theSecurities and Exchange Commission and is not and will not be incorporated byreference in any filing we make under the Securities Act of 1933 or theExchange Act, whether made before or after the date of this Form 10-K/A andirrespective of any general incorporation language in such filing.

 
|                   |          |                                                             |
|-------------------|---------------|------------------------------------------------------------------|
| Dated: April 2003 | Submitted by: | THE COMPENSATION COMMITTEE

Edson D. deCastro

Dennis J. Fischer |
|              |          |                                                             |

 

**Report of the Audit Committee**

 

                The Audit Committee is composedof three directors who are “independent” as defined in Rule 4200(a)(14) ofthe National Association of Securities Dealers’ Marketplace Rules. The membersalso meet the independence requirements under currently proposed Nasdaq and SECrules regarding audit committees. The Audit Committee operates under a writtencharter previously approved by the Board of Directors and performs thefunctions described therein.

 

                The Audit Committee reviews ourcompany’s financial reporting process on behalf of our board. Management hasthe primary responsibility for the financial statements and the reportingprocess, including the system of internal controls and procedures for financialreporting. In this context, the Audit Committee met six times during 2002.  The Audit Committee has had discussions withmanagement and Ernst & Young, our independent auditors, regardingthese matters. Management represented to the Audit Committee that our company’saudited consolidated financial statements were prepared in accordance withaccounting principles generally accepted in the United States of America andfairly present, in all material respects, the financial condition, results ofoperations and cash flows of our company as of and for the periods presented inthe financial statements.

 

17

----

 

                During its meetings withmanagement and Ernst & Young, the Audit Committee reviewed anddiscussed, among other things:

 

| • |   | the  appointment of Ernst & Young as our independent auditors,                                                                                                                                  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                     |
| • |   | the  impact of the Sarbanes-Oxley Act of 2002 and related corporate  governance proposals, including the certifications required to be made by our  Chief Executive Officer and Chief Financial Officer, |
|   |   |                                                                                                                                                                                                     |
| • |   | management  evaluations of the internal controls and disclosure controls and procedures  that we have adopted,                                                                                           |
|   |   |                                                                                                                                                                                                     |
| • |   | the  annual external audit plan including risk assessments, and                                                                                                                                          |
|   |   |                                                                                                                                                                                                     |
| • |   | our  significant accounting policies.                                                                                                                                                                    |

 

                The Audit Committee met inprivate sessions with Ernst & Young. During the private sessions, theAudit Committee confirmed that the independent auditors were satisfied with thepositions taken by management in the presentation of our financial results andthe independent auditors confirmed that there were no matters regarding ourinternal controls requiring communication to the Audit Committee undergenerally accepted auditing standards. In March 2003, management andErnst & Young reviewed and discussed the audited financial statementsfor the fiscal year ended December 31, 2002 with the Audit Committee,together with our disclosures under “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.” This discussion included amongother things:

 

| • |   | critical  accounting policies and practices used in the preparation of our financial  statements,                                           |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                        |
| • |   | any  significant audit adjustments proposed by the independent auditors,                                                                    |
|   |   |                                                                                                                                        |
| • |   | confirmation  that there were no matters of significant disagreement between management and  the independent auditors during the audit, and |
|   |   |                                                                                                                                        |
| • |   | other  matters required to be discussed by Statements of Auditing Standards.                                                                |

 

                Based on the review anddiscussions described above, the Audit Committee recommended to the Board ofDirectors that the audited financial statements be included in the Company’sAnnual Report on Form 10-K for fiscal 2002.

 

                The Audit Committee has alsodiscussed with Ernst & Young the matters required to be discussed byStatement on Auditing Standards No. 90 (Audit Committee Communications).The Audit Committee has received the written disclosures and confirmation fromErnst & Young required by Independence Standards Board StandardNo. 1, as modified or supplemented, and has discussed withErnst & Young their independence.

 
|               |                                                  |
|---------------|-------------------------------------------------------|
| Submitted by: | THE AUDIT COMMITTEE                                   |
|          | William E. Kimberly

John D. Sears

Martin E. Maleska |
|          |                                                  |

 

                The material in this report willnot be deemed filed with the SEC or will be incorporated by reference in any ofour filings under the Securities Act of 1933, as amended, or the SecuritiesExchange Act of 1934, whether made before or after the date of this Form 10-K/Aand irrespective of any general incorporation language in such filings.

 

18

----

 

**Item14.  Controls and Procedures**

 

(a) Evaluation ofdisclosure controls and procedures.  Within90 days prior to the filing date of the Company’s report on Form 10-Kfiled on March 31, 2003, the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures pursuant to Exchange Act Rule 13a-14. Based upon thatevaluation, the Company’s Chief Executive Officer and Chief Financial Officerhave concluded that the Company’s disclosure controls and procedures areeffective.

 

(b) Changes ininternal controls.  There have beenno significant changes in the Company’s internal controls or, to the knowledgeof these officers, in other factors that could significantly affect thesecontrols subsequent to the date of their evaluation.

 

 

19

----

 

**PARTIV**

 

**Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.**

 

(a)           The following Financial Statements,Financial Statement Schedules and Exhibits are filed as part of this report orincorporated herein by reference:

 

(1)           Financial Statements.

 

SeeIndex to Consolidated Financial Statements on page F-1.

 

(2)           Financial Statement Schedules.

 

Thefollowing financial statement schedule is filed with this report: Schedule II —Valuation and Qualifying Account and Reserve

 

Allother financial statement schedules for which provision is made in RegulationS-X are omitted because they are not required under the related instructions,are inapplicable, or the required information is given in the financialstatements, including the notes thereto and, therefore, have been omitted.

 

(3)          Exhibits.

 
| **Exhibit No.** |   | **Description**                                                                                                                                            |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  3.1(a)    |   | Amended  and Restated Certificate of Incorporation, as currently in effect.                                                                                |
|  3.2(a)    |   | Amended  and Restated Bylaws, as currently in effect.                                                                                                      |
|  4.1(a)    |   | Form  of Common Stock certificate.                                                                                                                         |
| 10.30(b)        |   | Series  C Preferred Stock and Warrant Purchase Agreement.                                                                                                  |
| 10.32(b)        |   | Series  D Preferred Stock Purchase Agreement dated June 29, 1998.                                                                                          |
| 10.34(b)        |   | Certificate  of Designations, Preferences and Rights of Series D Convertible Preferred  Stock dated June 26, 1998.                                         |
| 10.35(c)        |   | Certificate  of Designations, Preferences and Rights of Series C Convertible Preferred  Stock dated June 25, 1998.                                         |
| 10.42(d)        |   | Certificate of Designations,  Preferences and Rights of Series E Convertible Preferred Stock.                                                              |
|            |   |                                                                                                                                                       |
| 10.47(e)        |   | Stock Purchase Agreement dated  as of January 11, 2000 by and among the Registrant and Mastech Corporation  (now iGate Capital Corporation).               |
| 10.48(e)        |   | Registration  Rights Agreement dated as of January 11, 2000 by and among the Registrant and  Mastech Corporation (now iGate Capital Corporation).          |
| 10.49(e)        |   | Warrant  issued to Mastech Corporation (now iGate Capital Corporation), dated as of  January 11, 2000.                                                     |
| 10.50(f)        |   | Subscription  Agreement dated as of April 20, 2000, by and between the Registrant and US  West Internet Ventures, Inc, now Qwest Investment Company        |
| 10.51(f)        |   | Registration  Rights Agreement dated as of April 20, 2000 by and between the Registrant and  US West Internet Ventures, Inc, now Qwest Investment Company. |
| 10.52(f)        |   | Warrant  issued to US West Internet Ventures, Inc., now Qwest Investment Company,  dated as of April 20, 2000.                                             |
| 10.54(g)*       |   | Application  Hosting Agreement dated April 20, 2000 between the Company and US West Interprise  America, Inc.                                              |
| 10.55  (h)      |   | Employment  Agreement, dated August 8, 2000, with Daniel J. Neal.                                                                                          |
| 10.56  (h)      |   | Amendment  No.1 to Employment Agreement with Narasimhan P. Kannan dated August 10, 2000.                                                                   |
| 10.57(i)*       |   | Contract  with the General Services Administration dated April 18, 2001                                                                                    |
| 10.58(j)        |   | Form  of Subscription Agreement dated as of May 29, 2001 by and between the  registrant and the Purchasers.                                                |
| 10.59(j)        |   | Form  of Registration Rights Agreement dated as of May 29, 2001 by and between the  registrant and the Purchasers.                                         |
| 10.60(j)        |   | Warrant  issued to the purchasers dated as of May 29, 2001.                                                                                                |
| 10.61(j)        |   | Warrant  issued to the placement agent for the May 29, 2001 private placement.                                                                             |
| 10.62(k)        |   | Termination  of Employment Agreement with Narasimhan P. Kannan, dated December 31, 2001                                                                    |
| 10.63(l)        |   | Certificate of  Designations for the Series F-1 Preferred Stock, as filed in Delaware on  March 28, 2002                                                   |

 

20

----

 
| 10.64(l) |   | Certificate of  Designations for the Series F-2 Preferred Stock, as filed in Delaware on May  8, 2002                                             |
|----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.65(l) |   | Form of purchase  agreement for the issuance of Series F, F-1 and F-2 preferred stock                                                             |
| 10.66(l) |   | Form of registration  rights agreement covering the Series F, F-1 and F-2 preferred stock                                                         |
| 10.67(l) |   | Form of warrant issued  in connection with the Series F, F-1 and F-2 preferred stock financings                                                   |
| 10.68(m) |   | Employment  Agreement, dated June 3, 2002, with Christopher L. Nelson                                                                             |
| 10.69(n) |   | Certificate of  Correction of Series C Convertible Preferred Stock filed in Delaware on July  2, 2002,                                            |
| 10.70(n) |   | Certificate of Correction  of Series D Convertible Preferred Stock filed in Delaware on July 2, 2002.                                             |
| 10.71(n) |   | Certificate of  Correction of Series E Convertible Preferred Stock filed in Delaware on July  2, 2002.                                            |
| 10.72(n) |   | Certificate of  Correction of Series F Convertible Preferred Stock filed in Delaware on July  2, 2002.                                            |
| 10.73(n) |   | Certificate of  Correction of Series F-1 Convertible Preferred Stock filed in Delaware on  July 2, 2002.                                          |
| 10.74(n) |   | Certificate of  Correction of Series F-2 Convertible Preferred Stock filed in Delaware on  July 10, 2002.                                         |
| 10.75(n) |   | Certificate of  Amendment of Amended and Restated Certificate of Incorporation filed in  Delaware on July 3, 2002.                                |
| 10.76(o) |   | Certificate of  Designations for the Series G Preferred Stock filed with the Delaware  Secretary of State on September 27, 2002.        |
| 10.77(o) |   | Form of Securities  Purchase Agreement dated September 30, 2002 between the Registrant and  the purchasers of Series G Preferred Stock. |
| 10.78(o) |   | Form of Registration Rights Agreement dated  September 30, 2002 between the Registrant and the purchasers of  Series G Preferred Stock  |
| 10.79(o) |   | Form of Warrant issued  on September 30, 2002 to the purchasers of Series G Preferred  Stock.                                           |
| 10.80(p) |   | Amended and Restated  Employment Agreement, dated December 18, 2002, with Daniel J. Neal.                                                    |
| 10.81(p) |   | Employment Agreement,  effective January 1, 2003, with Narasimhan P. Kannan                                                                       |
| 21.1(r)  |   | List of Subsidiaries                                                                                                                              |
| 23.1     |   | Consent of Ernst &  Young LLP, Independent Auditors                                                                                           |
| 99.1(q)  |   | Securities  Purchase Agreement dated December 28, 2001 between the Registrant and the  Purchasers                                                 |
| 99.2(q)  |   | Form  of Convertible Note issued December 28, 2001                                                                                                |
| 99.3(q)  |   | Certificate  of Designations for the Series F Preferred Stock filed in Delaware on  December 28, 2001                                             |
| 99.4(q)  |   | Form  of Warrant issued to the Series F holders on December 28, 2001                                                                              |
| 99.5(q)  |   | Form  of Warrant issued to the convertible noteholders on December 28, 2001                                                                       |
| 99.6(q)  |   | Form  of Registration Rights Agreement dated December 28, 2001                                                                                    |
| 99.7(j)  |   | Audit  Committee Charter                                                                                                                          |
| 99.8     |   | Chief  Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                 |
| 99.9     |   | Chief  Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                 |

 

----

*Confidential treatment granted.

(a)                                           Incorporated by reference to the similarly numberedExhibit to the Registrant’s Registration Statement on Form S-1 (File No.333-12135).

(b)                                          Incorporated by reference to the identicallynumbered Exhibit to the Registrant’s Quarterly Report on Form 10-Q for thequarter ended March 31, 1998.

(c)                                           Incorporated by reference to the identicallynumbered Exhibit to the Registrant’s Quarterly Report on Form 10-Q for thequarter ended June 30, 1998.

(d)                                          Incorporated by reference to the correspondingappendix filed with the Registrant’s preliminary proxy materials on Schedule14A dated July 16, 1999 for its 1999 annual meeting of stockholders.

(e)                                           Incorporated by reference to the similarlynumbered Exhibit to the Registrant’s current Report on Form 8-K filed January13, 2000.

(f)                                             Incorporated by reference to the similarlynumbered Exhibit to the Registrant’s current Report on Form 8-K filed May 1,2000.

 

 

21

----

 

(g)                                 Incorporated by reference to the similarlynumbered Exhibit to the Registrant’s Quarterly Report on Form 10-Q filed May15, 2000.

(h)                                 Incorporated by reference to the similarlynumbered Exhibit to the Registrant’s Annual Report on Form 10-K for the yearended December 31, 2000.

(i)                                     Incorporated by reference to the similarlynumbered Exhibit to the Registrant’s Quarterly Report on Form 10-Q filed May15, 2001.

(j)                                     Incorporated by reference to the similarlynumbered Exhibit to the Registrant’s current Report on Form 8-K filed June 1,2001.

(k)                                  Incorporated by reference to the similarlynumbered Exhibit to the Registrant’s Annual Report on Form 10-K filed April 1,2002.

(l)                                     Incorporated by reference to the similarlynumbered Exhibit to the Registrant’s Quarterly Report on Form 10-Q filed May15, 2002.

(m)                               Incorporated by reference to the similarlynumbered Exhibit to the Registrant’s current report on Form 8-K filed June 28,2002.

(n)                                 Incorporated by reference to the similarlynumbered Exhibit to the Registrant’s Quarterly Report on Form 10-Q filed August9, 2002.

(o)                                 Incorporated by reference to the similarlynumbered Exhibit to the Registrant’s current report on Form 8-K filed October3, 2002.

(p)                                 Incorporated by reference to the similarlynumbered Exhibit to the Registrant’s current report on Form 8-K filed January24, 2003.

(q)                                 Incorporated by reference to the similarlynumbered Exhibit to the Registrant’s current report on Form 8-K filed January8, 2002.

(r)                                    Previously filed.

 

22

----

 

**SIGNATURES**

 

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

 
|                     | VCAMPUS  CORPORATION |
|--------------------------|----------------------|
|                     |                 |
|                     | By:                  | /s/  Narasimhan P. Kannan |   |
|                     |                 | Narasimhan  P. Kannan, Chief Executive Officer |
| Date:  July 8, 2003 |                 |

 

23

----

 

**CERTIFICATION**

 

*Securitiesand Exchange Act of 1934 Rule 13a-14 as adopted pursuant toSection 302 of Sarbanes-Oxley Act of 2002:*

 

I, Narasimhan P. Kannan,certify that:

 

1.               I have reviewedthis Amendment No. 2 to annual**reporton Form**10K of VCampusCorporation;

 

2.               Based on myknowledge, this Amendment No. 2 to annual report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this annual****report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this Amendment No. 2 to annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this Amendment No. 2 toannual report;

 

4.               The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

a.               designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisAmendment No. 2 to annual report is being prepared;

 

b.              evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this Amendment No. 2 to annualreport (the “Evaluation Date”); and

 

c.               presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a.               all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this Amendment No. 2 toannual report whether there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
|   | Date:  July  8, 2003 | By:                     | /s/ NARASIMHAN P. KANNAN |
|--------|---------------------------|-------------------------|--------------------------|
|   |                      | Narasimhan P. Kannan    |
|   |                      | Chief Executive Officer |

 

24

----

 

**CERTIFICATION**

 

*Securitiesand Exchange Act of 1934 Rule 13a-14 as adopted pursuant toSection 302 of Sarbanes-Oxley Act of 2002:*

 

I, Christopher L. Nelson,certify that:

 

1.     I have reviewed this Amendment No. 2 to annual**report on Form**10K of VCampus Corporation.;

 

2.               Based on myknowledge, this Amendment No. 2 to annual report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this annual****report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this Amendment No. 2 to annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this Amendment No. 2 toannual report;

 

4.               The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

a.               designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisAmendment No. 2 to annual report is being prepared;

 

b.              evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this Amendment No. 2 to annualreport (the “Evaluation Date”); and

 

c.               presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a.                     allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.                    any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officer and I have indicated in this Amendment No. 2 to annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  July 8, 2003 | By:    | /s/ CHRISTOPHER L. NELSON |   |
|--------------------------|--------|---------------------------|--------|
|                     |   | Christopher L. Nelson     |   |
|                     |   | Chief Financial Officer   |   |

 

 

25

----

 

**VCAMPUS CORPORATION**

 

 

**INDEX TO CONSOLIDATED FINANCIALSTATEMENTS**

 

| Report of Ernst & Young LLP, Independent  Auditors                                                      | F-2 |
|-------------------------------------------------------------------------------------------------------------|-----|
| Consolidated Balance Sheets  as of December 31, 2001 and 2002                                               | F-3 |
| Consolidated  Statements of Operations for the Years Ended December 31, 2000, 2001 and 2002                 | F-4 |
| Consolidated  Statements of Stockholders’ Equity for the Years Ended December 31, 2000,  2001 and 2002 | F-5 |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2000, 2001 and 2002                 | F-6 |
| Notes to  Consolidated Financial Statements                                                                 | F-7 |

 

F-1

----

 

**REPORT****OF ERNST& YOUNG LLP, INDEPENDENT AUDITORS**

 

Board of Directors

VCampus Corporation

 

We have audited the accompanying consolidated balancesheets of VCampus Corporation as of December 31, 2001 and 2002, and the relatedconsolidated statements of operations, stockholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2002. Our audits alsoincluded the financial statement schedule listed in the Index at Item15(a).  These financial statements andschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements and schedule based onour audits.

 

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

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of VCampus Corporation at December 31, 2001 and 2002, and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2002, in conformity with accountingprinciples generally accepted in the United States.  Also, in our opinion, the related financial statement schedule,when considered in relation to the basic financial statements taken as a whole,presents fairly in all material respects the information set forth therein.

 

As discussed in Note 2 and Note 6 to the consolidatedfinancial statements, effective January 1, 2002, VCampus Corporation adoptedStatement of Financial Accounting Standards No. 142, “Accounting for Goodwilland Other Intangible Assets.” As discussed in Note 2, effective April 1, 2002,VCampus Corporation adopted Statement of Financial Accounting Standards, No.145 “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASBStatement No. 13 and Technical Corrections.”

 
|                                                                        | /s/ ERNST &  YOUNG LLP |
|-----------------------------------------------------------------------------|----------------------------|
|                                                                        |
| McLean, Virginia                                                            |
| March 14, 2003, except  for Note 17, as to which the date is March 28, 2003 |

 

F-2

----

 

**VCAMPUS CORPORATION**

 

**CONSOLIDATED BALANCE SHEETS**

** **
|                                                                                                                                                                                                                                                                                                                |   | **December  31  2001** |       | **December  31  2002** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|------------------------|------------|
| ASSETS                                                                                                                                                                                                                                                                                                              |   |                   | ** ** |                   | ** ** |
|                                                                                                                                                                                                                                                                                                                |   |                   | ** ** |                   | ** ** |
| Current  assets:                                                                                                                                                                                                                                                                                                    |   |                   |       |                   |       |
| Cash  and cash equivalents                                                                                                                                                                                                                                                                                          |   | $                      | 2,027,771  |                   | $          | 727,466 |   |
| Accounts  receivable, less allowance of $99,000 and $31,000 at December 31, 2001  and  2002, respectively                                                                                                                                                                                                      |   | 668,180                |       | 354,340                |       |
| Loans  receivable from related party                                                                                                                                                                                                                                                                                |   | 140,183                |       | 116,753                |       |
| Loans  receivable – current                                                                                                                                                                                                                                                                                    |   | 159,736                |       | 38,689                 |       |
| Prepaid  expenses and other current assets                                                                                                                                                                                                                                                                          |   | 287,393                |       | 659,587                |       |
| Total  current assets                                                                                                                                                                                                                                                                                               |   | 3,283,263              |       | 1,896,835              |       |
| Property  and equipment, net                                                                                                                                                                                                                                                                                        |   | 944,795                |       | 328,296                |       |
| Capitalized  software costs and courseware development costs, net                                                                                                                                                                                                                                                   |   | 1,146,230              |       | 814,730                |       |
| Acquired  online publishing rights, net                                                                                                                                                                                                                                                                             |   | 6,230                  |       | —                 |       |
| Loans  receivable — less current portion                                                                                                                                                                                                                                                                       |   | 95,441                 |       | 65,502                 |       |
| Other  assets                                                                                                                                                                                                                                                                                                       |   | 242,886                |       | 190,446                |       |
| Other  intangible assets, net                                                                                                                                                                                                                                                                                       |   | 964,347                |       | 748,492                |       |
| Goodwill,  net                                                                                                                                                                                                                                                                                                      |   | 328,317                |       | 328,317                |       |
| Total  assets                                                                                                                                                                                                                                                                                                       |   | $                      | 7,011,509  |                   | $          | 4,372,618 |   |
|                                                                                                                                                                                                                                                                                                                |   |                   |       |                   |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                                                                          |   |                   |       |                   |       |
| Current  liabilities:                                                                                                                                                                                                                                                                                               |   |                   |       |                   |       |
| Accounts  payable                                                                                                                                                                                                                                                                                                   |   | $                      | 1,261,799  |                   | $          | 950,262 |   |
| Accrued  expenses                                                                                                                                                                                                                                                                                                   |   | 1,203,103              |       | 827,860                |       |
| Capital  lease obligation — current portion                                                                                                                                                                                                                                                                    |   | 206,924                |       | 23,529                 |       |
| Notes  payable — current portion                                                                                                                                                                                                                                                                               |   | 492,351                |       | 140,159                |       |
| Deferred  revenues                                                                                                                                                                                                                                                                                                  |   | 1,003,892              |       | 783,003                |       |
| Total  current liabilities                                                                                                                                                                                                                                                                                          |   | 4,168,069              |       | 2,724,813              |       |
|                                                                                                                                                                                                                                                                                                                |   |                   |       |                   |       |
| Long-term  liabilities:                                                                                                                                                                                                                                                                                             |   |                   |       |                   |       |
| Capital  lease obligation — less current portion                                                                                                                                                                                                                                                               |   | 29,707                 |       | —                 |       |
| Total  liabilities                                                                                                                                                                                                                                                                                                  |   | 4,197,776              |       | 2,724,813              |       |
|                                                                                                                                                                                                                                                                                                                |   |                   |       |                   |       |
| Stockholders’  equity:                                                                                                                                                                                                                                                                                         |   |                   |       |                   |       |
| Series  C convertible Preferred Stock, $0.01 par value per share; aggregate  liquidation preference of $7,910,172 at December 31, 2001 and 2002; 1,000,000  shares authorized; 623,339 shares issued and outstanding at December 31, 2001  and 2002                                                                 |   | 6,233                  |       | 6,233                  |       |
| Series  D convertible Preferred Stock, $0.01 par value per share; aggregate  liquidation preference of  $8,363,924  at December 31, 2001 and 2002; 1,200,000 shares authorized; 1,013,809 shares  issued and outstanding at December 31, 2001 and 2002                                                         |   | 10,138                 |       | 10,138                 |       |
| Series  E convertible Preferred Stock, $0.01 par value per share; aggregate  liquidation preference of $1,940,467 and $1,816,668 at December 31, 2001 and  2002, respectively;  3,000,000 shares  authorized; 545,075 and 574,895 shares issued and outstanding at December 31,  2001 and 2002, respectively   |   | 5,451                  |       | 5,749                  |       |
| Series  F convertible Preferred Stock, $0.01 par value per share; aggregate  liquidation preference of $924,993 and $1,050,000 at December 31, 2001 and  2002, respectively; 3,000,000 shares authorized; 2,642,836 and 3,000,000  shares issued and outstanding at December   31, 2001 and 2002, respectively |   | 26,428                 |       | 30,000                 |       |
| Series  F-1 convertible Preferred Stock, $0.01 par value per share; aggregate  liquidation preference of $0 and $510,445 at December 31, 2001 and 2002,  respectively; 1,458,413 shares authorized; 0 and 1,458,413 shares issued and  outstanding at December  31, 2001 and,  2002, respectively              |   | —                 |       | 14,584                 |       |
| Series  F-2 convertible Preferred Stock, $0.01 par value per share; aggregate  liquidation preference of $0 and $965,230 at December 31, 2001 and 2002,  respectively; 60,000 shares authorized; 0 and 27,578 shares issued and  outstanding at December 31, 2001 and 2002,   respectively                     |   | —                 |       | 276                    |       |
| Series  G convertible Preferred Stock, $0.01 par value per share; aggregate  liquidation preference of $0 and $1,091,652 at December 31, 2001 and December  31, 2002, respectively; 80,000 shares authorized; 0, and 49,320 shares issued  and outstanding at December 31, 2001 and 2002, respectively              |   | —                 |       | 492                    |       |
| Common  Stock, $0.01 par value per share; 36,000,000 shares authorized; 1,469,868 and  1,573,904 shares issued and outstanding at December 31, 2001 and 2002,  respectively                                                                                                                                         |   | 14,699                 |       | 15,739                 |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                         |   | 79,910,507             |       | 85,771,622             |       |
| Series  F convertible Preferred Stock subscribed                                                                                                                                                                                                                                                                    |   | (100,000               | )          | —                 |       |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                |   | (77,059,723            | )          | (84,207,028            | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                                                                    |   | 2,813,733              |       | 1,647,805              |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                                                                    |   | $                      | 7,011,509  |                   | $          | 4,372,618 |   |

 

The accompanyingnotes are an integral part of the financial statements.

 

F-3

----

 

**VCAMPUS CORPORATION**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

** **
|                                                                           |   | **Years ended  December 31,** |        |
|--------------------------------------------------------------------------------|--------|-------------------------------|-------------|
|                                                                           |   | **2000**                      |        | **2001** |   | **2002** |   |
| Revenues:                                                                      |   |                          |        |   |   |   |   |
| Online  tuition revenues                                                       |   | $                             | 5,064,889   |   | $ | 5,944,764 |   | $ | 5,606,214 |   |
| Virtual  campus software revenues                                              |   | 115,093                       |        | 71,863 |   | — |   |
| Online  development and other revenues                                         |   | 1,021,811                     |        | 687,232 |   | 495,425 |   |
| Product  sales revenues                                                        |   | 413,999                       |        | 45,038 |   | — |   |
| Other  service revenues                                                        |   | 175,399                       |        | 121,750 |   | 100,035 |   |
| Instructor-led  training revenues                                              |   | 2,664,892                     |        | 102,584 |   | — |   |
| Net  revenues                                                                  |   | 9,456,083                     |        | 6,973,231 |   | 6,201,674 |   |
| Costs  and expenses:                                                           |   |                          |        |   |   |   |   |
| Cost  of revenues                                                              |   | 3,296,284                     |        | 1,093,285 |   | 1,461,663 |   |
| Sales  and marketing                                                           |   | 6,241,397                     |        | 4,716,729 |   | 2,964,664 |   |
| Product  development and operations                                            |   | 3,555,093                     |        | 2,273,145 |   | 2,535,849 |   |
| General  and administrative                                                    |   | 2,759,682                     |        | 2,044,716 |   | 1,692,851 |   |
| Depreciation  and amortization                                                 |   | 2,916,152                     |        | 2,154,152 |   | 1,355,837 |   |
| Compensation  expense in connection with the acquisition of HTR, Inc           |   | 654,294                       |        | — |   | — |   |
| Reorganization  and other non-recurring charges                                |   | 2,261,335                     |        | 187,762 |   | 192,000 |   |
| Stock-based  compensation                                                      |   | 361,391                       |        | 440,898 |   | 76,172 |   |
| Total  costs and expenses                                                      |   | 22,045,628                    |        | 12,910,687 |   | 10,279,036 |   |
|                                                                           |   |                          |        |   |   |   |   |
| Loss  from operations                                                          |   | (12,589,545                   | )           | (5,937,456 | ) | (4,077,362 | ) |
|                                                                           |   |                          |        |   |   |   |   |
| Other  income                                                                  |   | —                        |        | — |   | 421,842 |   |
| Interest  (expense) income                                                     |   | 165,800                       |        | 4,563 |   | (220,145 | ) |
| Loss  on debt extinguishment                                                   |   | —                        |        | — |   | (503,246 | ) |
| Loss  before cumulative effect of change in accounting principle               |   | (12,423,745                   | )           | (5,932,893 | ) | (4,378,911 | ) |
| Cumulative  effect of change in accounting principle                           |   | (461,000                      | )           | — |   | — |   |
| Net  loss                                                                      |   | (12,884,745                   | )           | (5,932,893 | ) | (4,378,911 | ) |
| Dividends  to preferred stockholders                                           |   | (1,152,819                    | )           | (649,147 | ) | (2,768,394 | ) |
| Net  loss attributable to common stockholders                                  |   | $                             | (14,037,564 | ) | $ | (6,582,040 | ) | $ | (7,147,305 | ) |
|                                                                           |   |                          |        |   |   |   |   |
| Net  loss per share before cumulative effect of change in accounting principle |   | $                             | (17.07      | ) | $ | (5.23 | ) | $ | (4.79 | ) |
| Cumulative  effect of change in accounting principle                           |   | (0.58                         | )           | — |   | — |   |
| Basic  and diluted net loss per share                                          |   | $                             | (17.65      | ) | $ | (5.23 | ) | $ | (4.79 | ) |
| Pro  forma amounts assuming the accounting change is applied retroactively:    |   |                          |        |   |   |   |   |
| Net  loss attributable to common stockholders                                  |   | $                             | (13,576,564 | ) |   |   |   |   |
| Net  loss per share, basic and diluted                                         |   | $                             | (17.00      | ) |   |   |   |   |

 

The accompanyingnotes are an integral part of the financial statements.

 

F-4

----

 

# **VCampus Corporation**

 

**ConsolidatedStatements of Stockholders’ Equity**

** **
|                                                                                                     |   | **Series C Convertible  Preferred Stock** |   | **Series D Convertible  Preferred Stock** |   | **Series E Convertible  Preferred Stock** |      |
|----------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------|-----------|
|                                                                                                     |   | **Shares**                                |   | **Amount**                                |   | **Shares**                                |      | **Amount** |   | **Shares** |   | **Amount** |   |
|                                                                                                     |   |                                      |   |                                      |   |                                      |      |   |   |   |   |   |   |
| Balance  at December 31, 1999                                                                            |   | 623,339                                   |   | $                                         | 6,233  |                                      | 1,073,370 |   | $ | 10,734 |   | 214,928 |   | $ | 2,149 |   |
| Issuance  of Series E convertible Preferred Stock                                                        |   | —                                    |   | —                                    |   | —                                    |      | — |   | 963,092 |   | 9,631 |   |
| Issuance  of Series E convertible Preferred Stock for payment of Series E dividends                      |   | —                                    |   | —                                    |   | —                                    |      | — |   | 18,040 |   | 181 |   |
| Issuance  of Common Stock                                                                                |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Conversion  of Preferred Stock to Common Stock                                                           |   | —                                    |   | —                                    |   | (2,727                                    | )         | (28 | ) | (621,503 | ) | (6,215 | ) |
| Issuance  of Common Stock primarily in connection with conversion of debt to equity                      |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Issuance  of Common Stock for payment of Series D Convertible Preferred Stock dividends                  |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Issuance  of Common Stock in connection with exercise of options and exercise of  warrants               |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Cumulative  effect of change in accounting principle.                                                    |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Compensatory  stock, stock options and warrants                                                          |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Net  loss                                                                                                |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Dividends  on convertible preferred stock                                                                |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Balance  at December 31, 2000                                                                            |   | 623,339                                   |   | $                                         | 6,233  |                                      | 1,070,643 |   | $ | 10,706 |   | 574,557 |   | $ | 5,746 |   |
| Issuance  of Series E convertible Preferred Stock                                                        |   | —                                    |   | —                                    |   | —                                    |      | — |   | 187,500 |   | 1,875 |   |
| Issuance  of Preferred Stock-Series E dividends                                                          |   | —                                    |   | —                                    |   | —                                    |      | — |   | 89,472 |   | 895 |   |
| Issuance  of Series F convertible Preferred Stock                                                        |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Issuance  of Common Stock                                                                                |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Conversion  of Preferred Stock to Common Stock                                                           |   | —                                    |   | —                                    |   | (56,834                                   | )         | (568 | ) | (306,454 | ) | (3,065 | ) |
| Issuance  of Common Stock primarily in connection with conversion of debt to equity                      |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Issuance  of common stock-Series D dividends                                                             |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Exercise  of options and warrants                                                                        |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Stock,  stock options and warrants issued for services and in connection with debt  and equity offerings |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Net  loss                                                                                                |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Dividends  on convertible preferred stock                                                                |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Balance  at December 31, 2001                                                                            |   | 623,339                                   |   | $                                         | 6,233  |                                      | 1,013,809 |   | $ | 10,138 |   | 545,075 |   | $ | 5,451 |   |
|                                                                                                     |   |                                      |   |                                      |   |                                      |      |   |   |   |   |   |   |
| Issuance  of Preferred Stock for payment of Series E Dividends                                           |   | —                                    |   | —                                    |   | —                                    |      | — |   | 29,820 |   | 298 |   |
| Issuance  of Series F convertible Preferred Stock                                                        |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Issuance  of Series F-1 convertible Preferred Stock                                                      |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Issuance  of Series F-2 convertible Preferred Stock                                                      |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Issuance  of Series F-2 convertible Preferred Stock-primarily in connection with  cancellation of debt   |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Issuance  of Series G convertible Preferred Stock                                                        |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Series  F convertible Preferred Stock subscribed                                                         |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Issuance  of Common Stock in connection with reverse stock split                                         |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Issuance  of common stock – for payment of Series D dividends                                       |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Exercise  of options & warrants                                                                      |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Compensatory  stock, stock options and warrants                                                          |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Net  loss                                                                                                |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Dividends  on convertible preferred stock                                                                |   | —                                    |   | —                                    |   | —                                    |      | — |   | — |   | — |   |
| Balance  at December 31, 2002                                                                            |   | 623,339                                   |   | $                                         | 6,233  |                                      | 1,013,809 |   | $ | 10,138 |   | 545,075 |   | $ | 5,749 |   |

 
|                                                                                                     |   | **Series F Convertible  Preferred Stock** |   | **Series F-1 Convertible  Preferred Stock** |   | **Series F-2 Convertible  Preferred Stock** |      |
|----------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|---------------------------------------------|--------|---------------------------------------------|-----------|
|                                                                                                     |   | **Shares**                                |   | **Amount**                                  |   | **Shares**                                  |      | **Amount** |   | **Shares** |   | **Amount** |   |
|                                                                                                     |   |                                      |   |                                        |   |                                        |      |   |   |   |   |   |   |
| Balance  at December 31, 1999                                                                            |   | —                                    |   | $                                           | — |                                        | —    |   | $ | — |   | — |   | $ | — |   |
| Issuance  of Series E convertible Preferred Stock                                                        |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Issuance  of Series E convertible Preferred Stock for payment of Series E dividends                      |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Issuance  of Common Stock                                                                                |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Conversion  of Preferred Stock to Common Stock                                                           |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Issuance  of Common Stock primarily in connection with conversion of debt to equity                      |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Issuance  of Common Stock for payment of Series D Convertible Preferred Stock dividends                  |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Issuance  of Common Stock in connection with exercise of options and exercise of  warrants               |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Cumulative  effect of change in accounting principle.                                                    |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Compensatory  stock, stock options and warrants                                                          |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Net  loss                                                                                                |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Dividends  on convertible preferred stock                                                                |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Balance  at December 31, 2000                                                                            |   | —                                    |   | $                                           | — |                                        | —    |   | $ | — |   | — |   | $ | — |   |
| Issuance  of Series E convertible Preferred Stock                                                        |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Issuance  of Preferred Stock-Series E dividends                                                          |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Issuance  of Series F convertible Preferred Stock                                                        |   | 2,642,836                                 |   | 26,428                                      |   | —                                      |      | — |   | — |   | — |   |
| Issuance  of Common Stock                                                                                |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Conversion  of Preferred Stock to Common Stock                                                           |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Issuance  of Common Stock primarily in connection with conversion of debt to equity                      |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Issuance  of common stock-Series D dividends                                                             |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Exercise  of options and warrants                                                                        |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Stock,  stock options and warrants issued for services and in connection with debt  and equity offerings |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Net  loss                                                                                                |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Dividends  on convertible preferred stock                                                                |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Balance  at December 31, 2001                                                                            |   | 2,642,836                                 |   | $                                           | 26,428 |                                        | —    |   | $ | — |   | — |   | $ | — |   |
|                                                                                                     |   |                                      |   |                                        |   |                                        |      |   |   |   |   |   |   |
| Issuance  of Preferred Stock for payment of Series E Dividends                                           |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Issuance  of Series F convertible Preferred Stock                                                        |   | 357,164                                   |   | 3,572                                       |   | —                                      |      | — |   | — |   | — |   |
| Issuance  of Series F-1 convertible Preferred Stock                                                      |   | —                                    |   | —                                      |   | 1,458,413                                   |      | 14,584 |   | — |   | — |   |
| Issuance  of Series F-2 convertible Preferred Stock                                                      |   | —                                    |   | —                                      |   | —                                      |      | — |   | 17,859 |   | 179 |   |
| Issuance  of Series F-2 convertible Preferred Stock-primarily in connection with  cancellation of debt   |   | —                                    |   | —                                      |   | —                                      |      | — |   | 9,719 |   | 97 |   |
| Issuance  of Series G convertible Preferred Stock                                                        |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Series  F convertible Preferred Stock subscribed                                                         |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Issuance  of Common Stock in connection with reverse stock split                                         |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Issuance  of common stock – for payment of Series D dividends                                       |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Exercise  of options & warrants                                                                      |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Compensatory  stock, stock options and warrants                                                          |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Net  loss                                                                                                |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Dividends  on convertible preferred stock                                                                |   | —                                    |   | —                                      |   | —                                      |      | — |   | — |   | — |   |
| Balance  at December 31, 2002                                                                            |   | 3,000,000                                 |   | $                                           | 30,000 |                                        | 1,458,413 |   | $ | 14,584 |   | 27,578 |   | $ | 276 |   |

 
|                                                                                                     |   | **Series G Convertible  Preferred Stock** |       | **Common Stock** |       | **Additional  Paid in Capital** |      | **Preferred  Stock  Subscribed** |   |
|----------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|------------------|------------|---------------------------------|-----------|----------------------------------|--------|
| **Shares**                                                                                               |   | **Amount**                                | **Shares** |             | **Amount** |
|                                                                                                     |   |                                      |       |             |       |                            |      |                             |   |   |   |   |   |
| Balance  at December 31, 1999                                                                            |   | —                                    |       | $                | —     |                            | 568,519   |                             | $      | 5,685 |   | $ | 58,629,233 |   | $ | — |   |
| Issuance  of Series E convertible Preferred Stock                                                        |   | —                                    |       | —           |       | —                          |      | —                           |   | 4,315,006 |   | — |   |
| Issuance  of Series E convertible Preferred Stock for payment of Series E dividends                      |   | —                                    |       | —           |       | —                          |      | —                           |   | (181 | ) | — |   |
| Issuance  of Common Stock                                                                                |   | —                                    |       | —           |       | 205,335                         |      | 2,053                            |   | 6,682,890 |   | — |   |
| Conversion  of Preferred Stock to Common Stock                                                           |   | —                                    |       | —           |       | 62,423                          |      | 624                              |   | 5,619 |   | — |   |
| Issuance  of Common Stock primarily in connection with conversion of debt to equity                      |   | —                                    |       | —           |       | 48,257                          |      | 483                              |   | 1,184,755 |   | — |   |
| Issuance  of Common Stock for payment of Series D Convertible Preferred Stock dividends                  |   | —                                    |       | —           |       | 24,507                          |      | 245                              |   | 295,327 |   | — |   |
| Issuance  of Common Stock in connection with exercise of options and exercise of  warrants               |   | —                                    |       | —           |       | 41,965                          |      | 420                              |   | 876,334 |   | — |   |
| Cumulative  effect of change in accounting principle.                                                    |   | —                                    |       | —           |       | —                          |      | —                           |   | 461,000 |   | — |   |
| Compensatory  stock, stock options and warrants                                                          |   | —                                    |       | —           |       | —                          |      | —                           |   | 361,391 |   | — |   |
| Net  loss                                                                                                |   | —                                    |       | —           |       | —                          |      | —                           |   | — |   | — |   |
| Dividends  on convertible preferred stock                                                                |   | —                                    |       | —           |       | —                          |      | —                           |   | 773,228 |   | — |   |
| Balance  at December 31, 2000                                                                            |   | —                                    |       | $                | —     |                            | 951,006   |                             | $      | 9,510 |   | $ | 73,584,602 |   | $ | — |   |
| Issuance  of Series E convertible Preferred Stock                                                        |   | —                                    |       | —           |       | —                          |      | —                           |   | 186,453 |   | — |   |
| Issuance  of Preferred Stock-Series E dividends                                                          |   | —                                    |       | —           |       | —                          |      | —                           |   | (895 | ) | — |   |
| Issuance  of Series F convertible Preferred Stock                                                        |   | —                                    |       | —           |       | —                          |      | —                           |   | 750,214 |   | (100,000 | ) |
| Issuance  of Common Stock                                                                                |   | —                                    |       | —           |       | 313,738                         |      | 3,137                            |   | 2,912,565 |   | — |   |
| Conversion  of Preferred Stock to Common Stock                                                           |   | —                                    |       | —           |       | 36,328                          |      | 363                              |   | 3,270 |   | — |   |
| Issuance  of Common Stock primarily in connection with conversion of debt to equity                      |   | —                                    |       | —           |       | 118,378                         |      | 1,184                            |   | 1,156,554 |   | — |   |
| Issuance  of common stock-Series D dividends                                                             |   | —                                    |       | —           |       | 49,461                          |      | 495                              |   | 278,298 |   | — |   |
| Exercise  of options and warrants                                                                        |   | —                                    |       | —           |       | 85                              |      | 1                                |   | 101 |   | — |   |
| Stock,  stock options and warrants issued for services and in connection with debt  and equity offerings |   | —                                    |       | —           |       | 872                             |      | 9                                |   | 1,001,730 |   | — |   |
| Net  loss                                                                                                |   | —                                    |       | —           |       | —                          |      | —                           |   | — |   | — |   |
| Dividends  on convertible preferred stock                                                                |   | —                                    |       | —           |       | —                          |      | —                           |   | 37,615 |   | — |   |
| Balance  at December 31, 2001                                                                            |   | —                                    |       | $                | —     |                            | 1,469,868 |                             | $      | 14,699 |   | $ | 79,910,507 |   | $ | (100,000 | ) |
|                                                                                                     |   |                                      |       |             |       |                            |      |                             |   |   |   |   |   |
| Issuance  of Preferred Stock for payment of Series E Dividends                                           |   | —                                    |       | —           |       | —                          |      | —                           |   | 10,655 |   | — |   |
| Issuance  of Series F convertible Preferred Stock                                                        |   | —                                    |       | —           |       | —                          |      | —                           |   | 121,435 |   | — |   |
| Issuance  of Series F-1 convertible Preferred Stock                                                      |   | —                                    |       | —           |       | —                          |      | —                           |   | 583,894 |   | — |   |
| Issuance  of Series F-2 convertible Preferred Stock                                                      |   | —                                    |       | —           |       | —                          |      | —                           |   | 604,886 |   | — |   |
| Issuance  of Series F-2 convertible Preferred Stock-primarily in connection with  cancellation of debt   |   | —                                    |       | —           |       | —                          |      | —                           |   | 594,198 |   | — |   |
| Issuance  of Series G convertible Preferred Stock                                                        |   | 49,320                                    |       | 492              |       | —                          |      | —                           |   | 1,256,337 |   | — |   |
| Series  F convertible Preferred Stock subscribed                                                         |   | —                                    |       | —           |       | —                          |      | —                           |   | — |   | 100,000 |   |
| Issuance  of Common Stock in connection with reverse stock split                                         |   | —                                    |       | —           |       | 73                              |      | —                           |   | — |   | — |   |
| Issuance  of common stock – for payment of Series D dividends                                       |   | —                                    |       | —           |       | 81,325                          |      | 813                              |   | 277,952 |   | — |   |
| Exercise  of options & warrants                                                                      |   | —                                    |       | —           |       | 1,844                           |      | 19                               |   | 1,078 |   | — |   |
| Compensatory  stock, stock options and warrants                                                          |   | —                                    |       | —           |       | 20,794                          |      | 208                              |   | 2,410,679 |   | — |   |
| Net  loss                                                                                                |   | —                                    |       | —           |       | —                          |      | —                           |   | — |   | — |   |
| Dividends  on convertible preferred stock                                                                |   | —                                    |       | —           |       | —                          |      | —                           |   | — |   | — |   |
| Balance  at December 31, 2002                                                                            |   | 49,320                                    |       | $                | 492        |                            | 1,573,904 |                             | $      | 15,739 |   | $ | 85,771,622 |   | $ | — |   |

 
|                                                                                                     |   | **Accumulated Defecit** |        | **Total Stockholder’s Equity** |   |
|----------------------------------------------------------------------------------------------------------|--------|-------------------------|-------------|-------------------------------------|--------|
|                                                                                                     |   |                    |        |                                |   |
| Balance  at December 31, 1999                                                                            |   | $                       | (56,631,829 | )                                   | $      | 2,022,205 |   |
| Issuance  of Series E convertible Preferred Stock                                                        |   | —                  |        | 4,324,637                           |   |
| Issuance  of Series E convertible Preferred Stock for payment of Series E dividends                      |   | —                  |        | —                              |   |
| Issuance  of Common Stock                                                                                |   | —                  |        | 6,684,943                           |   |
| Conversion  of Preferred Stock to Common Stock                                                           |   | —                  |        | —                              |   |
| Issuance  of Common Stock primarily in connection with conversion of debt to equity                      |   | —                  |        | 1,185,238                           |   |
| Issuance  of Common Stock for payment of Series D Convertible Preferred Stock dividends                  |   | —                  |        | 295,572                             |   |
| Issuance  of Common Stock in connection with exercise of options and exercise of  warrants               |   | —                  |        | 876,754                             |   |
| Cumulative  effect of change in accounting principle.                                                    |   | —                  |        | 461,000                             |   |
| Compensatory  stock, stock options and warrants                                                          |   | —                  |        | 361,391                             |   |
| Net  loss                                                                                                |   | (12,884,745             | )           | (12,884,745                         | )      |
| Dividends  on convertible preferred stock                                                                |   | (1,068,842              | )           | (295,614                            | )      |
| Balance  at December 31, 2000                                                                            |   | $                       | (70,585,416 | )                                   | $      | 3,031,381 |   |
| Issuance  of Series E convertible Preferred Stock                                                        |   | —                  |        | 188,328                             |   |
| Issuance  of Preferred Stock-Series E dividends                                                          |   | —                  |        | —                              |   |
| Issuance  of Series F convertible Preferred Stock                                                        |   | —                  |        | 676,642                             |   |
| Issuance  of Common Stock                                                                                |   | —                  |        | 2,915,702                           |   |
| Conversion  of Preferred Stock to Common Stock                                                           |   | —                  |        | —                              |   |
| Issuance  of Common Stock primarily in connection with conversion of debt to equity                      |   | —                  |        | 1,157,738                           |   |
| Issuance  of common stock-Series D dividends                                                             |   | —                  |        | 278,793                             |   |
| Exercise  of options and warrants                                                                        |   | —                  |        | 102                                 |   |
| Stock,  stock options and warrants issued for services and in connection with debt  and equity offerings |   | (225,000                | )           | 776,739                             |   |
| Net  loss                                                                                                |   | (5,932,893              | )           | (5,932,893                          | )      |
| Dividends  on convertible preferred stock                                                                |   | (316,414                | )           | (278,799                            | )      |
| Balance  at December 31, 2001                                                                            |   | $                       | (77,059,723 | )                                   | $      | 2,813,733 | ) |
|                                                                                                     |   |                    |        |                                |   |
| Issuance  of Preferred Stock for payment of Series E Dividends                                           |   | (10,954                 | )           | (1                                  | )      |
| Issuance  of Series F convertible Preferred Stock                                                        |   | —                  |        | 125,007                             |   |
| Issuance  of Series F-1 convertible Preferred Stock                                                      |   | (44,282                 | )           | 554,196                             |   |
| Issuance  of Series F-2 convertible Preferred Stock                                                      |   | —                  |        | 605,065                             |   |
| Issuance  of Series F-2 convertible Preferred Stock-primarily in connection with  cancellation of debt   |   | (81,894                 | )           | 512,401                             |   |
| Issuance  of Series G convertible Preferred Stock                                                        |   | (198,166                | )           | 1,058,663                           |   |
| Series  F convertible Preferred Stock subscribed                                                         |   | —                  |        | 100,000                             |   |
| Issuance  of Common Stock in connection with reverse stock split                                         |   | —                  |        | —                              |   |
| Issuance  of common stock – for payment of Series D dividends                                       |   | —                  |        | 278,765                             |   |
| Exercise  of options & warrants                                                                      |   | —                  |        | 1,097                               |   |
| Compensatory  stock, stock options and warrants                                                          |   | (2,154,298              | )           | 256,590                             |   |
| Net  loss                                                                                                |   | (4,378,911              | )           | (4,378,911                          | )      |
| Dividends  on convertible preferred stock                                                                |   | (278,800                | )           | (278,800                            | )      |
| Balance  at December 31, 2002                                                                            |   | $                       | (84,207,028 | )                                   | $      | 1,647,805 |   |

 

The accompanyingnotes are an integral part of the financial statements.

 

F-5

----

 

**VCAMPUS CORPORATION**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                          |   | **Years  ended December 31,** |        |
|-----------------------------------------------------------------------------------------------|--------|-------------------------------|-------------|
|                                                                                          |   | **2000**                      |        | **2001** |   | **2002** |   |
| **Operating  Activities**                                                                     |   |                          |        |   |   |   |   |
| Net  loss                                                                                     |   | $                             | (12,884,745 | ) | $ | (5,932,893 | ) | $ | (4,378,911 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:                  |   |                          |        |   |   |   |   |
| Depreciation                                                                                  |   | 1,186,190                     |        | 1,095,703 |   | 694,998 |   |
| Amortization                                                                                  |   | 1,729,962                     |        | 1,058,449 |   | 660,839 |   |
| Bad  debt expense                                                                             |   | —                        |        | — |   | 6,833 |   |
| Loss  on debt extinguishment                                                                  |   | —                        |        | — |   | 503,246 |   |
| Impairment  of capitalized software and courseware development costs                          |   | —                        |        | — |   | 276,535 |   |
| Non-cash  stock option and stock warrant expense                                              |   | 361,391                       |        | 444,090 |   | 76,172 |   |
| Write-off  of intangible assets                                                               |   | 1,226,335                     |        | — |   | — |   |
| Write-off  of other assets                                                                    |   | 700,918                       |        | — |   | — |   |
| Write-off  of note receivable                                                                 |   | —                        |        | — |   | 120,693 |   |
| Debt  discount amortization                                                                   |   | —                        |        | — |   | 214,574 |   |
| Cumulative  effect of change in accounting principle                                          |   | 461,000                       |        | — |   | — |   |
| Increase  (decrease) in allowance for doubtful accounts                                       |   | 76,239                        |        | (118,471 | ) | (68,386 | ) |
| Changes  in operating assets and liabilities:                                                 |   |                          |        |   |   |   |   |
| Accounts  receivable                                                                          |   | 567,118                       |        | 156,266 |   | 382,225 |   |
| Prepaid  expenses and other current assets                                                    |   | 134,313                       |        | 93,746 |   | (438,353 | ) |
| Other  assets                                                                                 |   | (69,696                       | )           | 7,798 |   | 52,440 |   |
| Accounts  payable and accrued expenses                                                        |   | (2,529,207                    | )           | (296,903 | ) | (543,645 | ) |
| Deferred  revenues                                                                            |   | (425,713                      | )           | 238,322 |   | (220,889 | ) |
| Net  cash used in operating activities                                                        |   | (9,465,895                    | )           | (3,253,893 | ) | (2,661,629 | ) |
| **Investing  Activities**                                                                     |   |                          |        |   |   |   |   |
| Purchases  of property and equipment                                                          |   | (1,417,720                    | )           | (32,863 | ) | (85,539 | ) |
| Capitalized  courseware development costs                                                     |   | (625,528                      | )           | (453,257 | ) | (383,789 | ) |
| Proceeds  from loans receivable from related party                                            |   | —                        |        | — |   | 23,097 |   |
| Interest  on loans receivable from related party                                              |   | (8,000                        | )           | (8,001 | ) | (6,500 | ) |
| Proceeds  from sale of subsidiaries                                                           |   | 300,334                       |        | — |   | — |   |
| Proceeds  from loans receivable                                                               |   | —                        |        | 63,267 |   | 37,085 |   |
| Advances  under loans receivable                                                              |   | (81,506                       | )           | (10,199 | ) | (6,792 | ) |
| Net  cash used in investing activities                                                        |   | (1,832,420                    | )           | (441,053 | ) | (422,438 | ) |
| **Financing  Activities**                                                                     |   |                          |        |   |   |   |   |
| Proceeds  from issuance of Common Stock                                                       |   | 7,548,061                     |        | 2,763,701 |   | 1,096 |   |
| Proceeds  from the issuance of Series E convertible Preferred Stock                           |   | 4,324,637                     |        | 188,328 |   | — |   |
| Proceeds  from the issuance of Series F convertible Preferred Stock, net of offering  costs   |   | —                        |        | 752,642 |   | 225,007 |   |
| Proceeds  from the issuance of Series F-2 convertible Preferred Stock, net of offering  costs |   | —                        |        | — |   | 605,065 |   |
| Proceeds  from the issuance of Series G convertible Preferred Stock, net of offering  costs   |   | —                        |        | — |   | 1,058,663 |   |
| Payments  on capital lease obligations                                                        |   | —                        |        | (127,799 | ) | (206,069 | ) |
| Proceeds  from notes payable                                                                  |   | —                        |        | 1,902,641 |   | 100,000 |   |
| Repayments  of notes payable                                                                  |   | (535,634                      | )           | — |   | — |   |
| Net  cash provided by financing activities                                                    |   | 11,337,064                    |        | 5,479,513 |   | 1,783,762 |   |
| Net  (decrease) increase in cash and cash equivalents                                         |   | 38,749                        |        | 1,784,567 |   | (1,300,305 | ) |
| Cash  and cash equivalents at the beginning of the year                                       |   | 204,455                       |        | 243,204 |   | 2,027,771 |   |
| Cash  and cash equivalents at the end of the year                                             |   | $                             | 243,204     |   | $ | 2,027,771 |   | $ | 727,466 |   |
| **Supplemental  cash flow information:**                                                      |   |                          |        |   |   |   |   |
| Interest  paid                                                                                |   | $                             | 26,600      |   | $ | — |   | $ | — |   |

 

The accompanyingnotes are an integral part of the financial statements.

 

F-6

----

 

**VCAMPUS CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.             Organizationand Nature of Operations**

 

VCampus Corporation  (the “Company”) was incorporated in Virginiain 1984 and reincorporated in Delaware in 1985.  The Company is a leading e-learning Application ServicesProvider, or ASP, that manages and hosts turnkey, Internet-based learningenvironments for corporations, government agencies, institutions of highereducation, and associations. The Company has developed proprietary software forthe creation and hosting of a virtual campus, or “vcampus,” that enables itscustomers to offer Internet-based training to their customers, sales channelpartners, employees and students. The Company’s services cover a broad range ofe-learning programs, from enrollment and payment to course development anddelivery, as well as tracking of students’ progress and reporting of theresults.

 

**2.             Summaryof Significant Accounting Policies**

 

*Principles of Consolidation*

 

The consolidated financial statements include theaccounts of the Company and its wholly-owned subsidiaries. All significantintercompany accounts and transactions have been eliminated.

 

*Use of Estimates*

 

The preparation of the consolidated financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the consolidated financial statements and the reported amountsof revenues and expenses during the reporting period. Actual results coulddiffer from those estimates.

 

*Cash Equivalents*

 

Cash equivalents, which are stated at cost, consist ofhighly liquid investments with original maturities of three months or less.

 

#### *Non-Cash FinancingActivities*

 

In August 2001, the Company issued 10,000 shares ofits common stock with a value of $152,000 to a third party who assisted theCompany with its financing activities.  Upon completion of the December 2001 debt and equity financing,$76,000 of the total value of the shares was allocated to the Series FPreferred Stock offering as an equity issuance cost.  The remaining amount was allocated to the 8% debentures asdeferred debt issuance costs and will be recognized as interest expense overthe period the debentures are expected to be outstanding.

 

*Loans Receivable*

 

The Company periodically assesses the collectibilityof its loans receivable and records balances due at the amount it believesit will be able to collect during the term of the loan.  At December 31, 2001, the Company had a loanreceivable resulting from the 1999 sale of HTR’s Knowledgeworks businesstotaling approximately $123,000.  During2002, the Company determined that the loan receivable was impaired and wroteoff the remaining balance totaling approximately $121,000.  The Company recognized interest incomerelated to this loan receivable as earned.The Company recognized interest income related to this loan receivable ofapproximately $64,171 for the year ended December 31, 2000. No interest incomewas recognized for the years ended December 31, 2001 and 2002.

 

*Capitalized Software and Courseware Development Costs*

 

During 2000, 2001 and2002, the Company capitalized certain software and courseware developmentcosts. The Company capitalizes costs incurred during the development process,including payroll costs for employees who are directly associated with thedevelopment process and services performed by consultants. Amortization of suchcosts is based on the greater of (1) the ratio of current gross revenues to thesum of current and anticipated gross revenues, or (2) the straight-line methodover the remaining 

 

F-7

----

 

economic life of theVCampus or courseware, typically two to three years.  It is possible that those anticipated gross revenues, theremaining economic life of the products, or both, may be reduced as a result offuture events.  During 2000, 2001 and2002, the Company recognized amortization of capitalized software andcourseware development costs of $942,144, $533,931 and $438,754,respectively.  During 2002, the Companywrote off $276,535 in capitalized software and courseware development costs forcourses within the telecommunications industry segment determined to have nofuture value.  The write-off, whichrepresents the carrying value of the courses, has been included in productdevelopment costs in the 2002 statements of operations.

 

#### *Web SiteDevelopment Costs*

 

The Company accounts for web site development costs inaccordance with Emerging Issues Task Force Issue No. 00-2*, Accounting for Web Site Development Costs*(“EITF00-2”).  The implementation of EITF 00-2did not have a material impact on the Company’s financial position or resultsof operations.  In 2000, 2001 and 2002all web site development costs were incurred in the operating stage, includingmaintenance and minor enhancements and upgrades, and were expensed as incurred.

 

*Goodwill and Other Intangible Assets*

 

Goodwill and other intangibles represent theunamortized excess of the cost of acquiring subsidiary companies over the fairvalues of such companies’ net tangible assets at the dates of acquisition.

 

On January 1, 2002, the Company adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other IntangibleAssets” (SFAS 142).  In accordance withthe provisions of SFAS 142, the Company reclassified the net carrying value ofits workforce intangible asset recognized in connection with the acquisition ofHTR, Inc. ($57,818) into goodwill on January 1, 2002.  The workforce asset was comprised of at-will employees and nolonger met the criteria for recognition apart from goodwill.  Amortization of goodwill, including goodwillpreviously identified as a workforce intangible, ceased on January 1,2002.  The Company does not have anyindefinite-lived intangibles.  Inaccordance with SFAS 142, the Company reviewed the useful lives of itsintangible assets and determined that they remained appropriate.

 

In connection with the adoption of SFAS 142, theCompany performed an assessment of whether there were indicators that goodwillwas impaired at the date of adoption. To accomplish this, the Companyidentified its reporting units and determined the carrying value of eachreporting unit. The Company then determined the fair value of the reportingunit and compared it to the reporting unit’s carrying amount. To the extent thereporting unit’s carrying amount exceeds its fair value, an indication existsthat the reporting unit’s goodwill may be impaired and the Company must performthe second step of the impairment test. In the second step, the Company must compare the implied fair value ofthe reporting unit’s goodwill, determined by allocating the reporting unit’sfair value to all of its assets and liabilities in a manner similar to apurchase price allocation in accordance with SFAS 141, to its carrying amount,both of which would be measured as of the date of adoption.

 

The Company performed the initial goodwill impairmenttest required by SFAS 142 during the second quarter of fiscal 2002.  The Company considers itself to be a singlereporting unit.  Accordingly, all of theCompany’s goodwill is associated with the entire Company.  The Company performed its initial  impairment test and as of June 30, 2002,based on the Company’s market capitalization, there was no impairment ofgoodwill recorded upon implementation of SFAS 142.  The Company will continue to test for impairment on an annualbasis, coinciding with its fiscal year end, or on an interim basis ifcircumstances change that would more likely than not reduce the fair value ofthe Company’s reporting unit below its carrying amount.

 

*Impairment of Long-Lived Assets*

 

The Company accounts for long-lived assets inaccordance with the provisions of SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*(SFAS No. 144).  SFAS No. 144 requiresthat long-lived assets and certain identifiable intangibles be reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable.  Recoverability of assets is measured by comparing the carryingamount of an asset to future undiscounted net cash flows expected to begenerated by the asset.  If such assetsare considered to be impaired, the impairment to be recognized is measured bythe amount by which the carrying amount of the assets exceeds the fair value ofthe assets.  Assets to be disposed of bysale are reflected at the lower of their carrying amount or fair value lesscost to sell.

 

During 2000, the Company wrote off the remaininggoodwill, $1,226,000, recorded in connection with the acquisition of HTR as aresult of its decision to discontinue the majority of HTR’s non- onlinebusinesses as described in Note 7.

 

F-8

----

 

During 2002, the Company wrote off $276,535 incapitalized software and courseware development costs for courses within thetelecommunications industry segment, as a result of an impairmentanalysis.  The write-off has beenincluded in product development costs in the 2002 statement of operations.

 

*Revenue Recognition*

 

The Company currently derivesits revenues from the following sources — online tuition revenues, developmentand other revenues and other service revenues.

 

Online tuition revenues aregenerated primarily through three types of contracts: (i) higher educationpartners, (ii) corporate subscriptions, and (iii) corporate usage.  For higher education partners and corporatesubscriptions, revenue is recognized ratably (on a straight-line basis) overthe semester term and subscription period, respectively.  For corporate usage contracts, revenue isrecognized upon enrollment in a course. Once a student has enrolled in a course, he cannot cancel delivery of acourse or receive a refund.  Initialset-up fees related to all online tuition services are recognized ratably (on astraight-line basis) over the respective contract term.

 

Development and otherrevenues earned under courseware conversion contracts are recognized relativeto the Company’s proportionate performance based on the ratio that total costsincurred to date bear to the total estimated costs of the contract. Provisionsfor losses on contracts are made in the period in which they are determined.

 

Revenues for other servicesare recognized as the services are delivered.

 

In 2000, one customerrepresented approximately 12% of net revenues. In 2001 and 2002 two customers represented 19% and 11% and 31% and 11%,respectively, of  net revenues.

 

*Stock-Based Compensation*

 

SFAS No. 123, *Accountingfor Stock-Based Compensatio*n, allows companies to account forstock-based compensation using either the provisions of SFAS No. 123 or theprovisions of Accounting Principles Board Opinion (APB) No. 25, *Accounting for Stock Issued to Employees,*butrequires pro forma disclosure in the notes to the consolidated financialstatements as if the measurement provisions of SFAS No. 123 had been adopted.The Company accounts for its stock-based employee compensation in accordancewith APB No. 25.

 

Stock options and warrants granted to nonemployees areaccounted for using the fair value method in accordance with the SFAS No. 123and EITF 96-18, *Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Service*s.

 

The following table illustrates the pro forma effecton net loss attributable to common stockholders (net loss) and pro forma netloss per common share as if the Company had applied the fair value recognitionprovisions of SFAS No. 123 to stock-based compensation.

 

|                                                                                                                 |   | **2000**   |        | **2001**   |   | **2002**    |   |
|----------------------------------------------------------------------------------------------------------------------|--------|------------|-------------|------------|--------|-------------|--------|
| Pro  forma net loss:                                                                                                 |   |       |        |       |   |        |   |
| As  reported                                                                                                         |   | $          | (14,037,564 | )          | $      | (6,582,040  | )      | $ | (7,147,305 | ) |
| Add:  Non cash stock compensation included in reported net loss attributable to  common stockholders                 |   | 361,391    |        | 440,898    |   | 76,172      |   |
| Deduct:  Total employee non cash stock compensation expense determined under fair  value based method for all awards |   | (5,502,008 | )           | (5,501,385 | )      | (4,996,214  | )      |
| Pro  forma net loss                                                                                                  |   | $          | (19,178,181 | )          | $      | (11,642,527 | )      | $ | (12,067,347 | ) |
|                                                                                                                 |   |       |        |       |   |        |   |
| Net  loss per common share:                                                                                          |   |       |        |       |   |        |   |
| Basic  and diluted—as reported                                                                                  |   | $          | (17.65      | )          | $      | (5.23       | )      | $ | (4.79 | ) |
| Basic  and diluted—pro forma                                                                                    |   | $          | (24.11      | )          | $      | (9.25       | )      | $ | (8.08 | ) |

 

F-9

----

 

The effect of applying SFAS No. 123 on a pro forma net loss as statedabove is not necessarily representative of the effects on reported net loss forfuture years due to, among other things, the vesting period of the stockoptions and the fair value of additional options to be granted in the futureyears.

 

The fair value of each option grant is estimated onthe date of grant using the Black-Scholes option-pricing fair value model withthe following assumptions:

 

|                             |   | **2000** |   | **2001** |   | **2002** |   |
|----------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                             |   |     |   |     |   |     |   |
| Dividend  yield                  |   | 0        | %      | 0        | %      | 0        | %      |
| Volatility                       |   | 69       | %      | 133      | %      | 133      | %      |
| Average  risk-free interest rate |   | 6.50     | %      | 4.78     | %      | 4.39     | %      |
| Expected  term                   |   | 7 years  |   | 7 years  |   | 7 years  |   |

 

*Concentration of Credit Risk*

 

The Company performs ongoing credit evaluations of itscustomers’ financial condition and generally does not require collateral. TheCompany maintains reserves for credit losses, and such losses have been withinmanagement’s expectations.

 

Two customers represented 12% and 13%, respectively ofaccounts receivable at December 31, 2001. One customer represented 19% of accounts receivable at December 31,2002.

#### * *

#### *FinancialInstruments*

 

The carrying value of the Company’s financialinstruments, including cash and cash equivalents, accounts receivable, accountspayable, loans receivable and loans payable approximates their fair values.

 

*Royalties*

 

Royalties are due and payable by the Company upon thesale of certain courses for which the Company has acquired or otherwiselicensed the online publishing rights. In addition, the Company may beobligated to pay certain royalties related to courses which a customer may haveconverted to an online format and elected to distribute to all the Company’scustomers. Royalties accrue at a rate of 10% to 85% of the tuition feesreceived with respect to certain courses.

 

Royalties are classified as a cost of revenues andamounted to approximately $436,000, $675,000 and $1,325,000 during the yearsended December 31, 2000, 2001 and 2002, respectively.

 

*Advertising Costs*

 

The Company expenses advertising costs asincurred.  Advertising costs amounted toapproximately  $606,000, $49,000 and $0for the years ended December 31, 2000, 2001, and 2002 respectively.

 

*Income Taxes*

 

The Company provides for income taxes in accordancewith the liability method.  Under thismethod, deferred tax assets and liabilities are determined based on differencesbetween financial reporting and tax bases of assets and liabilities and aremeasured using the enacted tax rates and laws that are expected to be in effectwhen the differences are expected to reverse. Because the realization of taxbenefits related to the Company’s net deferred tax asset is uncertain, a fullvaluation allowance has been provided against the net deferred tax asset.

 

*Changein Accounting Principle*

 

During the fourth quarter of 2000, the Company implemented EmergingIssues Task Force Issue No. 00-27, Application of EITF Issue No. 98-5, *“Accounting for Convertible Securities withBeneficial Conversion Features or Contingently Adjustable Conversion Ratios,”to Certain Convertible Instruments* (“EITF 00-27”).  Issue 1 of EITF 00-27 modified thecalculation of beneficial conversion 

 

F-10

----

 

features for convertible securities issued with detachable instrumentsfor all transactions subject to EITF Issue No. 98-5.  Companies are required to report any changes in a beneficialconversion feature as a result of applying Issue 1 of EITF 00-27 as acumulative effect of a change in accounting principle at the time ofimplementation in accordance with APB Opinion No. 20, *Accounting Changes*.  As a result of the implementation of EITF00-27, in 2000 the Company recorded a charge of $461,000, or $0.58 per share,as a cumulative effect of a change in accounting principle.

 

*Net Loss Per Share*

 

The Company follows the provisions of SFAS No. 128, *Earnings perShare*(“SFAS No. 128”) which requires the Company to present basicand diluted earnings per share. Basic earnings per share is based on theweighted-average shares outstanding and excludes any dilutive effects ofoptions, warrants and convertible securities. Diluted earnings per shareincreases the shares used in the basic calculation by the dilutive effect ofstock options, warrants, and convertible preferred stock.  For all years presented, common stockequivalents related to stock options, warrants, and convertible preferred stockhave been excluded from diluted earnings per share because their effect isanti-dilutive.

 

*Comprehensive Income*

 

SFAS No. 130, *Reporting of Comprehensive Income* (“SFASNo. 130”), establishes standards for the display of comprehensive income andits components in a full set of financial statements. Comprehensive incomeincludes all changes in equity during a period except those resulting from theissuance of shares of stock and distributions to shareholders. There were nodifferences between net loss and comprehensive loss for any period presented.

 

*Recent Accounting Pronouncements*

 

In April 2002, the FinancialAccounting Standards Board issued SFAS No. 145, *Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASBStatement No. 13, and Technical Corrections* (SFAS 145).  Among other things, SFAS 145 generallyprohibits the classification of gains or losses from the early extinguishmentof debt as an extraordinary item, and therefore rescinds the previousrequirement to do so. Gains and losses from prior early debt extinguishmentsare required to be reclassified. The Statement was not required to beimplemented until 2003, though earlier application was encouraged. The Companyelected to adopt the SFAS 145 in 2002 and, accordingly, no amounts related tothe extinguishment of debt was classified as extraordinary in 2002.

 

In June 2002, the FinancialAccounting Standards Board issued SFAS No. 146, *Accounting for Costs Associated with Exit or Disposal of Activities*(SFAS No. 146).  SFAS No. 146 nullifiesprevious accounting guidance and requires that a liability for a cost associatedwith an exit or disposal activity be recognized when the liability isincurred.  The provisions of SFAS No.146 are effective for exit or disposal activities that are initiated afterDecember 31, 2002.  The Company does notexpect the adoption of this statement to have a material impact on itsfinancial position, results of operations, or liquidity.

 

#### *Management’s Plans*

 

The Company has incurred significant losses in thecurrent and prior periods.  The Companyexpects negative cash flow from operations to continue until the online revenuestream matures. The Company believes it has access to adequate resources tofund operations until operations reach cash flow positive.  However, in the event revenues do not meetanticipated levels or the Company is unable to raise additional funding to meetworking capital requirements, the Company may need to further reduce operatingexpenses. If the Company is unable to raise additional funding to meet workingcapital requirements, it may be unable to maintain compliance with Nasdaq SmallCap market listing requirements.  TheCompany believes it has available sources for debt or equity capital in amountsnecessary to, in addition to operating sources, meet its cash needs through2003.  However, such capital may nothave terms favorable to the Company or its current stockholders.

 

If the Company does not addressits funding needs, it will be materially adversely affected. The Company’sfuture capital requirements will depend on many factors, including, but notlimited to, acceptance of and demand for its products and services, customerdemands for technology upgrades, the types of arrangements that the Company mayenter into with customers and resellers, and the extent to which the Companyinvests in new technology and research and development projects.

 

F-11

----

 

**3.             Propertyand Equipment**

 

Property and equipment,including leasehold improvements, are recorded at cost. Depreciation iscalculated using the straight-line method over an estimated useful life of twoto seven years. Leasehold improvements are amortized over the lesser of therelated lease term or the useful life. Depreciation expense on equipment obtained under capital leaseobligations is included with depreciation expense for similar types ofequipment.  Property and equipmentconsisted of the following:

 

 

|                           |   | **December  31,** |      |
|--------------------------------|--------|-------------------|-----------|
|                           |   | **2001**          |      | **2002** |   |
| Equipment                      |   | $                 | 3,190,903 |   | $ | 3,265,065 |   |
| Computer  software             |   | 970,512           |      | 973,286 |   |
| Leasehold  improvements        |   | 152,118           |      | 152,118 |   |
| Furniture  and fixtures        |   | 570,650           |      | 572,218 |   |
|                           |   | 4,884,183         |      | 4,962,687 |   |
| Less  accumulated depreciation |   | (3,939,388        | )         | (4,634,391 | ) |
| Total                          |   | $                 | 944,795   |   | $ | 328,296 |   |

 

Equipment recorded undercapital lease obligations aggregated $394,695 and  $387,662 at December 31, 2001 and 2002, respectively.  Accumulated depreciation of assets undercapital lease obligations totaled $162,366 and $325,932 at December 31, 2001and 2002, respectively.

 

**4.             CapitalizedSoftware and Courseware Development Costs**

 

Capitalized software and courseware development costsconsisted of the following:

 

|                                      |   | **December  31,** |      |
|-------------------------------------------|--------|-------------------|-----------|
|                                      |   | **2001**          |      | **2002** |   |
| Capitalized  software costs               |   | $                 | 3,200,454 |   | $ | 3,584,243 |   |
| Capitalized  courseware development costs |   | 1,214,259         |      | 937,724 |   |
|                                      |   | 4,414,713         |      | 4,521,967 |   |
| Less  accumulated amortization            |   | (3,268,483        | )         | (3,707,237 | ) |
| Total                                     |   | $                 | 1,146,230 |   | $ | 814,730 |   |

 

**5.             AcquiredOnline Publishing Rights**

 

Acquired online publishing rights consisted of thefollowing:

 

|                               |   | **December  31,  2001** |    |
|------------------------------------|--------|-------------------------|---------|
| Acquired  online publishing rights |   | $                       | 410,000 |   |
| Less  accumulated amortization     |   | (403,770                | )       |
| Total                              |   | $                       | 6,230   |   |

 

At December 31, 2002,acquired online publishing rights were fully amortized.  The Company has written off the total costand related accumulated amortization at December 31, 2002.

 

**6.             Goodwilland Other Intangible Assets**

 

Goodwill and other intangible assets were comprisedof: 

 

|                           |   | **Decemb er  31,** |    |
|--------------------------------|--------|--------------------|---------|
|                           |   | **2001**           |    | **2002** |   |
| Goodwill                       |   | $                  | 814,509 |   | $ | 814,509 |   |
| Less  accumulated amortization |   | (486,192           | )       | (486,192 | ) |
|                           |   | $                  | 328,317 |   | $ | 328,317 |   |

 

|                           |   | **December  31,** |    |
|--------------------------------|--------|-------------------|---------|
|                           |   | **2001**          |    | **2002** |   |
| Developed  content             |   | 1,223,800         |    | 523,800 |   |
| Trademarks  and names          |   | 904,720           |    | 904,720 |   |
| Customer  base                 |   | 304,820           |    | 304,820 |   |
|                           |   | 2,433,340         |    | 1,733,340 |   |
| Less  accumulated amortization |   | (1,468,993        | )       | (984,848 | ) |
|                           |   | $                 | 964,347 |   | $ | 748,492 |   |
|                                |        |                   |         |  |  |  |  |

 

F-12

----

 

In 2000, as a result of the restructuring of HTR, Inc.(“HTR”) non-online business, the Company wrote off approximately $1,226,000,which was the remaining net unamortized goodwill balance that had resulted fromthe acquisition of HTR.  This write-offis included in reorganization and other non-recurring charges in the 2000statement of operations.  See Note 8.

 

Amortization expense for other intangible assets isexpected to be as follows:

 
| 2003   |   | 210,579  |   |
|--------|--------|----------|--------|
| 2004   |   | 210,579  |   |
| 2005   |   | 157,536  |   |
| 2006   |   | 131,014  |   |
| 2007   |   | 38,784   |   |
|   |   | $748,492 |   |

 

Amortization expense related to intangible assetssubject to amortization totaled $390,850, $361,693 and $215,855 at December 31,2000, 2001 and 2002, respectively.

 

With the adoption of SFAS 142, amortization ofgoodwill was discontinued as of January 1, 2002.  The following information reconciles reported net lossattributable to common stockholders to adjusted net loss, including goodwillamortization previously recorded.

 

|                                                        |   | **2000** |        | **2001** |   |
|-------------------------------------------------------------|--------|----------|-------------|----------|--------|
| Pro  forma net loss:                                        |   |     |        |     |   |
| As  reported                                                |   | $        | (14,037,564 | )        | $      | (6,582,040 | ) |
| Impact  of SFAS 142                                         |   | 266,763  |        | 128,447  |   |
| Pro  forma net loss                                         |   | $        | (13,770,801 | )        | $      | (6,453,593 | ) |
|                                                        |   |     |        |     |   |
| Pro  forma net loss per common share—basic and diluted |   | ($17.31  | )           | ($5.13   | )      |

 

**7.             Dispositions**

 

*HTR, Inc.*

 

In December 2000, the Company announced its decisionto discontinue the majority of HTR’s non-online business.  The Company determined that the remaininggoodwill related to HTR at the time of the decision was impaired under the guidancein SFAS 121.  The Company compared thecarrying value of the HTR goodwill to its fair value as determined using thepresent value of the projected net cash flows of the remaining HTR non-onlineoperations.  This analysis resulted in awrite off of approximately $1,226,000 of goodwill related to the non-onlinebusinesses.

 

**8.             Restructuringof Operations and Other Non-Recurring Items**

 

During 2000, the Company implemented a plan to closecertain office facilities related to HTR’s non-online business. The planresulted in the closure of the Company’s facilities located in Dallas, Texas,Rockville, Maryland and Washington, D.C. As a result, the Company recorded a restructuring charge ofapproximately $335,000 in 2000 included in reorganization and other non-recurringcharges in the 2000 statement of operations. The restructuring charge includedexpenses related to facilities lease cancellations and write-down of assets nolonger in use. During 2000, the Company paid no cash under the restructuringaccrual. Included in accounts payable and accrued expenses at December 31, 2000is approximately $335,000, primarily representing future lease terminationpayments.  All termination fees werepaid in the second quarter of 2001.  Theoperating activities of the discontinued operations were not tracked separatelyby the Company. During 2002, the Company recorded an additional expense of$192,000 to adjust its accrual related to the minimum amount due under a leasefor HTR’s Rockville, Maryland facility

 

In December 2001, the employment agreement between theCompany and its Chairman was terminated, resulting in $187,762 of severancerelated expense.

 

F-13

----

 

**9.             LoansReceivable from Related Party**

 

Loans receivable from a Company officer amounted to$140,183 and $116,753 as of December 31, 2001 and 2002, respectively. TheCompany accrues interest on the loans receivable at a rate of prime less1%.  Interest income related to loansreceivable amounted to  $8,000, $8,001and $6,384 during the years ended December 31, 2000, 2001 and 2002,respectively.  Amounts repaid on loansreceivable from related parties was $23,097 in 2002. No amounts were repaid onloans receivable from related parties in 2000 or 2001.

 

**10.          NotesPayable**

 

In June 1999, the Company raised $2.5 million throughthe issuance of 9% Secured Subordinated Convertible Debentures.  The debentures were due to mature onDecember 15, 2000 with accrued interest payable quarterly.  The debentures were convertible into sharesof the Company’s common stock at a per share price of $55.50.  The conversion price was at a discount fromthe market value of the Company’s common stock on the date the debentures wereissued.  In addition, the Company issuedfive-year warrants to the debenture holders for the purchase of 11,260 sharesof the Company’s common stock at $63.80 per share.  The Company recorded an aggregate debt discount of approximately$413,000 for the value of the warrants and the ability to convert at a discountfrom market value. Throughout 1999 and 2000 all of the debentures wereconverted into shares of common stock. See Note 13.  In the fourthquarter of 2000, the Company recalculated the debt discount related to thedebentures under the guidance provided in EITF 00-27 and recorded a cumulativeeffect of change in accounting principle of $461,000.

 

In February 2001, the Company secured $1,150,000 ofdebt financing through the issuance of short-term notes bearing interest at 10%to two directors of the Company.  In connectionwith this financing, the Company granted stock options for the purchase of5,750 shares of common stock at $9.38 per share to the directors.  The fair value of the options was estimatedat $47,150 using the Black-Scholes option pricing model and has been includedin stock-based compensation in the 2001 consolidated statement ofoperations.  These notes were cancelledin March 2001 in exchange for an aggregate of 118,378 shares of common stock ata purchase price of $9.78 per share and warrants to purchase an aggregate of28,750 shares of common stock at an exercise price of $10.76 per share.  The warrants have a three year term and werefully vested upon issuance.  The fairvalue of the warrants was estimated at $212,750 using the Black-Scholes optionpricing model and has been included in stock-based compensation in the 2001consolidated statements of operations.

 

In December 2001 and January 2002, the Company raised$925,000 through the issuance of 8% debentures together with five-year, fullyvested warrants to purchase 132,143 shares of common stock at $4.00 pershare.  The Company allocated theproceeds of the offering to the debentures and the warrants based on theirrelative fair values using the Black-Scholes option pricing model.  The amount allocated to the warrants($335,841 and $40,708 for the 2001 and 2002 funding, respectively), wasrecorded as a debt discount and is being amortized to interest expense over theperiod the debentures are expected to be outstanding.  In March 2002, the Companyissued 1,458,413 shares of Series F-1 Preferred Stock and five-year fullyvested warrants to purchase 14,584 shares of common stock at $4.00 per share inexchange for the cancellation of a note in the original principal amount of$500,000 plus $10,445 in accrued interest. In May 2002, the Company issued of 5,878 shares of Series F-2Preferred Stock plus a warrant to purchase 5,878 shares of common stock at$4.00 per share, in exchange for the cancellation of a convertible promissorynote in the principal and accrued interest amount of $205,730.  Upon shareholder approval of the debtfinancing, the Company recorded an additional $91,563 of debt discount for theinstruments’ beneficial conversion feature. The unamortized debt discount at December 31, 2002 was $84,841.  Principal and accrued interest under thedebentures are due and payable at December 31, 2003.  The debentures are convertible into shares of the Company’scommon stock at the election of the holders at a conversion price of $3.50 pershare.

 

**11.          Commitmentsand Contingencies**

 

#### *Leases*

 

The Company leases office space and officeequipment  under non-cancelableoperating lease agreements with various renewal options. Future minimum leasepayments may be periodically adjusted based on changes in the lessors’operating charges.  Rent expense for theyears ended December 31, 2000, 2001 and 2002 was  $792,459, $486,479 and $521,953 respectively.  As of December 31, 2002, the Company isobligated under an operating lease for space vacated as part of the 2000restructuring.  The monthly payment forthis space is approximately $13,000. The Company is currently negotiating a termination of the lease but hasaccrued the minimum amount that would be due under the lease.  Subsequent to year end, the Company wasordered to pay all outstanding amounts related to this vacated space.  The Company is contesting the liability forfuture rents beyond December 2003 per the lease terms. Further litigation isanticipated.  See Note 17.

 

F-14

----

 

As of December 31, 2002, payments due undernon-cancelable operating leases were as follows:

 
| 2003       |   | $         | 656,096   |   |
|------------|--------|-----------|-----------|--------|
| 2004       |   | 509,735   |      |
| 2005       |   | 525,027   |      |
| 2006       |   | 540,778   |      |
| 2007       |   | 557,001   |      |
| Thereafter |   | 1,263,601 |      |
|       |   | $         | 4,052,238 |   |

 

The Company also leases equipment under leaseagreements which are capitalized using the interest rates appropriate at theinception of the lease.  The relatedequipment is included in property and equipment and depreciated accordingly.  Future minimum lease payments under capitallease obligations at December 31, 2002 are as follows:

 
| 2003                                   |   | 24,800 |   |
|----------------------------------------|--------|--------|--------|
| Less  amounts representing interest    |   | (1,271 | )      |
| Present  value of net minimum payments |   | 23,529 |   |

 

*Employment Agreements*

 

The Company has entered into employment agreements withcertain members of management and other key employees.  These agreements specify minimum annualsalaries as well as discretionary bonus amounts to be paid over the next twoyears.

 

#### *PurchaseCommitment*

 

Effective December 15, 2000 the Company entered into athree-year reseller agreement with a vendor to resell certain software.  The agreement, as amended, specifies aminimum contract commitment of $650,000 over the three year period.   Amounts paid under the agreement during theyears ended December 31, 2001 and 2002 were $143,000 and $144,697,respectively. No amounts were paid under the agreement in 2000.

 

*Litigation*

 

The Virginia Department of Taxation recently completedan audit of VCampus’ sales and use tax payments from August 1998 throughOctober 2001.  In July 2002, the Companyreceived a draft assessment which contemplated a payment of taxes, penaltiesand interest by VCampus of $212,719 primarily associated with the allegedfailure of VCampus to assess use tax on third-party royalties paid by VCampusto content providers for courses delivered online by the Company. Thispreliminary assessment was not yet a formal, binding assessment by the VirginiaDepartment of Taxation. The Company paid the sales and use tax, and interest onnon-contested items, which amounted to $18,928 out of the $212,719,respectively. The Company has formally contested the remaining items covered bythe draft assessment, including the assessment of use tax on the royalties paidby VCampus to content providers for courses delivered online by the Company.The Company is also contesting the methodology used by the Virginia Departmentof Taxation to estimate the royalties. The Company does not have a firmestimate of the probability of liability for this issue or the amount of anticipatedlegal costs, but has reason to believe that the potential liability will bereduced to the point where it will not be considered material. Accordingly, theCompany cannot estimate at this time the amount of the liability to beincurred, if any. No amounts have been accrued in the financial statements forthis potential liability.

 

On June 26, 2002, a former employee (separated in June1998) filed suit against the Company in Dallas County, Texas. The suit allegesdamages in the following amounts: $56,250 from an allegedly earned unpaidbonus, $231,250 based on an alleged change of control in the Company and$360,000 for the company’s alleged failure to allow him to exercise stockoptions. After thorough investigations, the Company has rejected this formeremployee’s claims several times in the past and the Company continues tobelieve these claims are without merit and plans to vigorously defend againstthem. The case was subject to mediation in December 2002, which failed toproduce a settlement. The case is scheduled for trial in September 2003.  The plaintiff filed a motion for summaryjudgment on the issue of the unpaid bonus, which is expected to be heardshortly. The Company at this time cannot provide a definitive estimate of legalfees required for the case; however they may become material as the caseprogresses. The Company cannot estimate at this time the amount or probabilityof the liability to be incurred, if any. Accordingly, no amounts have beenaccrued in the financial statements.

 

F-15

----

 

**12.          AccruedExpenses**

 

Accrued expenses consisted of the following:

 

|                                            |   | **December  31,** |      |
|-------------------------------------------------|--------|-------------------|-----------|
|                                            |   | **2001**          |      | **2002** |   |
| Accrued  royalties                              |   | $                 | 226,577   |   | $ | 230,679 |   |
| Accrued  payroll and payroll taxes              |   | 91,413            |      | 62,333 |   |
| Accrued  reorganization and non recurring costs |   | 187,762           |      | 276,103 |   |
| Accrued  vacation                               |   | 55,477            |      | 41,063 |   |
| Other                                           |   | 641,874           |      | 217,682 |   |
|                                            |   | $                 | 1,203,103 |   | $ | 827,860 |   |

 

Accrued payroll as of December 31, 2001 and 2002primarily consists of earned but unpaid commissions and bonuses.

 

Accrued reorganization and non recurring costs as ofDecember 31, 2001 primarily consist of severance related expense in connectionwith the termination of the employment agreement between the Company and itschairman.

 

Accrued reorganization and non recurring costs as ofDecember 31, 2002 primarily consist of an accrual in connection with the minimum payment due under a lease forHTR’s Rockville, Maryland lease.   SeeNotes 7, 8 and 17.

 

**13.          Stockholders’Equity**

 

# ***Stock Split***

 

On June 18, 2002, the Company’s Board of Directorsapproved a one-for-ten reverse stock split of the Company’s common stock.  The reverse stock split became effective asof the opening of business on July 8, 2002. Stockholders’ equity has been restated to give retroactive recognitionto the stock split for all periods presented by reclassifying the excess parvalue resulting from the reduced aggregate number of shares from common stockto paid-in capital.  All references tocommon shares and per share amounts for all periods presented have beenretroactively restated to reflect the stock split.

 

*Series C Preferred Stock*

 

In March 1998, the Company raised net proceeds ofapproximately $5,300,000 in a private placement of Series C Preferred Stock andwarrants (the “Series C Preferred Stock”). In this transaction, the Companyissued approximately 626,300 shares of the Series C Preferred Stock, which areconvertible into approximately 75,910 shares of common stock. The Company alsoissued five-year warrants, which were fully vested, to purchase approximately62,630 shares of common stock at an exercise price of $84.60 per share.  The Series C Preferred stockholders areentitled to receive dividends if and when declared by the Board of Directors.  The Series C Preferred Stock has aliquidation preference of $12.69 per share plus all declared but unpaiddividends upon sale or liquidation of the Company. The common stock underlyingboth the Preferred Stock and the warrants has certain registration rights. Theholders of the Series C Preferred Stock are entitled to one vote for each 10shares of Series C Preferred Stock held. The Company recorded deemed dividends of approximately $207,000 due tothe Series C Preferred Stock being convertible to common stock at a discountfrom fair value on the date of issuance. In 1999, 2,954 shares of Series C Preferred Stock were converted into358 shares of common stock.

 

*SeriesD Preferred Stock*

 

In June 1998, the Company raised approximately$5,200,000 in net proceeds through its private placement of Series D PreferredStock (the “Series D Preferred Stock”). In this transaction, the Company issued1,082,625 shares of the Series D Preferred Stock, which are convertible to108,263 common shares. The holders of Series D Preferred Stock are entitled toreceive a 5% annual dividend compounded and paid semi-annually. Such dividendsare payable, at the option of the Company, either in cash or in common stock.The Series D Preferred Stock has a liquidation preference of $8.25 per shareplus all declared but unpaid dividends upon sale or liquidation of theCompany.   The holders of the Series DPreferred Stock are entitled to one vote for each 10 shares of Series DPreferred Stock held.

 

In  2000 and2001, 2,727 and 56,834 shares of Series D Preferred Stock were converted into273 and 5,683 shares of common stock, respectively.  No shares were converted during 2002.

 

In 2000, 2001 and 2002, the Company issued 24,507,49,461 and  81,325 shares of commonstock, respectively, to the Series D Preferred Stock holders as payment foraccrued dividends.  The number of sharesissued as payment of the dividends was determined based on the fair marketvalue of the Company’s common stock on the date of issuance.  The value of such shares amounted to,$295,607, $278,798 and $278,765 for 2000, 2001 and 2002, respectively.

 

 

F-16

----

 

 

*SeriesE Preferred Stock*

 

The Company entered into a Private Equity Line ofCredit Agreement (the “Equity Line Agreement”), as amended, with Hambrecht& Quist Guaranty Finance, LLC (“H&QGF”) effective May 4, 1999. Underthe Equity Line Agreement, the Company had the right, subject to certainconditions, to issue and sell to H&QGF, from time to time, shares of itsSeries E Convertible Preferred Stock (“Series E Preferred Stock”), for cashconsideration of up to an aggregate of $7.0 million, subject toavailability.  The Company had the rightto sell to H&QGF shares of its Series E Preferred Stock at a price equal to85% of the lower of (1) the closing market price of the Company’s common stockon the date of issuance and (2) the average of the lowest intra-day prices ofthe Company’s common stock over the five-day period ending on the date ofissuance.  Each ten shares of Series EPreferred Stock are convertible into one share of common stock.  The holders of the Series E Preferred Stockare entitled to one vote for each ten shares of Series E Preferred Stockheld.  The holders of Series E PreferredStock are entitled to monthly dividends paid in Series E Preferred Stock, equalto 0.5% of the number of shares of Series E Preferred Stock held.  The value of Series E Preferred Stock issuedas dividends amounted to $83,977, $107,733 and $10,954 for 2000, 2001 and 2002,respectively.

 

In connection with the Equity Line Agreement, theCompany issued seven-year warrants, which were fully vested, to purchase100,000 shares of its Series E Preferred Stock to H&QGF at $2.50 per share(subsequently adjusted to 1,138,440 shares at $0.2196 per share pursuant to anti-dilutionrights), and ten-year warrants, which were fully vested, to purchase 10,000shares of its common stock at $40.00 per share to a third party.  In March 2000, the Company granted H&QGFfully vested warrants to purchase 43,632 shares of Series E Preferred Stock atan exercise price of $8.50 per share (subsequently adjusted to 384,960 sharesat $0.2196 per share pursuant to anti-dilution rights) in exchange for anincrease in capacity and extension of the equity line.  These warrants expire in November 2006.  In October 2000, the Company grantedH&QGF fully vested, seven-year warrants to purchase 15,000 shares of SeriesE Preferred Stock at an exercise price of $1.94 per share (subsequentlyadjusted to 132,350 shares at $0.2196 per share pursuant to anti-dilutionrights) in exchange for a further increase and extension of the equity line.

 

During 1999, the Company drew down $859,000 under theEquity Line Agreement and issued 379,437 shares of Series E Preferred Stock atan average price of $2.26.  During 2000,the Company drew down $4,382,000 under the Equity Line Agreement and issued963,092 shares of Series E Preferred Stock at an average price of $4.55 pershare.  During 2001, the Company drewdown $213,150 under the Equity Line Agreement and issued 187,500 shares ofSeries E Preferred Stock at an average price of $1.14 per share.  During 2000 and 2001, 621,503 and 306,454shares of Series E Preferred Stock were converted into 62,150 and 30,645 commonshares, respectively. No shares of Series E Preferred Stock were converted intocommon stock in 2002.

 

During 2000 and 2001, the Company recorded deemeddividends of approximately $773,000 and $38,000, respectively, due to theSeries E Preferred Stock being issued at a discount from fair value on the dateof issuance.  No deemed dividends wererecorded in 2002.

 

In February 2001, the Equity Line Agreement wasterminated.  During 2001, the Companyissued 60,000 shares of Series E Preferred Stock to H&QGF as considerationfor the Company’s failure to keep an active registration statement effective inaccordance with H&QGF’s registration rights.  In April 2001, the Company regained compliance with H&QGF’sregistration rights through the filing and effectiveness of a new registrationstatement.

 

*SeriesF, F-1 and F-2 Preferred Stock*

 

In December 2001, the Company issued 2,642,836 sharesof Series F Preferred Stock at a price of $0.35 per share.  Under the terms of this financing, theCompany issued five-year fully vested warrants to purchase 66,071 shares of commonstock at $4.00 per share.  As ofDecember 31, 2001, 285,712 shares of Series F Preferred Stock were subscribedfor but not issued until January 2002.  Each share of Series F-1 Preferred Stock was initially convertible into 1/10thof a share of common stock at any time at the election of the holder.  The Series F preferred stockholdersare entitled to receive dividends if and when declared by the Board ofDirectors.  The Series F Preferred Stockhas a liquidation preference of $0.35 per share plus all declared but unpaiddividends upon sale or liquidation of the Company.  The holders of the Series F Preferred Stock are entitled to onevote for each ten shares of Series F Preferred Stock held.

 

The Company allocated the proceeds from the Series FPreferred Stock offering between the preferred stock and warrants on a relativefair value basis.  The fair value of thewarrants was estimated using the Black-Scholes option pricing model.  The proceeds 

 

F-17

----

 

allocated to the preferred stock were $700,000.  The excess of the value of the common stockinto which the Series F Preferred Stock was convertible on the date of issuanceover the proceeds allocated to the preferred stock amounted to $225,000.  This amount represents the beneficialconversion feature discount on the Series F Preferred Stock and has beenreflected as a deemed dividend in the 2001 statement of operations.  This discount was recognized entirely in2001 as the Series F Preferred Stock is immediately convertible.

 

In March 2002, the Companyissued 1,458,413 shares of Series F-1 Preferred Stock and five-year fullyvested warrants to purchase 14,584 shares of common stock at $4.00 per share inexchange for the cancellation of a note in the original principal amount of$500,000 plus $10,445 in accrued interest. Each share of Series F-1Preferred Stock was initially convertible into 1/10th of a share ofcommon stock at any time at the election of the holder.  The holders of the Series F-1Preferred Stock are entitled to one vote for each ten shares of Series F-1Preferred Stock held.  The excess of the fair value of the PreferredStock and warrants over the carrying value of the note amounted to $267,488 andwas recognized as a loss on debt extinguishment in March 2002.  The carrying value of the debt at thetime of its conversion was $324,392, excluding accrued interest of$10,445.  The extinguishment of the debtresulted in the write-off of $50,121 in deferred debt issuance costs.  The excess of the value of common stock intowhich the Series F Preferred Stock is convertible over the amount allocated tothe Preferred Stock amounted to $44,282. Such amount represented a beneficial conversion feature discount and wasrecognized as a deemed dividend to the preferred stockholder upon stockholderapproval of the transaction in May 2002. The fair value of the preferred stock issued in the exchange wasestimated at the closing price of VCampus' common stock on the trading dateprior to the exchange and the fair value of the warrants was estimated at$48,128 based on the Black-Scholes option-pricing model.

 

In May 2002, the Company issued 242,859 shares ofSeries F Preferred Stock for $85,000 in cash at $0.35 per share and warrants topurchase 6,071 shares of common stock at $4.00 per share.  Each share of Series F Preferred Stock was initially convertible into 1/10thof a share of common stock at any time at the election of the holder.  The proceeds were allocated to thePreferred Stock and the warrants based on their relative fair values.  The excess of the value of common stock intowhich the Series F Preferred Stock is convertible over the proceeds allocatedto the Preferred Stock amounted to $57,104. Such amount represented a beneficial conversion feature discount and wasrecognized as a deemed dividend to preferred stockholders upon stockholderapproval of the offering in May 2002.

 

In May 2002, the Company issued 17,859 shares ofSeries F-2 Preferred Stock for approximately $625,000 in cash at $35.00 per share(each of which Series F-2 Preferred Share was initially convertible into 10shares of common stock) and warrants to purchase a total of 160,365 shares ofcommon stock at $4.00 per share.  Theholders of Series F-2 Preferred Stock are entitled to one vote for each shareof common stock that such holder could have purchased at the fair market valueof the Common Stock on the date the Series F-2 Preferred Stock was originallypurchased from the Company for the aggregate purchase price paid for the SeriesF-2 Preferred Stock   The proceeds wereallocated to the Preferred Stock and the warrants based on their relative fairvalues.  The excess of the value ofcommon stock into which the Series F-2 Preferred Stock is convertible over theproceeds allocated to the Preferred Stock amounted to $579,746.  Such amount represented a beneficialconversion feature discount and was recognized as a deemed dividend topreferred stockholders upon stockholder approval of the offering in May 2002.

 

In May 2002, the Company issued 5,878 shares of SeriesF-2 Preferred Stock plus a warrant to purchase 5,878 shares of common stock at$4.00 per share, in exchange for the cancellation of a convertible promissorynote in the principal and accrued interest amount of $205,730, each of whichSeries F-2 Preferred Share was initially convertible into 10 shares of commonstock. The excess of the fair value of the Preferred Stock and warrants overthe net carrying value of the debt was $170,677 and was recognized as a loss ondebt extinguishment.  The carrying valueof the debt at the time of its conversion was $143,944, excluding accruedinterest of $5,730.  The extinguishmentof the debt resulted in the write-off of $16,038 in deferred debt issuancecosts.  The excess of the value of commonstock into which the Series F Preferred Stock is convertible over the amountallocated to the Preferred Stock amounted to $24,267.  Such amount represented a beneficial conversion feature discountand was recognized as a deemed dividend to the preferred stockholder uponstockholder approval of the transaction in May 2002.  The fair value of the preferred stock issued in the exchange wasestimated at the closing price of VCampus' common stock on the trading date priorto the exchange and the fair value of the warrants was estimated at $26,451based on the Black-Scholes option-pricing model.

 

In May 2002, the Company issued 3,841 shares of SeriesF-2 Preferred Stock in exchange for the cancellation of $126,970 of accountspayable, each of which Series F-2 Preferred Share was initially convertibleinto 10 shares of common stock.  Theexcess of the fair value of the Preferred Stock over the carrying value of theaccounts payable amounting to $65,081 was recognized as a loss on theexchange.  The excess of the value ofcommon stock into which the Series F Preferred Stock is convertible over theamount allocated to the Preferred Stock amounted to $57,627.  Such amount represented a beneficialconversion feature discount and was recognized as a deemed dividend to thepreferred stockholder upon stockholder approval of the transaction in May 2002.

 

In June 2002, the Company issued 114,305 shares ofSeries F Preferred Stock for $40,007 in cash at $0.35 per share and warrants topurchase 2,858 shares of common stock at $4.00 per share.  Each share of Series F Preferred Stock wasinitially convertible into 1/10th of a share of common stock at any time at theelection of the holder.  The proceedswere allocated to the Preferred Stock and the warrants based on their relativefair values.  The excess of the value ofcommon stock into which the Series F Preferred Stock is convertible over theproceeds allocated to the Preferred Stock amounted to $17,685.  Such amount represented a beneficialconversion feature discount and was recognized as a deemed dividend topreferred stockholders upon stockholder approval of the offering in May 2002.

 

 

F-18

----

 

 

*SeriesG Preferred Stock*

 

In September 2002, the Companyissued 46,400 shares of Series G Preferred Stock at a purchase price of $21.96per share (10 times the trailing five-day average closing price of itscommon stock) to accredited investors. Under the terms of the financing agreement, the Company also issued five-year fully vested warrants to purchase116,000 shares of common stock at $2.42 per share.  Each share of Series GPreferred Stock is initially convertible into 10 shares of common stock at anytime at the election of the holder.  Theholders of the Series G Preferred Stock are entitled to ten votes for share ofSeries of Preferred Stock held.  Theexcess of the value of common stock into which the Series G Preferred Stock isconvertible over the proceeds allocated to the Preferred Stock amounted to$185,883.  Such amount represented abeneficial conversion feature discount and was immediately recognized as adeemed dividend to preferred stockholders. The fair value of the preferred stock was estimated at the closing priceof VCampus' common stock on the trading date prior to the issuance date and thefair value of the warrants was estimated at $227,360 based on the Black-Scholesoption-pricing model.  The issuance ofthe Series G Preferred Stock triggered an antidilution adjustment in theconversion price of the Series F, F-1 and F-2 Preferred Stock from $3.50 to$2.196.  As result, the number of commonshares potentially issuable upon conversion of the Series F, F-1 and F-2Preferred Stock has increased from 721,620 to 1,150,124.  The Company recorded a deemed dividend of$1,499,762 in connection with this adjustment.

 

InNovember 2002, the Company issued2,800 and 120 shares of Series G Preferred Stock at a purchase price of $24.90per share (10 times the trailing five-day average closing price of itscommon stock) to accredited investors and a placement agent, respectively.  Under the terms of this financing, theCompany also issued five-year fully vestedwarrants to purchase 7,000 and 300 shares of common stock at $2.74 per share tothe same accredited investors and placement agent, respectively.  Each share of Series G Preferred Stock is initially convertible into 10 shares ofcommon stock at any time at the election of the holder.  The excess of the value of commonstock into which the Series G Preferred Stock is convertible over the proceedsallocated to the Preferred Stock amounted to $12,283.  Such amount represented a beneficial conversion feature discountand was immediately recognized as a deemed dividend to preferred stockholders.  The fair value of the preferred stock wasestimated at the closing price of VCampus' common stock on the trading dateprior to the issuance date and the fair value of the warrants was estimated at$14,910 based on the Black-Scholes option-pricing model.

 

*CommonStock*

 

In January 2000, the Company completed a privateplacement of its Common Stock to iGate Capital Corporation (formerly MastechCorporation). The Company issued 113,625 shares of Common Stock at $36.20 pershare, a 20% premium over the average closing price for a 15-day trailing period,resulting in gross proceeds to VCampus of approximately $4,000,000.  No obligations with respect to the deliveryof goods or the performance of services were involved in determining thispurchase price.  The Company also issuedwarrants, which were fully vested, to purchase 45,000 shares of its commonstock at exercise prices between $43.40 and $61.25 per share. The warrantsexpired in January 2001.

 

During 2000, the Company issued 48,257 shares of itscommon stock to its convertible debenture holders, at an average price of$33.00 per share, in exchange for the conversion of the remaining balance ofapproximately $1,590,000 in principal and accrued interest under the SecuredSubordinated Convertible Debentures.

 

In April 2000, the Company raised $2,500,000 through aprivate placement of its common stock to US West Internet Ventures, Inc, nowQwest Investment Company.  The Companyissued 35,714 shares of common stock at $70.00 per share and five-year warrantsto purchase 71,429 shares of the Company’s common stock at $70.00 pershare.  One-half of the warrants vestedimmediately with the second half vesting on the first anniversary of theissuance of the warrants.  Also in April2000, the Company entered into a one-year Application Hosting Contract with USWest Interprise America, Inc. (US West) under which US West may resell certainVCampus services.  The Company hasvalued the second tranche of the warrants using the Black-Scholes option  pricing model at each reporting date priorto the commitment date.  The fair valueof the warrants at December 31, 2000 was $207,142.  Of that amount, $144,716 was recognized as stock basedcompensation for the year ended December 31, 2000.   The fair value of the warrant at the commitment date in April2001 was $310,714.  Of that amount,$165,998 was recognized as stock based compensation for the year ended December31, 2001.

 

In September 2000, the Company granted 2,000 shares ofrestricted stock with a purchase price of $0.10 per share to an employee ithired as an officer and a director.  Anadditional 500 options were granted with an exercise price equal to 50% of thefair market value at the date of grant to the same employee.  The Company recorded compensation expense,under APB 25, related to these stock issuances of approximately $184,000.

 

F-19

----

 

In December 2000, the Company sold 51,948 shares ofits common stock at $9.625 per share to accredited investors.  The purchase price of $9.625 equaled 110% ofthe fair market value of the stock on the date of the transaction.  In connection with this transaction, theCompany also issued fully vested 5-year warrants to purchase 51,948 shares ofthe Company’s common stock at $9.625 per share.  No obligations with respect to the delivery of goods or theperformance of services were involved in determining this purchase price.

 

In December 2000, the Company issued 16,706 shares ofits common stock at $9.625 per share to certain employees, executive officers,and directors.  The purchase price of$9.625 equaled 110% of the fair market value of the stock on the date of thetransaction.  In connection with thistransaction, the Company also issued fully vested 5-year stock options topurchase 16,706 shares of the Company’s common stock at $9.625 per share.

 

In December 2000, the Company issued 4,000 shares ofits common stock to a financial advisor as a retainer fee.   The stock was valued at the then fairmarket value of $8.125 per share.  TheCompany recorded an expense related to the stock issuance of $32,500.

 

In May and June 2001, the Company issued 303,892shares of common stock at a purchase price of $10.60 per share in a privateplacement.  Under the terms of thisfinancing, the Company also issued five-year, fully vested warrants to purchase93,848 shares of common stock at $17.90 per share.

 

During 2002, the Company issued 10,794 shares of itscommon stock, at an average price of $3.15 (equal to the fair market value ofthe stock on date of each transaction) per share, to certain of its directorsin lieu of cash compensation for their services.  The Company recorded $33,972 of compensation expense inconnection with these issuances.

 

*Stock Option Plans*

 

The Company adopted a stock option plan (the “OriginalPlan”) which permitted the Company to grant options to purchase up to 28,892shares of Common Stock to employees, board members and others who contributematerially to the success of the Company. In November 1996, the Company’s Boardof Directors decided not to grant any further options under the Original Plan.

 

During 1996, the Company’s Board of Directors approveda new stock plan (the “1996 Plan”), for the grant of stock awards to employees,directors and consultants.  Stockoptions under the Original Plan and 1996 Plan are generally granted at priceswhich the Company’s Board of Directors believes approximates the fair marketvalue of its Common Stock at the date of grant. Individual grants generallybecome exercisable ratably over a period of four to five years from the date ofgrant. The contractual terms of the options range from three to ten years fromthe date of grant.

 

Common stock option activity was as follows:

 
|                                      |   | **Years  Ended December 31,** |   |
|-------------------------------------------|--------|-------------------------------|--------|
|                                      |   | **2000**                      |   | **2001** |   | **2002** |   |
|                                      |   | **Shares**                    |   | **Weighted  Average  Exercise  Price** |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   |
| Outstanding  at the beginning of the Year |   | 140,814                       |   | $ | 97.90 |   | 245,964 |   | $ | 71.40 |   | 325,637 |   | $ | 18.95 |   |
| Granted                                   |   | 229,324                       |   | 62.80 |   | 302,741 |   | 6.50 |   | 111,222 |   | 3.71 |   |
| Exercised                                 |   | (35,770                       | )      | 20.40 |   | (85 | ) | 0.10 |   | (25,576 | ) | 3.36 |   |
| Canceled  or expired                      |   | (88,404                       | )      | 112.10 |   | (222,983 | ) | 60.00 |   | (111,418 | ) | 17.87 |   |
| Outstanding  at the end of the Year       |   | 245,964                       |   | 71.40 |   | 325,637 |   | 18.95 |   | 299,865 |   | 15.03 |   |
| Options  exercisable at year-end          |   | 59,724                        |   | $ | 69.40 |   | 140,739 |   | $ | 19.50 |   | 198,829 |   | $ | 13.06 |   |

 

As of December 31, 2002, 143,453 shares were availablefor issuance under the 1996 Plan.

 

F-20

----

 

The following table summarizes information aboutfixed-price stock options outstanding at December 31, 2002:

 

|                                           |   | **Options  Outstanding**                       |   | **Options  Exercisable**                  |   |
|------------------------------------------------|--------|------------------------------------------------|--------|-------------------------------------------|--------|
| **Range of  Exercise Prices**                  |   | **Number  Outstanding at  December 31,  2002** |   | **Average  Remaining  Contractual  Life** |   | **Weighted-  Average  Exercise  Price** |   | **Number  Exercisable at  December 31,  2002** |   | **Weighted-  Average  Exercise  Price** |   |
| Less  than     $10.00      |   | 226,030                                        |   | 8.7                                       |   | $ | 3.54 |   | 154,342 |   | $ | 3.52 |   |
| $   10.00 –    $30.00 |   | 24,027                                         |   | 7.9                                       |   | 13.55 |   | 14,394 |   | 13.51 |   |
| $   30.01 –    $60.00 |   | 22,120                                         |   | 6.5                                       |   | 40.76 |   | 19,120 |   | 40.16 |   |
| $   60.01 –    $90.00 |   | 20,241                                         |   | 7.5                                       |   | 76.64 |   | 5,154 |   | 76.67 |   |
| $   90.01 – $120.00             |   | 4,745                                          |   | 5.1                                       |   | 110.73 |   | 3,695 |   | 110.22 |   |
| $  120.01 – $150.00                       |   | 2,452                                          |   | 5.7                                       |   | 138.21 |   | 1,874 |   | 135.52 |   |
| $  150.01 – $180.00                       |   | 250                                            |   | 4.7                                       |   | 176.20 |   | 250 |   | 176.20 |   |
|                                           |   | 299,865                                        |   | 8.3                                       |   | $ | 15.03 |   | 198,829 |   | 13.06 |   |
|                                                |        |                                                |        |                                           |        |  |  |  |  |  |  |  |  |

 

The weighted average fair values of the optionsgranted in 2000 with a stock price equal to the exercise price, and with astock price greater than the exercise price, and with a stock price less thanthe exercise price are $7.80, $72.70 and $9.60, respectively.  The weighted average fair values of theoptions granted in 2001 with a stock price equal to the exercise price was$6.50.   The weighted average fair valuesof the options granted in 2002 with a stock price equal to the exercise pricewas $3.71.

 

On June 15, 2001, the Company cancelled options topurchase 81,038 shares of common stock and agreed to issue an equal number ofnew options on December 17, 2001 with an exercise price equal to thethen-current fair market value.  Theemployees whose options were cancelled had not received options in the sixmonths prior to the cancellation date. On December 17, 2001, the Company issued 73,803 replacement options toemployees who participated in the exchange program, with an exercise price equalto the fair market value on that date.

 

*Warrants*

 

The Company has also granted warrants to purchaseCommon Stock to various investors, employees and outside vendors. Warrantactivity was as follows:

 

|                                      |   | **Years  Ended December 31,** |   |
|-------------------------------------------|--------|-------------------------------|--------|
|                                      |   | **2000**                      |   | **2001** |   | **2002** |   |
| Outstanding  at the beginning of the year |   | 197,149                       |   | 377,414 |   | 635,388 |   |
| Granted                                   |   | 197,729                       |   | 389,630 |   | 551,492 |   |
| Exercised                                 |   | (11,649                       | )      | — |   | — |   |
| Canceled  or expired                      |   | (5,815                        | )      | (131,656 | ) | (77,969 | ) |
| Outstanding  at the end of the year       |   | 377,414                       |   | 635,388 |   | 1,108,911 |   |

 

Exercise prices on the outstanding warrants range from$2.20 to $120.00 per share. The weighted average grant date fair value ofwarrants issued in 2002 was $4.80.  Thefair value of each warrant grant is estimated on the date of grant using the Black-Scholesoption-pricing fair value model with the following ranges of assumptions:dividend yield of 0%; expected volatility of 69% to 133%; risk-free interestrate of 4.39% to 6.50%; and expected life of the warrant term of three to sevenyears.  During 2000, 2001 and 2002, thenumber of shares and exercise prices of certain warrants were adjusted tosatisfy certain anti-dilution rights previously granted.

 

*Reserve for Issuance*

 

As of December 31, 2001, the Company had reserved1,408,776 shares of Common Stock for issuance upon the exercise of outstandingoptions and warrants.

 

**14.          RetirementPlans**

 

The VCampus Corporation 401(k) plan (adopted in 1997)allows employees to elect an amount between 1% and 15% of their totalcompensation to contribute to the plan. All full-time employees are eligible tomake participation elections at any time while employed by the Company. Thereis a graduated vesting schedule for employer contributions in whichcontributions fully vest over a period of four years. The plan allowsdiscretionary Company contributions. In 2000, 2001 and 2002, there were nodiscretionary Company contributions made to the plan.

 

F-21

----

 

**15.          IncomeTaxes**

 

Deferred income taxes reflect the net tax effects oftemporary differences between the carrying amounts of assets and liabilitiesfor financial reporting and income tax purposes. The Company has recognized afull valuation allowance against the deferred tax assets because it is morelikely than not that sufficient taxable income will not be generated during thecarryforward period available under the tax law to utilize the deferred taxassets.  Significant components of theCompany’s net deferred tax assets were as follows:

 

|                               |   | **December  31,** |       |
|------------------------------------|--------|-------------------|------------|
|                               |   | **2001**          |       | **2002** |   |
| Net  operating loss carryforwards  |   | $                 | 21,314,000 |   | $ | 22,647,000 |   |
| Accrued  payroll                   |   | 53,000            |       | 16,000 |   |
| Other  accruals                    |   | 70,000            |       | 285,000 |   |
| Other  assets and liabilities, net |   | 1,662,000         |       | 1,722,000 |   |
| Total  deferred tax assets         |   | 23,099,000        |       | 24,670,000 |   |
| Valuation  allowance               |   | (23,099,000       | )          | (24,670,000 | ) |
| Net  deferred tax assets           |   | $                 | —     |   | $ | — |   |

 

As of December 31, 2001and 2002, the Company had netoperating loss carryforwards for federal income tax purposes of approximately$53,278,000 and $56,610,000, respectively, which will expire at various datesthrough 2022. The Company may have had changes in ownership, which may imposelimitations on its ability to utilize net operating loss carryforwards underSection 382 of the Internal Revenue Code.

 

The Company’s effective rate reconciling items relateto non-deductible expenses, state income taxes, and changes to the valuationallowance.

 

**16.          Net LossPer Share**

 

The following table sets forth the computation ofbasic and diluted net loss per share:

 

|                                                                                |   | **Years  Ended December 31,** |        |
|-------------------------------------------------------------------------------------|--------|-------------------------------|-------------|
|                                                                                |   | **2000**                      |        | **2001** |   | **2002** |   |
| Numerator:                                                                          |   |                          |        |   |   |   |   |
| Loss  before cumulative effect of change in accounting principle                    |   | $                             | (12,423,745 | ) | $ | (5,932,893 | ) | $ | (4,378,911 | ) |
| Less:  Dividends accruing to preferred stockholders                                 |   | (1,152,819                    | )           | (649,147 | ) | (2,768,394 | ) |
| Net  loss before cumulative effect of change in accounting principle                |   | (13,576,564                   | )           | (6,582,040 | ) | (7,147,305 | ) |
| Cumulative  effect of change in accounting principle                                |   | (461,000                      | )           | — |   | — |   |
| Net  loss available to common stockholders                                          |   | $                             | (14,037,564 | ) | $ | (6,582,040 | ) | $ | (7,147,305 | ) |
| Denominator:                                                                        |   |                          |        |   |   |   |   |
| Denominator  for basic earnings per share — weighted-average shares            |   | 795,348                       |        | 1,258,610 |   | 1,493,643 |   |
| Denominator  for diluted earnings per share — adjusted weighted-average shares |   | 795,348                       |        | 1,258,610 |   | 1,493,643 |   |
| Basic  and diluted loss per share:                                                  |   |                          |        |   |   |   |   |
| Net  loss per share before cumulative effect of change in accounting principle      |   | $                             | (17.07      | ) | $ | (5.23 | ) | $ | (4.79 | ) |
| Cumulative  effect of change in accounting principle per share                      |   | (0.58                         | )           | — |   | — |   |
| Net  loss per share available to common stockholders                                |   | $                             | (17.65      | ) | $ | (5.23 | ) | $ | (4.79 | ) |

 

F-22

----

 

The following equityinstruments (with underlying common share numbers show in the table) were notincluded in the diluted net loss per share calculation because their effectwould have been anti-dilutive:

 

|                          |   | **Year ended December 31,** |   |
|-------------------------------|--------|-----------------------------|--------|
|                          |   | **2000**                    |   | **2001** |   | **2002** |   |
| Convertible  notes payable:   |   | 4,813                       |   | 49,235 |   | 64,285 |   |
| Convertible  preferred stock: |   |                        |   |   |   |   |   |
| Series  C                     |   | 75,554                      |   | 75,554 |   | 75,554 |   |
| Series D                      |   | 107,337                     |   | 101,380 |   | 101,380 |   |
| Series E                      |   | 28,646                      |   | 54,508 |   | 57,490 |   |
| Series F                      |   | —                      |   | 264,284 |   | 478,142 |   |
| Series F-1                    |   | —                      |   | — |   | 232,443 |   |
| Series F-2                    |   | —                      |   | — |   | 439,540 |   |
| Series G                      |   | —                      |   | — |   | 493,200 |   |
| Stock  options                |   | 245,964                     |   | 325,637 |   | 299,865 |   |
| Warrants                      |   | 377,714                     |   | 635,388 |   | 1,108,911 |   |

 

**17.          SubsequentEvents**

 

#### *Financing*

 

InFebruary 2003, the Company issued10,125 and 226 shares of Series G Preferred Stock at a purchase price of $39.50per share to accredited investors and a placement agent, respectively.  Under the terms of this financing, theCompany also issued five-year fully vestedwarrants to purchase 25,313 and 564 shares of common stock at $4.35 per shareto the same accredited investors and placement agent, respectively.  Each share of Series G Preferred Stock is initially convertible into 10 shares ofcommon stock at any time at the election of the holder.  The excess of the value of commonstock into which the Series G Preferred Stock is convertible over the proceedsallocated to the Preferred Stock amounted to $48,995.  Such amount represented a beneficial conversion feature discountand was immediately recognized as a deemed dividend to preferredstockholders.   These transactions arereflected in the pro forma balance sheet as if such transactions had occurredon December 31, 2002.

 

InMarch 2003, the Company issued18,370 shares of Series G Preferred Stock at a purchase price of $27.22 pershare to accredited investors. Under the terms of this financing, the Company also issued five-year fully vested warrants to purchase 45,925shares of common stock at $2.99 per share to the same accreditedinvestors.  Each share of Series G Preferred Stock is initiallyconvertible into 10 shares of common stock at any time at the election of theholder.  The excess of the valueof common stock into which the Series G Preferred Stock is convertible over theproceeds allocated to the Preferred Stock amounted to $103,186.  Such amount represented a beneficialconversion feature discount and was immediately recognized as a deemed dividendto preferred stockholders.   Thesetransactions are reflected in the pro forma balance sheet as if suchtransactions had occurred on December 31, 2002.

 

The following table sets forth selected balance sheetdata as of December 31, 2002, on a pro forma basis, after giving effect to theFebruary 2003 and March 2003 financings. This table is disclosed to demonstrate the Company's compliance, on apro forma basis, with the minimum $2.5 million of stockholders' equity requiredfor continued listing on the Nasdaq Small Cap Market.

 

|                             |   | **December  31,  2002** |      | **Pro forma  Adjustments** |   | **Pro forma  as of  December 31,  2002** |   |
|----------------------------------|--------|-------------------------|-----------|----------------------------|--------|------------------------------------------|--------|
|                             |   |                    |      |                       |   | **(Unaudited)**                          |   |
| Cash                             |   | $                       | 727,466   |                       | $      | 899,937                                  |   | $ | 1,627,403 |   |
| Total  assets                    |   | 4,372,618               |      | 899,937                    |   | 5,272,555                                |   |
| Total  liabilities               |   | 2,724,813               |      | 25,000                     |   | 2,749,813                                |   |
| Accumulated  deficit             |   | (84,207,028             | )         | (323,567                   | )      | (84,530,595                              | )      |
| Total  stockholders’ equity |   | $                       | 1,647,805 |                       | $      | 874,937                                  |   | $ | 2,522,742 |   |

#### * *

#### *Legal Matters*

 

In March 2003, the Montgomery County, Maryland CircuitCourt issued an order for VCampus to pay its landlord in Rockville, Maryland$93,453 of back rent due and all future rents ($499,535) less any rentsreceived by the landlord from any re-leasing of the premises. The order callsfor the future rent amount to be paid monthly through the end of the lease termin 2005. The Company plans to contest the liability for future rents beyondDecember 2003 ($323,231) per the lease terms. The liability for back rents andrents through December 2003 and attorney’s fees is reflected on the Company’sbalance sheet. The Company cannot estimate the 

 

F-23

----

 

probability of the liability to be incurred, if any, for rent beyondDecember 2003. Accordingly, no amounts have been accrued in the financialstatements for this.

 

**18.          QuarterlySales and Earnings Data–Unaudited**

 

The following table presentsthe quarterly results for VCampus Corporation and its subsidiaries for theyears ending December 31, 2001 and 2002:

 
|                                          |   | **1st  Quarter** |      | **2nd  Quarter** |   | **3rd  Quarter** |   | **4th  Quarter** |      |
|-----------------------------------------------|--------|------------------|-----------|------------------|--------|------------------|--------|------------------|-----------|
| **2002**                                      |   |             |      |             |   |             |   |             |      |
| Revenue                                       |   | $                | 1,465,701 |             | $      | 1,633,208        |   | $                | 1,735,807 |   | $ | 1,366,958 |   |
| Loss  from operations                         |   | (959,751         | )         | (672,138         | )      | (1,101,971       | )      | (1,343,502       | )         |
| Net  loss attributable to common stockholders |   | (1,511,052       | )         | (1,806,500       | )      | (2,794,858       | )      | (1,034,895       | )         |
| Net  loss per share, basic and diluted        |   | $                | (1.03     | )                | $      | (1.23            | )      | $                | (1.83     | ) | $ | (0.68 | ) |
|                                          |   |             |      |             |   |             |   |             |      |
| **2001**                                      |   |             |      |             |   |             |   |             |      |
| Revenue                                       |   | $                | 1,811,437 |             | $      | 1,969,361        |   | $                | 1,678,833 |   | $ | 1,513,600 |   |
| Loss  from operations                         |   | (2,016,802       | )         | (1,422,166       | )      | (1,191,617       | )      | (1,306,871       | )         |
| Net  loss attributable to common stockholders |   | (2,146,180       | )         | (1,508,617       | )      | (1,272,999       | )      | (1,654,244       | )         |
| Net  loss per share, basic and diluted        |   | $                | (2.20     | )                | $      | (1.26            | )      | $                | (0.89     | ) | $ | (1.16 | ) |

 

F-24

----

 

**SCHEDULE II — VALUATION ANDQUALIFYING ACCOUNT AND RESERVE**

**(in thousands)**

 

**VCampus Corporation**

 
| **Classification**                |   | **Balance at  Beginning of  Period** |   | **Additions** |   | **Deductions** |   | **Balance at  End of Period** |   |
|-----------------------------------|--------|--------------------------------------|--------|---------------|--------|----------------|--------|-------------------------------|--------|
| Allowance  for doubtful accounts: |   |                                 |   |          |   |           |   |                          |   |
| Year  ended December 31, 2000     |   | 142                                  |   | 76            |   | —         |   | 218                           |   |
| Year  ended December 31, 2001     |   | 218                                  |   | 52            |   | (171) (1       | )      | 99                            |   |
| Year  ended December 31, 2002     |   | 99                                   |   | 12            |   | (80) (1        | )      | 31                            |   |

 

----

(1)  Uncollectible amounts written off.  Net of recoveries.

 

F-25

----