**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K/A#1**

 

**ý****  ANNUAL REPORT UNDER SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002**

 

 

**CommissionFile No. 0-17973**

** **

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| **I-LINK  INCORPORATED**                                                   |
|----------------------------------------------------------------------------|
| (Name of registrant as  specified in its charter)                          |
|                                                                       |   |   |
| **Florida**                                                                |   | **52-2291344** |
| (State or other  jurisdiction  of incorporation or organization)           |   | (I.R.S. Employer  Identification Number) |
|                                                                       |   |   |
| **9775 Business Park Avenue, San  Diego, California 92131 (858) 547-5700** |
| (Address and telephone  number of principal executive offices)             |

 

Securities registered pursuant to Section 12(b) of the Exchange Act: **None.**

 

Securities registered pursuant to Section 12(g) of the Exchange Act: **Common Stock, $.007 par value.**

 

Checkwhether the issuer: (1) filed all reports required to be filed by Section13 or 15(d) of the Exchange Act during the past twelve months (or for suchperiod that the Registrant was required to file such reports); and (2) hasbeen subject to such filing requirements for the past 90days.    Yes    ý       No  o

 

Notwithstandingthe foregoing, as of the date of this filing, the Registrant has not filed itsQuarterly Report on Form 10-Q for the quarterly period ended June 30, 2003.

 

Check if there is no disclosure of delinquent filers in response toItem 405 of Regulation S-K contained in this form, and no disclosure willbe contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.    o

 

The aggregate market value of Common Stock held by non-affiliates basedupon the closing price on June 28, 2002, as reported by the Electronic BulletinBoard, was approximately $16,317,000.

 

Check whether the registrant is an accelerated filed (as defined inRule 12b-2 of the Act).

Yes    o      No  ý

 

As of March 27, 2003, there were 116,549,547 shares of Common Stock,$.007 par value, outstanding.

 

 

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TABLE OF CONTENTS

 
| Item  No. |                                                                                        |
|-----------|---------------------------------------------------------------------------------------------|
| Part I    |
|      |
| 1.        | Description of Business                                                                     |
| 2.        | Description of  Properties                                                                  |
| 3.        | Legal Proceedings                                                                           |
| 4.        | Submission  of Matters to a Vote of Security Holders                                        |
|      |                                                                                        |
| Part II   |
|      |
| 5.        | Market  for the Registrant’s Common Equity and Related Stockholder Matters             |
| 6.        | Selected Financial Data                                                                     |
| 7.        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| 7A.       | Quantitative  and Qualitative Disclosures About Market Risk                                 |
| 8.        | Financial  Statements and Supplementary Data                                                |
| 9.        | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure       |
|      |                                                                                        |
| Part III  |
|      |
| 10.       | Directors  and Executive Officers of the Registrant                                         |
| 11.       | Executive Compensation                                                                      |
| 12.       | Security  Ownership of Certain Beneficial Owners and Management                             |
| 13.       | Certain  Relationships and Related Transactions                                             |
|      |                                                                                        |
| Part IV   |
|      |
| 14.       | Controls and  Procedures                                                                    |
| 15.       | Exhibits,  Financial Statements Schedules and Reports on Form 8-K                           |

 

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***Explanatory Note***

 

This Amendment No. 1 on Form 10-K/A (this “Amendment”) amends theAnnual Report on Form 10-K for the fiscal year ended December 31, 2002, filedon April 30, 2003. I-Link has filed this Amendment to give effect to therestatement of the Company’s financial statements for the years ended December31, 2002 as discussed in Note 3 to the Consolidated Financial Statements. Weare making adjustments relating to revising our method of accounting forrevenues from a network service offering that commenced in November 2002.  The adjustments reflected in this filing aredescribed in more detail elsewhere in this filing.  Although we have revised this Amendment to give effect to theadjustments, other information contained herein has not been updated.  Therefore, you should read this Amendmenttogether with our Quarterly Report on Form 10-Q for the quarter ended March 31,2003 as amended to the date hereof or as subsequently amended, as well as theother documents that we have filed with the Securities and Exchange Commission.Information in such reports and documents update and supersede certaininformation contained in this Amendment.

 

**PART I**

 

**Item1.  Description of Business**

 

**Overview**

 

I-Link Incorporated’s (“I-Link”, the “Company”, “our”or “we”) vision is to be the preferred supplier of communications products andservices to targeted markets that will deliver profitable growth while creatingvalue for all stakeholders.  The missionof I-Link is to provide businesses and consumers with competitively priced voice,data and enhanced communications services via direct and indirectchannels.  Through the dedication of ouremployees, we deliver industry leading customer care, customized productsolutions and full back office support, building long-term loyalty and trustwith all of our customers.

 

**History and Development of theBusiness**

 

I-Link was incorporated in Florida in 1983 under thename Medcross, Inc. It changed its name to I-Link Incorporated in 1997. In1994, I-Link began operating as an Internet service provider (“ISP”) with abusiness model built around providing both network access and value-addedservices.  I-Link quickly identifiedthat the emerging Internet Protocol (“IP”) environment was a promising basisfor enhanced service delivery, and soon turned to designing and building an IPtelecommunication platform consisting of I-Link proprietary software, hardwareand leased telecommunication lines.  Thegoal was to create a platform with the quality and reliability necessary forvoice transmission.  By 1996, I-Linkreleased its first IP-based service called “Fax-4-Less.”  This service provided users with a moreefficient and cost-effective way to distribute facsimile information.

 

In 1997, I-Link started offering enhanced servicesover a mixed IP-and-circuit-switched network platform. These services offered ablend of traditional and enhanced communication services and combined theinherent cost advantages of the IP-based network with the reliability of theexisting public switched telephone network (“PSTN”).  The suite of services included a one number “follow me” service,long distance calling, unified messaging, conference calling, messagebroadcasting, and web-based interface to manage messages and maintain personalaccount settings.  In 1997 we formed oursubsidiary I-Link Worldwide, LLC through which we began marketing our productsand services thorough a network marketing channel.

 

In August 1997, I-Link acquired MiBridge, Inc.(“MiBridge”), a New Jersey-based communications technology company engaged inthe design, development, integration and marketing of a range of softwaretelecommunication products that support multimedia communications over thePSTN, local area networks (“LAN”) and IP networks.  Historically, MiBridge concentrated its development efforts

 

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on compression systemssuch as voice- and fax-over-IP (“VoIP”). As part of I-Link, MiBridge continued to develop patent-pendingtechnologies combining sophisticated compression capabilities with IP telephonytechnology.  The acquisition of MiBridgepermitted us to accelerate the development and deployment of IP technologyacross our network platform.

 

In 1998, we first deployed our real-time, IPcommunications network platform.  Withthis new platform, all core-operating functions such as switching, routing, andmedia control, became software-driven. This new platform represented the first nationwide, commercially viableVoIP platform of its kind.  Following thelaunch of its software-defined VoIP platform in 1998, I-Link has continued torefine and enhance the platform to make it even more efficient and capable forour partners and customers.

 

In February 2000, we transitioned our direct-salesmarketing program to Big Planet, Inc. (“Big Planet”), a subsidiary of Nu SkinEnterprises, Inc., whereupon Big Planet became one of our wholesalecustomers.  The transition of thenetwork marketing sales channel to Big Planet has allowed us to focus ourefforts on the expansion of the VoIP platform and the development anddeployment of new enhanced services and products, while at the same timemaintaining existing channels for retail sales.

 

On March 1, 2001, I-Link became a majority-ownedsubsidiary of Counsel Communications, LLC, which is now a wholly ownedsubsidiary of Counsel Corporation, (collectively, “Counsel”).   Since taking a controlling position inI-Link Counsel has advanced approximately $60.7 million in cash to I-Link.  Of this amount, approximately $20.5 millionwas utilized to acquire certain assets of WorldxChange Communications, Inc. andRSL COM U.S.A. Inc., while the remaining approximate $40.2 million has beenused directly in operations, principally to fund operating losses and bringI-Link’s technology to market. Through December 31, 2002, $5.5 million of theseadvances have been repaid and pursuant to a debt restructuring agreement,Counsel has agreed to convert approximately $29.3 million of its existing debt,including accrued interest, to capital (subject to shareholder approval).  Additionally, Counsel has committed to fund, through long-term inter-company advancesor equity contributions, all capital investment, working capital or otheroperational cash requirements of I-Link through April 15, 2004..  Related to our association with Counsel, onApril 17, 2001, I-Link acquired WebToTel, Inc. (“WebToTel”), a subsidiary ofCounsel, and also its subsidiary, Nexbell Communications Inc. (“Nexbell”), in astock-for-stock transaction.  Nexbellwas sold in December 2001 (see note 8 of financial statements included in Item8 hereof).

 

In June 2001, our wholly owned subsidiary WorldxChangeCorp. (“WorldxChange”) purchased certain assets and assumed certain liabilitiesof WorldxChange Communications, Inc. from a bankruptcy proceeding.  WorldxChange is a facilities-basedtelecommunications carrier that provides international and domesticlong-distance service to retail customers. Telecommunication services provided by WorldxChange initially consistedprimarily of a dial-around product that allows a customer to make a call fromany phone by dialing a 10-10-XXX prefix. Historically, WorldxChange marketed its services through consumer massmarketing techniques, including direct mail and direct response television andradio. In 2002, WorldxChange amended its channel strategy, de-emphasized the directmail channel and devoted its efforts to pursue more profitable methods ofattracting and retaining customers. WorldxChange also utilizes commercial agents as well as a network ofindependent commission agents recruited through its multi-level marketingprograms to retain and attract new customers.

 

On December 6, 2002, we entered into a definitivepurchase and sale agreement to sell substantially all of the assets andcustomer base of I-Link Communications Inc. (“ILC”), a wholly owned subsidiaryof I-Link, to Buyers United, Inc. (“BUI”). The sale is anticipated to close inthe second quarter of 2003. The sale includes the physical assets required tooperate I-Link’s nationwide network using its patented VoIP technology(constituting the core business of ILC) and a fully paid perpetual license touse our proprietary software-based network convergence solution for voice anddata. In January 2003, we entered into our second domestic agreement with acommunications company, to license and assist that company in deploying asimilar network solution for voice and data ( see note 6 of financialstatements included in Item 8 hereof).

 

We have three issued patents and utilize thetechnology underlying those patents in providing our

 

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products and services. Wehave also licensed certain portions of that technology to third parties. Wehave several patent applications that are currently pending before UnitedStates Patent and Trademark Office (“USPTO”). See Item #2 –Description of Properties below for a more full explanationof our patents.

 

On December 10, 2002, WorldxChange completed thepurchase of the Enterprise and Agent business of RSL COM U.S.A. Inc (“RSL”)from a bankruptcy proceeding.  The acquisition included the assets used by RSLto provide long distance voice and data services, including frame relay, tosmall and medium size businesses (“Direct” business), and the assets used toprovide long distance and other voice services to small businesses and theconsumer/residential market (“A&R” business), together with the existingcustomer base of the Enterprise and Agent business.

 

Today, I-Link remains focused on delivering voice anddata services and solutions to our partners and customers.  With over eight years experience developingVoIP technologies, I-Link continues to offer a proven and time-tested solutionfor companies to use our technology to reduce telecommunication costs and/orwho wish to enter the enhanced communications market.  At present, I-Link continues to actively market its voice anddata services and solutions through wholesale and retail channels, and licensesits enhanced services platform to partners and service providers domesticallywho wish to offer voice services without incurring high development costs.

 

As of December 31, 2002, I-Link had 356 employees withwhom we feel we have a generally good relationship.  We are not subject to any collective bargaining agreements.

 

**BusinessReorganization**

 

At the next shareholders’ meeting, we intend to askshareholders to approve a proposal to change the name of I-Link Incorporated toAcceris Communications Inc.

 

In late 2002, we reorganized I-Link into threeoperating segments.  AccerisCommunications Partners (“Acceris Partners”), Acceris Communications Solutions (“Acceris Solutions”) and AccerisCommunications Technologies (“Acceris Technologies”).  These segments are discussed below.

 

Acceris Partners is a combination of the WorldxChangeassets acquired in June 2001 and the A&R business of RSL, which we acquiredin December 2002.  Acceris Partners is afacilities-based provider of circuit-switched long distance telecommunicationservices to end users. Acceris Partners, through WorldxChange, initially approachedthe market through a combination of direct mailings (primarily of a dial-aroundproduct that allows a customer to make a call from any phone by dialing a10-10-XXX prefix) and multi-level marketing (“MLM”).  In 2002, Acceris Partners amended its channel strategy,de-emphasizing the direct mail channel and devoting our efforts to the agentchannel.  It is focused on two distinctagent channels: MLM and commercial agent. In addition, Acceris Partners expanded its product offerings in 2002 tofocus on 1+ switched (1+ is when a customer can pick up the phone and directlydial a long distance number by pushing 1-area code-phone number), dedicatedcircuits, and data.  Further, theCompany began to offer a 1+plus calling plan to its existing customer base inthe dial around business (10-10-XXX prefix). ).  This segment accounted for approximately 95% of the revenue fromcontinuing operations in 2002 and is expected to be the largest contributor torevenue in 2003, but at a lesser percentage as Acceris Solutions contributes alarger proportion. There were no customers in 2002 that accounted for over 10%of this segment’s revenues, which revenues were generated in the United Statesof America.

 

Acceris Solutions is the Enterprise business of RSL,which was acquired in December 2002. Acceris Solutions provides customized integrated communicationssolutions for voice and data. Our innovative approach to networking,connectivity and telecommunications products and services leverages technologyto improve the way our customers do business. Our solutions help our customersincrease revenues and reduce the total cost of technology ownership. Whatdifferentiates Acceris Solutions from other network providers is that we willwork with our customers to develop a customized solution that is designed andimplemented specifically for the way they do business. As this business wasacquired in

 

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December 2002, thissegment accounted for approximately 2% of the revenue from continuingoperations in 2002. The revenue contribution from this source will increasedramatically in 2003 as it operates for the full year in 2003. In 2002, AccerisSolution ‘s two largest customers accounted for 12% and 10% respectively of therevenues of this segment which revenues were generated in the United States ofAmerica.

 

Acceris Technologies is the former technologylicensing and development business of I-Link. Acceris Technologies offers a fully developed network convergencesolution for voice and data.  Over thelast five years, Acceris Technologies has sold several technology licenses ininternational markets based on its IP communications technology, which aresupported by three patents.  AccerisTechnologies refined its technology over the last five years by proving andresolving quality of service integration while developing numerous enhancedfeatures that create incremental revenue for communications providers.  This maturing of the technology was enabledby the building and operation of an IP network across the United States. Thissegment accounted for approximately 3% of the revenue from continuingoperations in 2002. The revenue contribution from this source is expected toincrease in 2003, however its contribution as a percentage of total revenuewill remain relatively consistent with 2002. There were three customers in 2002 each of which accounted for over 10%of the total revenues and which, combined, accounted for 100% of this segment’srevenues, which revenues were with US subsidiaries of internationalcompanies.  However, as of the end of2002 these customers were no longer our customers.

 

**Competition**

 

Our long-term success will be founded in our abilityto provide quality service, enhanced features and new product offerings, whichoffer greater convenience to the Consumer and Enterprise markets.  These products must be offered at value forservice pricing, through our selected distribution channels.

 

The Acceris Solutions and Acceris Partners businessesface competition from numerous telecommunications organizations offeringservice in the United States. Providers include such large organizations asAT&T, Sprint and Verizon, as well as numerous small, less widely known,service providers.

 

The Acceris Partners business, consistent with itscompetitors, sees significant attrition in its customer base over short periodsof time. In order to attract new customers and minimize attrition, we mustdevelop and market product offerings that appeal to people demanding longdistance services originating in the United States.  Factors that influence the highly mobile customer base include,among other things, premium quality of service, enhanced features offerings andpremium customer service, at value pricing. Long-term success in the Acceris Partners market is sustained by attractingnew customers and developing customer loyalty.

 

The Acceris Solutions business differs significantlyfrom the Acceris Partners business.  Inthis business, customers tend to remain with the Company for many years.  This longer term retention results inrecurring revenue streams, which result from our ability to offer specificsolutions to each individual customer. Acceris Solutions differentiates itself from its competitors by offeringcustomized, integrated solutions that enhance its customers’ productivity and,ultimately, improve profitability.

 

Acceris Technologies offers an internally developedpatented technology solution that operates in both a convergence and IPworld.  Acceris Technologies provides a100% software solution for VoIP deployment.  The solution unlike some competition does not rely on hardware toprovide switching, conference or enhanced services.  Additionally, the solution provides an open Application ProgrammingInterface (“API”), to enable development of a wide variety of voice applicationsand services. Commencing in late 2002, we made the decision to pursue thedevelopment of the domestic market providing software based IP solutions toUnited States domestic carriers which assists those companies by reducing theirinternal costs and/or allows them to offer enhanced service products (such asOne-number) to retail customers.  Priorto late 2002, we had offered these products internationally and marketed ourenhanced service products to customers on a retail basis.  Formalizing this directional decision of ouroverall business strategy, in December we entered into an agreement to sell ourIP network operations based in Draper, Utah

 

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to BUI.  We do not see any direct competition to ourcurrent technology although there are many competitors with certain portions ofour technology, but not as an entire package. Our competition would include the traditional switched telephonyinfrastructure providers, such as Nortel and Lucent, which this technologydisplaces.  While our competition offersproducts with similar features, our competitive product is software basedversus hardware based and as such can be deployed at a significantly lowercost.  Also the software nature of ourproduct makes it easier and more economically feasible to develop additionalfeatures and services to meet ever-changing customer needs.

 

**Government Regulation**

 

*General. *We believe many of theservices we provide are subject to the provisions of the Telecommunications Actof 1996 (the “1996 Act”), the regulations promulgated thereunder, as well asthe applicable laws and regulations of the various states administered by therelevant state authorities.  While therecent trend in the U.S., for both federal and state regulation oftelecommunication service providers has been toward less regulation rather thenmore, the Federal Communications Commission (“FCC”) and relevant stateauthorities continue to regulate telecommunication carriers and the terms andconditions under which telecommunication services are provided.

 

*Federal. *The FCC modifies itsregulations of telecommunication carriers from time to time.  In March 2001, the FCC issued an orderrequiring non-dominant carriers to remove their international exchange servicetariffs from the FCC by January 28, 2002. We believe we are in compliance with the FCC’s detariffing orders andthat achieving such compliance did not significantly impact us.

 

In 1997 the FCC issued an order implementing thoseprovisions of the 1996 Act, which promote universal telephone service (the “USFOrder”).  The USF Order requiresinterstate telecommunication carriers to contribute toward a fund for schoolsand libraries, a fund for rural health care and a fund to develop regionscharacterized by low income levels and high telecommunication costs(collectively “USF”). Our USF contributions are assessed based on certain enduser telecommunication revenues, which we calculate in accordance with theFCC’s legislative rules.  The amounts wecontribute to USF may be billed to our end-users and we have elected to passthose charges along to our end user customers. If we continue to bill theseamounts to our end-user customers, our customers may choose to purchase similarservices from our competitors. If we elect not to bill these amounts to ourend-user customers in the future, our profit margins may be less.

 

During the past year the FCC increased the USFcontribution percentages.  Originally inMay 2001 and subsequently in February 2002, the FCC proposed changes to the USFregulations that, if adopted, would alter the basis on which we determine ourUSF contributions and the ability and means by which such contributions may berecovered from our customers.  Forexample, although the FCC has not proposed to prevent carriers from passing USFcharges through to customers, the FCC has recently ruled that it will limit theextent to which carrier costs for administering USF charges may be passedthrough to customers.  In addition, theFCC is considering alternative mechanisms under which it will assess USFcharges to carriers.  Although webelieve that certain proposals may benefit the Company, we cannot predict theoutcome of these proceedings. It remains possible that the FCC could adopt aUSF contribution mechanism that would have a negative effect upon ouroperations.

 

*State. *In addition to regulationby the FCC, the majority of the states require us to register or apply forcertification prior to initiating intrastate interexchange telecommunicationsservices.  To date, our subsidiaries,ILC and WorldxChange, are authorized through certification to provideintrastate interexchange telecommunications services and, in certain states,local exchange services.  Thesesubsidiaries are subject to the obligations that the applicable state lawsplace on all similarly certificated carriers including the regulation ofservices, the payment of regulatory fees and the preparation and submission ofreports. If state regulators or legislators change current regulations or adoptnew regulations it may negatively impact our ability to providetelecommunication services.

 

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**Available Information**

 

I-Link is subject to theinformational requirements of the Securities Exchange Act of 1934, as amended(Exchange Act), which requires that I-Link file reports, proxy statements andother information with the Securities and Exchange Commission (“SEC”). The SECmaintains a website on the Internet that contains reports, proxy and informationstatements and other information regarding registrants, including I-Link, thatfile electronically with the SEC. The SEC’s website address is www.sec.gov. Inaddition, I-Link’s Exchange Act filings may be inspected and copied at thepublic reference facilities of the SEC located at Room 1024, Judiciary Plaza,450 Fifth Street, N.W., Washington, DC 20549; and at the SEC’s regional officesat Citicorp Center, 500 West Madison Street, Room 1400, Chicago, IL 60661, andat 233 Broadway, New York, NY 10279. Copies of the material may also beobtained upon request and payment of the appropriate fee from the PublicReference Section of the SEC located at Room 1024, Judiciary Plaza, 450 FifthStreet, N.W., Washington, DC 20549.

** **

**Item 2.  Description of Properties**

 

At December 31, 2002, I-Link leased approximately26,300 square feet of space for office and other facilities in Draper, Utahpursuant to commercial leases with original terms of five to seven years.  These leases expire between 2003 and 2005subject to our right to extend for an additional five years.  The current aggregate base rent isapproximately $28,000 per month.  I-Linkalso leases several other co-location facilities throughout the United Statesto house its Communication Engines. Such spaces vary in size and length of term.

 

Of the 26,300 square feet leased as of December 31,2002, I-Link subleased approximately 12,000 square feet on a month to monthbasis at approximately $14,000 per month which was the same as our cost. InFebruary 2003, I-Link was released from this lease (12,000 square feet) andcancelled its related sublease agreement.

 

In December 2002, I-Link entered into an agreementwherein it was released from the lease of approximately 14,300 square feet(approximately $14,000 per month) subject to the closing of its sale of certainassets to BUI, which we anticipate will close in the second quarter of 2003.

 

WorldxChange rents approximately 24,000 square feet ofoffice space in San Diego, California under a five-year commercial lease datedAugust 1, 1997, which was extended to March 2003, at a cost of approximately$25,000 per month. WorldxChange also leases several other co-locationfacilities throughout the United States to house its network equipment.  Such spaces vary in size and length of term.

 

WorldxChange also rents approximately 46,000 squarefeet of office space in Pittsburgh, Pennsylvania under a lease dated December11, 2002 and expiring on June 30, 2005, at a cost of approximately $54,000 permonth.  A $200,000 irrevocable letter ofcredit is in place until December 2004 as security for the lease.

** **

We have three issued patents and utilize thetechnology underlying those patents in providing our products andservices.  We have also licensed certainportions of that technology to third parties. We have several patentapplications that are currently pending before USPTO.  In August 2002, our “voice internet transmission system” patent(“VoIP Patent”) was issued (No. 6,438,124) The VoIP Patent joins I-Link’s twoother IP patents, filed in 1996, which are related to the delivery of highquality conference calls with compressed signals (No. 5,898,675; No.5,754,534).  Together, these patentedtechnologies have been successfully deployed and commercially proven in anationwide IP network and in I-Link’s unified messaging service, applicationprogramming interface, and software licensing businesses.  I-Link plans to further leverage thesepatents as it packages an IP solution for the growing Enterprise andapplications markets. While we are using the technology underlying the VoIPPatent in our business, we are also investigating whether and to what extentthe VoIP Patent is licensable to third parties. The Company is currentlyreviewing the results of that review and considering its alternatives.

 

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**Item3. Legal Proceedings**

 

In the Arbitration Matter of Red Cube InternationalAG, v. I-Link Incorporated, before the American ArbitrationAssociation, New York, New York, AAA # 50 T 117 0002B 01.

 

On or about January 24, 2001 Red Cube International,AG (“Red Cube AG”) delivered to us a written demand for arbitration under a May2000 Cooperation and Framework Agreement between the parties.  Red Cube AG’s demand constituted writtennotice of an alleged breach of the Cooperation and Framework Agreement.  We denied these allegations, filed acounterclaim against Red Cube, AG and filed a third-party claim against RedCube, Inc, seeking compensatory and/or punitive damages for Red Cube Inc.’sdefault under a subsequent agreement to provide approximately $60,000,000 inequity funding to us, engaging in a scheme to drive us out of business andobtain control of our proprietary technology, telecommunications network, keyemployees and customers.

 

On July 9, 2002 an evidentiaryarbitration hearing was held in New York before a panel of arbitrators of theAAA and the AAA panel issued its award effective October 7, 2002.  The AAA panel dismissed all of Red Cube’s claimswith prejudice and determined that Red Cube had breached the agreements betweenthe parties.  The arbitration panelawarded I-Link $6,741,835 in damages against Red Cube International AG and RedCube International, Inc., jointly and severally.  In addition the AAA panel ordered Red Cube to pay I-Link $18,210as reimbursement for certain administrative fees and expenses and $64,033 asreimbursement for a portion of the arbitrators’ compensation.  As uncertainty exists at this time as to theultimate collectibility of the awarded amount, management has not recorded anybenefit relating to this reward in the financial statements.

 

D/Vit, Inc. v I-Link Incorporated,Civil No. H-00-3914, United States District Court, Southern District of Texas,Houston Division.

 

On November 9, 2000 D/Vit, Inc (“Dvit”) filed anaction against I-Link in federal court in Texas alleging that I-Link’s use ofthe “V-Link” trademark infringed upon Dvit’s intellectual property rights inthe mark “V Linc”.  Dvit’s complaintsought damages and an injunction enjoining I-Link’s use of the mark“V-Link”.  On August 22, 2001 the courtissued a preliminary injunction enjoining I-Link’s use of the “V-Link”mark.  I-Link had already elected tochange the name of its product to “I-Link One Number”.  On February 14, 2002, I-Link filed a motionfor summary judgment asking the court to rule as a matter of law that I-Link’spast use of the “V-Link” mark did not constitute an infringement upon Dvit’sintellectual property rights in the “V Linc” mark.  Also on February 14, 2002, Dvit filed a motion for partialsummary judgment asking the court to determine as a matter of law that I-Link’sprior use of the “V-Link” mark infringed upon Dvit’s rights in the “V Linc”mark.  On May 8, 2002, the court issueda Memorandum and Order (“Order”) denying I-Link’s motion for summary judgmentand granting Dvit’s partial motion for summary judgment.  The Order permanently enjoined I-Link fromusing the “V-Link” mark in association with the sale, marketing, description,development or service of its telecommunications products.  The court’s order did not address possibledamages.  In December 2002, we settledthe claim for $180,000 of which $120,000 was previously reserved.

 

We are involved in litigation relating to claimsarising out of our operations in the normal course of business, none of whichis expected, individually or in the aggregate, to have a material adverseaffect on us.

 

**Item 4. Submission of Matters to aVote of Security Holders**

 

No matter was submitted during the fourth quarter ofthe fiscal year ended December 31, 2002, to a vote of our security holders.

 

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**PART II**

 

**Item5. Market for I-Link Incorporated’s Common Stock and Related StockholderMatters**

 

**Price Range of Common Stock **

 

I-Link’s common stock is traded on the OTC-ElectronicBulletin Board under the symbol ILNK.

 

Thefollowing table sets forth the high and low prices for our common stock for theperiod as quoted on Nasdaq from January 1, 2000 to September 30, 2001 and onthe Electonic Bulletin Board from October 1, 2001 to December 31, 2002 (asreported by Commodity Systems, Inc.) based on interdealer quotations, withoutretail markup, markdown, commissions or adjustments and may not representactual transactions:

 

| **Quarter Ended**   |   | **High** |   | **Low** |   |
|---------------------|--------|----------|--------|---------|--------|
|                |   |     |   |    |   |
| March 31, 2001      |   | $        | 1.22   |    | $      | 0.25 |   |
| June 30, 2001       |   | 0.75     |   | 0.38    |   |
| September 30,  2001 |   | 0.57     |   | 0.19    |   |
| December 31,  2001  |   | 0.24     |   | 0.07    |   |
|                |   |     |   |    |   |
| March 31, 2002      |   | $        | 0.50   |    | $      | 0.07 |   |
| June 30, 2002       |   | 0.29     |   | 0.13    |   |
| September 30,  2002 |   | 0.24     |   | 0.09    |   |
| December 31,  2002  |   | 0.17     |   | 0.07    |   |

 

On March 27, 2003, the closing price for a share ofour common stock was $0.13.

 

**Holders**

 

As of March 18, 2003, we had approximately 800stockholders of common stock of record and approximately 11,700 beneficialowners.

 

**Dividends**

 

To date, we have not paid and do not anticipate thatwe will pay dividends on our common stock in the foreseeable future.  As of December 31, 2002, we do not have anypreferred stock outstanding which has any preferential dividend.  Preferred stock dividends in the amount of$0, $0 and $196,333 were paid in 2002, 2001 and 2000, respectively, in commonstock (non-cash) on the converted shares of Series F redeemable preferredstock.  A preferred stock dividend in theamount of $630,313 was paid in 2001 in common stock (non-cash) on the Class Cpreferred stock.

 

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**Item 6. Selected Financial Data**

 

The following selected consolidated financialinformation was derived from the audited consolidated financial statements andnotes thereto.  The information setforth below is not necessarily indicative of the results of future operationsand should be read in conjunction with Item 7 – Management’s Discussion andAnalysis of Financial Condition and Results of Operations and the ConsolidatedFinancial Statements and Notes thereto included elsewhere in this Form 10-K.

 
|                                                                   |   | **2002**           |        | **2001**    |       | **2000**    |       | **1999**    |        | **1998**    |       |
|------------------------------------------------------------------------|--------|--------------------|-------------|-------------|------------|-------------|------------|-------------|-------------|-------------|------------|
|                                                                   |   | **(as  restated)** |        |        | ** ** |        | ** ** |        | ** **  |        | ** ** |
| **Statement of Operations Data**:                                      |   |               |        |        |       |        |       |        |        |        |       |
|                                                                   |   |               |        |        |       |        |       |        |        |        |       |
| Revenues:                                                              |   |               |        |        |       |        |       |        |        |        |       |
| Telecommunications  services                                           |   | $                  | 85,252,480  |        | $          | 50,288,917  |       | $           | —      |        | $          | — |   | $ | — |   |
| Marketing  services                                                    |   | —             |        | —      |       | 463,740     |       | 3,672,988   |        | 4,548,421   |       |
| Technology  licensing and Development                                  |   | 2,836,655          |        | 5,696,893   |       | 8,972,828   |       | 2,506,701   |        | 1,466,315   |       |
| Other                                                                  |   | —             |        | —      |       | 400,000     |       | —      |        | —      |       |
| Net sales                                                              |   | 88,089,135         |        | 55,985,810  |       | 9,836,568   |       | 6,179,689   |        | 6,014,736   |       |
|                                                                   |   |               |        |        |       |        |       |        |        |        |       |
| Operating costs  and expenses:                                         |   |               |        |        |       |        |       |        |        |        |       |
| Telecommunications  network expenses (exclusive of depreciation below) |   | 50,935,474         |        | 35,545,611  |       | —      |       | —      |        | —      |       |
| Marketing  services costs                                              |   | —             |        | —      |       | 456,354     |       | 5,400,149   |        | 5,850,873   |       |
| Selling,  general, administrative and other                            |   | 44,683,709         |        | 42,392,038  |       | 22,893,902  |       | 18,265,390  |        | 14,615,105  |       |
| Total operating  expenses                                              |   | 95,619,183         |        | 77,937,649  |       | 23,350,256  |       | 23,665,539  |        | 20,465,978  |       |
|                                                                   |   |               |        |        |       |        |       |        |        |        |       |
| Operating loss                                                         |   | (7,530,048         | )           | (21,951,839 | )          | (13,513,688 | )          | (17,485,850 | )           | (14,451,242 | )          |
|                                                                   |   |               |        |        |       |        |       |        |        |        |       |
| Other income  (expense)                                                |   | (7,498,526         | )           | (4,023,016  | )          | (1,639,109  | )          | (4,856,201  | )           | (8,070,501  | )          |
|                                                                   |   |               |        |        |       |        |       |        |        |        |       |
| Loss from  continuing operations                                       |   | (15,028,574        | )           | (25,974,855 | )          | (15,152,797 | )          | (22,342,051 | )           | (22,521,743 | )          |
|                                                                   |   |               |        |        |       |        |       |        |        |        |       |
| Loss from  discontinued operations                                     |   | (12,508,374        | )           | (19,614,588 | )          | (10,599,381 | )          | (2,317,237  | )           | (5,436,336  | )          |
| Loss before  extraordinary gain                                        |   | (27,536,948        | )           | (45,589,443 | )          | (25,752,178 | )          | (24,659,288 | )           | (27,958,079 | )          |
|                                                                   |   |               |        |        |       |        |       |        |        |        |       |
| Extraordinary  gain on extinguishment of debt                          |   | —             |        | 1,092,818   |       | —      |       | —      |        | —      |       |
| Net loss                                                               |   | $                  | (27,536,948 | )           | $          | (44,496,625 | )          | $           | (25,752,178 | )           | $          | (24,659,288 | ) | $ | (27,958,079 | ) |
|                                                                   |   |               |        |        |       |        |       |        |        |        |       |
| Loss from  continuing operations applicable to common stock            |   | $                  | (15,028,574 | )           | $          | (10,759,019 | )          | $           | (16,799,615 | )           | $          | (31,269,025 | ) | $ | (32,362,885 | ) |
|                                                                   |   |               |        |        |       |        |       |        |        |        |       |
| Net loss per  common share - basic and diluted:                        |   |               |        |        |       |        |       |        |        |        |       |
|                                                                   |   |               |        |        |       |        |       |        |        |        |       |
| Loss from  continuing operations                                       |   | $                  | (0.13       | )           | $          | (0.11       | )          | $           | (.63        | )           | $          | (1.46 | ) | $ | (1.84 | ) |
| Loss from  discontinued operations                                     |   | (0.11              | )           | (0.20       | )          | (.40        | )          | (0.11       | )           | (0.31       | )          |
| Extraordinary  gain                                                    |   | —             |        | 0.01        |       | —      |       | —      |        | —      |       |
| Net  loss per common share                                             |   | $                  | (0.24       | )           | $          | (0.30       | )          | $           | (1.03       | )           | $          | (1.57 | ) | $ | (2.14 | ) |
|                                                                   |   |               |        |        |       |        |       |        |        |        |       |
| **Balance Sheet Data**:                                                |   |               |        |        |       |        |       |        |        |        |       |
|                                                                   |   |               |        |        |       |        |       |        |        |        |       |
| Working capital  deficit                                               |   | $                  | (17,244,372 | )           | $          | (40,812,272 | )          | $           | (30,060,766 | )           | $          | (1,318,640 | ) | $ | (4,073,914 | ) |
| Property and  equipment, net                                           |   | 11,479,111         |        | 21,023,696  |       | 10,983,273  |       | 7,019,361   |        | 7,262,781   |       |
| Total assets                                                           |   | 41,446,037         |        | 46,780,149  |       | 21,657,492  |       | 21,658,199  |        | 23,855,363  |       |
| Long-term  obligations                                                 |   | 64,518,354         |        | 19,661,184  |       | 2,801,592   |       | 9,658,525   |        | 8,785,933   |       |
| Stockholders’  deficit                                            |   | (63,924,466        | )           | (36,997,854 | )          | (28,839,061 | )          | (11,049,897 | )           | (16,953,363 | )          |

 

On April 17, 2001, we acquired WebToTel Incorporatedand its subsidiaries (including Nexbell Communications Inc.) in a stock forstock transaction.  However, as WebToTel(which was a subsidiary of Counsel) and I-Link were under common control ofCounsel (the majority shareholder of I-Link) as of March 1, 2001 (the dateCounsel obtained its ownership in I-Link), we have accounted for theacquisition

 

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on an accounting methodconsistent with the pooling-of-interests method of accounting as of March 1,2001.  Accordingly, we have included thefinancial results of WebToTel and its subsidiaries (including Nexbell which wassold in December 2001) subsequent to March 1, 2001.

 

On June 4, 2001, I-Link, through WorldxChange,purchased certain assets and assumed certain liabilities of WorldxChangeCommunications, Inc. from a bankruptcy proceeding. WorldxChange is afacilities-based telecommunications carrier that provides international anddomestic long-distance service to residential and commercial customers.  WorldxChange operations are part of ourAcceris Partners segment of operations.

 

On December 6, 2002, I-Link entered into an agreementto sell substantially all of the assets of ILC.  The sale includes the physical assets required to operateI-Link’s nationwide network using its patented VoIP technology (constitutingthe core business of ILC) and a license in perpetuity to use I-Link’sproprietary software platform.  Additionally,I-Link is selling its customer base that was serviced by ILC. The sale isanticipated to close in the second quarter of 2003.  Pursuant to Statement of Financial Accounting Standards No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”, operatingresults of ILC have been reclassified in the years from 1998 to 2002 todiscontinued operations.  The operationsof ILC had previously been reported as part of a business segment referred toas Telecommunication Services, which was a separate segment different than ourcurrent business segments.

 

On December 10, 2002, WorldxChange completed thepurchase of the Enterprise and Agent business of RSL. The acquisition included the assets used by RSL to provide long distancevoice and data services, including frame relay, to small and medium sizebusinesses (“Direct” business), and the assets used to provide long distanceand other voice services to small businesses and the consumer/residentialmarket (“A&R” business), together with the existing customer base of theEnterprise and Agent business.  The Direct and A&R businesses are included in our Acceris Partnerssegment while the Enterprise and Agent business is included in our AccerisSolutions segment.

 

**Item 7.          Management’s Discussion and Analysis of Financial Conditionand Results of Operations**

 

The Chief Executive Officer and Chief FinancialOfficer of I-Link have evaluated the disclosure controls and procedures ofI-Link and determined that there were significant deficiencies and materialweaknesses.  For more informationregarding these findings and corrective actions taken, see the discussion inItem 14 - Controls and Procedures below.

 

***Forward-Looking Information***

 

*Thisreport contains certain “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933, as amended, Section 21E of theSecurities Exchange Act of 1934, as amended, and information relating to I-Linkthat are based on management’s exercise of business judgment as well asassumptions made by and information currently available to management. Whenused in this document, the words “anticipate,” “believe,” “estimate,” “expect,”and “intend” and words of similar import, are intended to identify anyforward-looking statements. You should not place undue reliance on theseforward-looking statements.  Thesestatements reflect our current view of future events and are subject to certainrisks and uncertainties as noted below. Should one or more of these risks oruncertainties materialize, or should underlying assumptions prove incorrect,our actual results could differ materially from those anticipated in theseforward-looking statements.*

 

Although we believe that our expectations are based onreasonable assumptions, we can give no assurance that our expectations willmaterialize.  Many factors could causeactual results to differ materially from our forward-looking statements.  Several of these factors include, withoutlimitation:

 

•                  TheCompany’s ability to:

•                  financeand manage expected growth;

•                  provideongoing competitive services and pricing;

•                  retainand attract key personnel;

 

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•                  operateeffective network facilities;

•                  maintainfavorable relationships with local exchange carriers (“LEC”s), long distanceproviders and other vendors; including our ability to meet our usagecommitments.

•                  attractnew subscribers while minimizing subscriber attrition;

•                  adjustthe channel of distribution for Acceris Partners from a direct 10-10-xxx andMLM agent channel strategy to a commercial agent and MLM strategy;

•                  revitalizethe sales efforts of the business operations acquired out of bankruptcy (RSL);

•                  efficientlyintegrate completed and currently contemplated acquisitions;

•                  addresslegal proceeding in a effective manner;

 

•                  Changesin federal and state governmental regulation of the long distancetelecommunications and internet industries;

•                  Theadoption of new, or changes in, accounting principles;

•                  Ourability to maintain, operate and upgrade our information systems network;

•                  Ourability to complete our debt restructuring agreement with Counsel;

•                  Counsel’scontinued commitment and ability to finance funds required by the operations ofthe business as well as our own ability to funds any cash requirements;

•                  Otherrisks referenced from time to time in our filings with the SEC.

 

We undertake no obligation and do not intend toupdate, revise or otherwise publicly release any revisions to these forward-lookingstatements to reflect events or circumstances after the date hereof or toreflect the occurrence of any unanticipated events.

 

**CriticalAccounting Policies**

 

A summary of our significant accounting policies isincluded in Footnote 4 to our Consolidated Financial Statements.  Our Consolidated Financial Statements arebased on the selection and application of significant accounting policies, someof which require management to make estimates and assumptions which affect thereported amounts of assets, liabilities, revenues and expenses and also affectthe disclosure of contingent items. Critical accounting policies are those that may have a material impacton our Consolidated Financial Statements and also require management toexercise significant judgement.  Webelieve our more critical judgment areas in the application of our accountingpolicies that currently affect our financial condition and results ofoperations include those addressing the recognition of revenue, provision fordoubtful accounts and the recoverability and useful lives of tangible and intangibleassets.

 

**Restatement**

 

I-Link commenced the sale of a network serviceoffering in November 2002 and ceased offering the service on July 23, 2003.Revenue from this service offering was recorded as an element oftelecommunication services which we had initially recorded on the accrual basisand estimated uncollectible revenue.  Inthe second quarter of 2003, we determined that collectibility of the amountsbilled to customers was not reasonably assured at the time of billing.  Accordingly, we have revised our method ofaccounting for revenues from this network service offering, from the accrualmethod to recognition of revenue when the amount of our actual cash collectionsare known and retained by us. Under our agreement with the LEC’s, cash collectionsremitted to us are subject to adjustment generally within two to fourmonths.  Commissions (included inselling, general and administrative expense) and estimated bad debt expensesassociated with the eliminated revenues have also been eliminated.  All other direct expenses such astelecommunications network expenses are expensed as incurred and totaled$1,994,000 in the fourth quarter. Commission expense (which is based on cash collected) will be recognizedwhen amounts collected can be reasonably estimated. The effect of this changeis an increase in the net loss for the fourth quarter and year ended December31, 2002 of $3,505,043, or $.03 per share. We anticipate recognizing revenue from this program commencing in thesecond quarter and ending in the fourth quarter of 2003.  The first quarter of 2003 is also beingrestated.

 

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The effect of this change is set out in the belowtable:

 
| Net  loss as originally reported                          |   | $          | (24,031,905 | ) |
|-----------------------------------------------------------|--------|------------|-------------|---|
| Reduction  of telecommunication services revenue          |   | (5,158,460 | )           |
| Reduction  of provision for doubtful accounts             |   | 331,783    |        |
| Reduction  of selling, general and administrative expense |   | 1,321,634  |        |
| Net  loss as restated                                     |   | $          | (27,536,948 | ) |
|                                                      |   |       |        |
| Net  loss per share as originally reported                |   | $          | (0.21       | ) |
| Net  loss per share as restated                           |   | $          | (0.24       | ) |

 

The following sets forth the effects of these restatements on theConsolidated Balance Sheet as of December 31, 2002:

 

|                      |   | **As  Originally Reported** |       | **Adjustments** |   | **As  Restated** |   |
|---------------------------|--------|-----------------------------|------------|-----------------|--------|------------------|--------|
| Accounts  Receivable, Net |   | $                           | 21,750,826 |            | $      | (4,826,677       | )      | $ | 16,924,149 |   |
| Accrued  Liabilities      |   | 19,411,946                  |       | (1,321,634      | )      | 18,090,312       |   |
| Shareholders'  Deficit    |   | (60,419,423                 | )          | (3,505,043      | )      | (63,924,466      | )      |
|                           |        |                             |            |                 |        |                  |        |  |  |  |

 

 

**Results of Continuing Operations **

 

When considering the review of the results ofcontinuing operations for 2002 compared to 2001, and 2001 compared to 2000, itis important to note the following significant changes in our operations thatoccurred in 2002 and 2001.  Namely:

 

1.                                       OnJune 4, 2001, WorldxChange completed the purchase of certain assets andliabilities of WorldxChange Communications, Inc. WorldxChange continues tooffer the dial-around telecommunications product, which WorldxChangeCommunications, Inc. had previously offered. We did not offer a comparable product prior to June 4, 2001.

 

2.                                       OnDecember 10, 2002, WorldxChange acquired the Enterprise and Agent Business ofRSL, including the assumption of certain liabilities.  RSL offers voice services to residential and small businesscustomers through an indirect sales channel. It also offers voice and data solutions to small and medium sizeenterprise customers through a direct sales channel.    The RSL operations from December 11, 2002 to December 31, 2002have been included in the statement of operations for 2002.

 

3.                                     OnDecember 6, 2002, we entered into an agreement to sell substantially all of theassets and customer base of ILC. The sale is anticipated to close in the secondquarter of 2003.  As a result of theagreement, the operational results related to ILC have been reclassified asdiscontinued operations in the current and prior years and accordingly are notspecifically included in the following analysis of continuing operations forthe past three years.

 

**Revenues**

 

Telecommunications services revenue increased to $85.3million in 2002 from  $50.3 million in2001.  The increase is primarily relatedto the following events:

 

(1)          In June 2001, we acquired the longdistance operations of WorldxChange Communications Inc. from bankruptcy. Thepurchase was accounted for under the purchase method of accounting.  Accordingly, revenue in 2001 is limited torevenue from the date of acquisition in June 2001 through the end of 2001(approximately seven months).  In 2002,revenue for twelve months of operations of WorldxChange is included in thereported revenue.

 

(2)          In December 2002, we acquired the assetsof the Agent and Residential business (“A&R”) and the Enterprise businessof RSL COM USA, Inc. (“RSL”) from bankruptcy. The acquisition has been accounted for under the purchase method ofaccounting; accordingly, revenue subsequent to the acquisition, which isapproximately three weeks of 2002, has been included in the reported revenue.

 

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In the segment reporting section of the consolidatedfinancial statements, we segment the telecommunications revenue by itsoperating segments, known as Acceris Partners and Acceris Solutions. TheAcceris Partners business includes the operations of the former WorldxChangeand the former A&R business of RSL, while the Acceris Solutions business iscomprised of the former Enterprise business of RSL.

 

*AccerisPartners:*The Acceris Partners business accounted for$83.7 million of the continuing telecommunications services revenue in 2002 andall of the 2001 telecommunications services revenue.  There were no 2000 telecommunications services revenues (orexpenses) from continuing operations, as the telecommunications servicesrevenues from continuing operations began in June 2001.  Excluded from Acceris Partnerstelecommunication services revenues is approximately $4.8 million related toservices rendered through December 31, 2002 that have not been recognized asrevenues because of uncertainty related to the ultimate cash collection.  This revenue related to the network serviceoffering introduced in November 2002 that we ceased to offer on July 23,2003.  Net cash receipts from thisnetwork service offering will be recognized as revenue in the future periods,beginning in the second quarter of 2003, when the actual cash collection to beretained by us are finalized.

 

Comparing Acceris Partners 2002 revenues to annualized2001 revenue shows a small increase in revenue.  Understanding the change in revenue requires a more detailedreview as follows.  Telecommunicationsservices revenues are the result of three primary elements, specifically,volume of minutes, rate per minute and the number of customers.

 

In 2002, the Acceris Partners business experienced anincrease of approximately 12% in the volume of minutes over its networkcompared to 2001 on an annualized basis. This increased network utilization was offset by a 23% decrease in theaverage rate per minute due to significant price decreases in the long distancemarket throughout most of 2002 which decreases we do not expect to continue in2003.  The average number of customersin 2002 increased over 2001 by 3%.  Part of the source of that increase began in the fourth quarter of 2001,when Acceris Partners embarked on an aggressive direct advertising campaignwhich resulted in large increases in the number of customers on the network inlate 2001and into the first half of 2002. While the investment in direct advertising increased revenues, itscontribution was not as profitable as we had expected.  Accordingly in early 2002, we ceased ourdirect advertising campaign and pursued more profitable methods of attractingand retaining customers.  Among thealternative methods being used to attract profitable customers was our decisionto focus on and grow our commercial agent and MLM channels, while alsoexpanding our product offerings to include 1+ long distance services, networkprovisioning, wholesale carriage, and conference call services.  The acquisition of the A&R business ofRSL is expected to act as an accelerator to our commercial agent strategy.

 

Acceris Partners expects to show increasing revenue in2003. We believe the increase will be achieved by (1) increasing the customerbase, which in turn increases network utilization and (2) the effect of a fullyear inclusion of the A&R business of RSL. The expected increase in customer base will come from the customerattraction and retention programs in place, the completing and maturing of thechannel transition coupled with the rounding out of Acceris Partners’ productsofferings.

 

*AccerisSolutions:*Revenue from Acceris Solutions in 2002 camefrom the Enterprise business of RSL, which we acquired out of bankruptcy onDecember 10, 2002.  Revenue of $1.5million has been included in 2002 for the period from December 11, 2002 throughDecember 31, 2002.  While in bankruptcy,the Enterprise business of RSL found it nearly impossible to attract newcustomers.  Despite competitive pricing,prospective customers were unwilling to make contractual commitments givenRSL’s financial uncertainty.  Thisfinancial uncertainty also affected the existing customer base as theircontracts expired, resulting in higher than normal customer turnover.  We expect price competition to continue in2003, however we believe that our contribution margin from our revenues in thissegment will remain comparable with 2002.

 

While in bankruptcy, the Enterprise business of RSLconcentrated on maintaining its customer base. Upon our acquisition of the business, we have focused on stabilizing theexisting customer base and have instituted a customer acquisition plan which weexpect will take several months to put in place before we see significantcustomer acquisitions.  We expect to seea steady growth in revenue from our sales efforts beginning in the second halfof 2003 and beyond.

 

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We expect Acceris Solutions to be self-funding beyondits acquisition capitalization.  LikeAcceris Partners, in order to obtain working capital, Acceris Solutions willenter into an asset backed debt facility based on the quality of its accountsreceivable; such debt will be senior to the debt of Counsel.  We do not anticipate making debt repaymentsin 2003 to Counsel on our debt instrument used to acquire RSL.

 

*AccerisTechnologies:*Acceris Technologies is the segmentresponsible for licensing and development revenue, which revenues were $2.8million in 2002, $5.7 million in 2001 and $9.0 million in 2000.  Revenues in 2002 ($1.7 million), 2001 ($5.0million) and 2000 ($3.3 million) were from a $10 million licensing agreemententered into May 2000 between Red Cube and I-Link that was recorded as revenueover a twenty-four month period, which ended in May 2002. When examining thetechnology licensing market it is important to appreciate that the revenue isproject based and as such revenue will vary from year to year based on timingof technology licensing, development projects and payments.

 

The primary decrease in revenue in 2002 from 2001 wasdue to the reduction in revenue recorded relating to the Red Cubeagreement.  Historically, AccerisTechnologies has focused its sales on international markets while focusingdomestically on its own network development, which we intended to take tomarket.  In December 2002, we enteredinto an agreement to sell the domestic network operations (ILC) to BUI as partof a formal plan of disposal pursuant to a refocusing of strategy by Acceris.The sale is anticipated to close in the second quarter of 2003.  While we sold the operations of ILC, weretained ownership of the technology that was licensed to BUI.  While the licensing to BUI was the firstdomestic licensing of our technology, in January 2003, we entered into oursecond domestic licensing agreement and expect to sell several additionallicenses throughout 2003.

 

The decrease from 2000 to 2001 was primarily a resultof licensing agreements in 2000 that did not recur in 2001, primarily twoagreements that resulted in revenues of nearly $4.0 million in 2000 which did notrecur in 2001.  This decrease was offsetby increased revenues from the Red Cube agreement and $680,000 from a newforeign license agreement in 2001.

 

**Otherrevenues**

 

In 2000, we had marketing services revenues of$463,740.  The business to which this revenuerelated was sold in February 2000 and accordingly there have been no suchrevenues since then.  Additionally, in2000 we had revenues of $400,000 relating to the sale of products, whichproduct has not been sold since that date nor is there anticipated to be anycomparable sales in the future.

 

**Operatingcosts and expenses**

 

Acceris Partners’ telecommunication network expensewas $49.7 million in 2002 and $35.5 million in 2001.  The increase in 2002 over 2001 relates primarily to inclusion ofa full year of WorldxChange operations in Acceris Partners as opposed to sevenmonths in 2001.  On an annualized basis,telecommunications network expense decreased from 2001 to 2002.  The decrease on an annualized basiscorrelates with a 14% increase in telecommunications services revenue margin(telecommunication services revenue compared to telecommunication networkexpense) in 2002 over 2001, primarily relating to improved network efficiencyderived from reductions in operating costs, efficiencies relating to morescaled utilization of the network.  Thetelecommunications services revenue margin was negatively impacted in 2002 bythe expensing of $2.0 million of network service offering costs for which norevenue was recognized (see discussion of accounting for this network serviceoffering in “Restatement” above).   Asoutlined in the revenue discussions, price erosion was pervasive throughout2002, however this erosion was mitigated by price protection clauses in our contractswith our underlying carriers that also reduce our carrier costs.  In 2003, excluding revenues and expensesrelated to the network service offering, we expect telecommunication networkexpense will directly correlate with telecommunication services revenues andthat the telecommunications services margin will remain consistent with2002.  The margin on the network serviceoffering will be higher than normal in 2003 due to revenue to be recognized in2003 on services provided in the fourth quarter of 2002.  Acceris Solutions accounted for $1.2 millionof the total network expense in 2002 and we anticipate its telecommunicationsnetwork expense will increase in 2003 at a slower rate than its revenue growththus increasing telecommunications services margins.

 

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Acceris Partners’selling, general, administrative and other expense was $27.8 million in 2002 upfrom $20.4 million in 2001. The increase in 2002 over 2001 primarily relates toa full year of operations of Acceris Partners, primarily WorldxChange, in 2002as compared to seven months of operations in 2001. Selling, general,administrative and other expense will increase in 2003 due to the inclusion ofthe A&R business of RSL which we acquired in December 2002.  Selling, general, administrative and otherexpense for 2002 includes advertising costs of $1,590,000 as compared to$7,266,000 in 2001. The decrease in 2002 compared to 2001 relates to thecurtailment of a direct advertising program in the first quarter of 2002 thatcommenced in 2001. The program was curtailed, as the returns from the programdid not justify the investment.  Subsequent to the curtailment of the direct advertising program in early2002, management focused its attention on the reorganization of its channelstrategy by placing larger emphasis on the commercial agent andMulti-Level-Marketing (“MLM”) channels. The transition in strategy reducedadvertising costs but introduced a higher level of sales commissions.  Acceris Solutions accounted for $777,000 ofselling, general, administrative and other expense in 2002.  It is anticipated that this expense willremain constant on an annualized basis in 2003.  Acceris Technologies’ selling, general, administrative and otherexpense was $451,000 as compared to $1.6 million in 2001 and $1.8 million in2000.  The decrease is directly relatedto our efforts to refocus our resources to better match our revenues.  We anticipate that Acceris Technologies’ selling,general, administrative and other expense in 2003 will approximate 2002.  In 2002, there were selling, general,administrative and other expenses of $4.1 million relating to corporateoverhead which will be less in 2003 as a result of our termination of theDraper Utah operations in December 2002. Likewise in 2000 we incurred $196,000 in selling, general,administrative and other expense in the Marketing Services segment which didnot recur after 2000.

 

Acceris Partners’ provision for doubtful accounts was$6.0 million in 2002 as compared to $2.9 million in 2001. The increase in 2002over 2001 primarily relates to a full year of revenue from Acceris Partners,primarily WorldxChange, in 2002 as compared to seven months of operations in2001.  Other than the increase due to afull year of operations, the provision increase in 2002 relates to a change inchannels resulting in more direct billing of customers which incurs a largerpercentage of uncollectible accounts. Acceris Solutions recorded a provision of $33,000 in 2002.  Acceris Solutions anticipates that its 2003provision for doubtful accounts as a percentage of revenue will remainconsistent with 2002.  AccerisTechnologies had no bad debts in any year presented due to the nature of therevenues and revenue recognition policies.

 

Acceris Partners’ depreciation and amortization was$4.1 million in 2002 compared to $2.3 million in 2001. The increase in 2002over 2001 primarily relates to a full year of operations from Acceris Partners,primarily WorldxChange, in 2002 as compared to seven months of operations in2001.  We anticipate the dollar amountof 2003 depreciation to remain constant with 2002.  Acceris Solutions recorded $158,000 in depreciation andamortization in 2002.  It is anticipatedthat the dollar amount of their depreciation and amortization will remainconstant on an annualized basis in 2003. Acceris Technologies recorded depreciation of $11,000 in 2002 comparedto $126,000 in 2001 and $98,000 in 2000. We anticipate that Acceris Technologies will incur depreciationconsistent with 2002 in 2003.

 

Acceris Technologies incurred research and developmentcosts of $1.4 million in 2002 compared to $2.3 million in 2001 and $4.2 millionin 2000.  The decreases over the pastthree years are a result of our decision to consolidate our research operationsand to curtail research and development activities in order to concentrate ourfinancial resources on sales and marketing of existing products.  With the sale of the ILC business inDecember 2002, we have stopped our research and development activities andexpect that there will be minimal research and development activities in 2003as we continue to concentrate on sales of existing products.

 

In 2000, we incurred marketing service costs of$456,354.  The business to which thisexpense related was sold in February 2000 and accordingly there have been nosuch expenses since then.

 

 

**OtherIncome (expense)**

 

Interest expense was $7.9 million in 2002 as comparedto $4.7 million in 2001 and $1.5 million in 2000.   Overall the increase is directly related to our increased debtfrom loans from Counsel (necessary to fund our continued cash operatingrequirements and acquisitions), inclusion of interest from Acceris

 

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Partner’s capital leasesfor twelve months in 2002 as compared to seven months in 2001 and from AccerisPartner’s revolving credit facility which originated in December 2001.  Interest expense in 2003 should decreasesignificantly due to the agreement with Counsel to convert approximately $29.3million in debt into common stock of I-Link and our sale of the ILC businesswhich will significantly decrease our operational cash requirements in thefuture.  This decrease will be offset bythe interest related to the new $8.5 million notes related to our acquisitionof RSL in December 2002.

 

Interest and other income were $395,000 in 2002,$81,000 in 2001 and $487,000 in 2000. Other income in 2002 was primarilyrelated to Acceris Partners, who in the fourth quarter was informed that it hadfunds on deposit with certain carriers that it had not previously knownexisted.  Upon verification of suchdeposits, we recorded the asset and recognized other income of approximately$200,000. We did not have similar transactions in 2001 or 2000, nor do weanticipate similar transactions in 2003.  The other changes from year to year relate to various items which do notrecur from year to year and a decrease in interest earned in 2002 compared to2001 and 2000 which corresponds to the decrease in average cash balances onhand during the respective years and the reduction in interest rates during thesame periods.

 

In December 2001 we sold our subsidiary Nexbell to an unrelatedparty.  The sale was a sale of Nexbell’sstock and accordingly the assets and liabilities of Nexbell were assumed by thepurchaser with no further financial obligation on our part.  At the time of the sale, the liabilitiesexceeded the assets of Nexbell and accordingly we have recorded a gain on saleof subsidiary in the amount of $588,943 (the amount by which the liabilities ofNexbell exceeded its assets).

 

A settlement expense of $639,565 was recorded in 2000.  This expense is the result of an obligationto issue 129,519shares of common stock in exchange for trading restrictions imposed on JNCOpportunity Fund Ltd. (JNC) in relation to the common stock to be issued to JNCpursuant to a settlement and release agreement entered into in February2000.  The settlement and releaseagreement settled the litigation between JNC and us over unconverted Series Fpreferred stock held by JNC. The amount of this expense was based upon themarket price of our common stock on May 24, 2000 when the common stock wasissued.  There was no comparable expensein 2002 or 2001.

 

 

**Extraordinarygain**

 

In 2001, anextraordinary gain on extinguishment of debt was recorded. In the third quarterof 2001, Nexbell (a wholly-owned subsidiary of I-Link at the time) was indefault on two leases and at the time of settlement we were liable for$1,272,818.  As the liability wassettled for $180,000, we recorded an extraordinary gain in the amount of$1,092,818.  There was no comparableevent in 2002 or 2000.

 

 

**SegmentProfitability**

 

For the year ended December 31, 2002, Acceris Partnersand Solutions incurred operating segment losses from continuing operations of$6.7 million and $629,000, respectively. We anticipate that through revenue growth and continued control ofexpenses, both segments will report operating income for 2003.  Acceris Technologies reported operatingsegment income of $976,000 in 2002.  Weanticipate that this segment will also report segment income in 2003.  The measures of segment loss or incomediscussed above exclude approximately $8.1 million of expenses which areconsidered corporate expenses and which are not allocated to a specificsegment.  These expenses consistprimarily of interest expense on debt from I-Link Incorporated to Counsel,which we anticipate will decrease dramatically in 2003 when the debtrestructuring with Counsel is approved by the shareholders (see note 15).

 

 

**Liquidityand Capital Resources**

 

Cash and cash equivalents as of December 31, 2002 were$3.6 million compared to $4.7 million in 2001.

 

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Cash flow from operatingactivities

 

The Company’s working capital deficit declined to$17.2 million as of December 31, 2002, down from the $40.8 million as ofDecember 31, 2001.  The reduction in theworking capital deficit is due primarily to the classification as long-term in2002 of approximately $17.5 million in debt to Counsel which will be convertedto equity in 2003 when the 2003 shareholders meeting is held.  This $17.5 million in debt was classified asa current liability at December 31, 2001. Additionally, $9.4 million in debt to Counsel was extended to 2004 andthus reduced our current liabilities.

 

Cash used in operating activities during 2002 was $4.9million compared to $29.3 million in 2001 and cash provided by operatingactivities of $1.9 million in 2000.  Thedecrease in cash used in operating activities in 2002 as compared to 2001 isprimarily due to a decrease in our net loss which resulted from improvedoperating performance of Acceris Partners in 2002 as compared to 2001 andcontinued downsizing of I-Link’s network and development operations.   The decrease in cash from operatingactivities in 2001 from 2000 was primarily due to an increase in our net lossand the difference in cash receipts and revenue recognition related to unearnedrevenue.

 

Cash utilized ininvesting activities

 

Net cash used by investing activities in 2002 was $9.2million as compared to $15.4 million in 2001 and $6.9 million in 2000.

 

In December 2002, we expended $8.3 million related tothe acquisition of the A&R and Enterprises assets of RSL.  In addition to the RSL purchase, we expended$1.6 million on purchases of furniture, fixtures, equipment, software andintangible assets as we expanded our Acceris Partners operations and continuedto improve our network in order to reduce it’s overall cost.  These expenditures were offset by proceedsof $692,000 from the sale of a building.

 

The net increase in cash used by investing activitiesin 2001 as compared to 2000 was primarily due to a $13.5 million purchase ofWorldxChange assets, which purchase was offset by a reduction in the purchaseof furniture, fixtures, equipment and software of $4.9 million.

 

Cash provided byfinancing activities

 

Net cash provided by financing activities in 2002 was$13.1 million as compared to $47.2 million in 2001 and $4.2 million in 2000.

 

In 2002, our largest shareholder, Counsel loaned us$16.8 million, including $7.5 million to fund the cash requirements for theasset purchase of RSL.  Offsetting theseadvances from Counsel was a repayment of $3.0 million to Counsel.   During 2002, we borrowed a net additional$2.1 million on Acceris Partners’ revolving credit facility.

 

In 2002, Counsel reimbursed the Company $498,000 forcertain expenses.  This amount, as wellas the sources discussed above, was offset by payments of $2.5 million pursuantto our capital lease obligations and long-term debt.

 

Cash provided from financing activities in 2001included cash borrowings (net of repayments of $2.5 million) from notes payableto a related party (Counsel) of $41.4 million and net borrowings from arevolving line of credit of $7.0 million. Additionally, I-Link received $15,000 from the sale of I-Link commonstock under its employee stock purchase plan. During 2001, we repaid $1.2 million in long-term debt and capital leaseobligations.  Cash provided in 2000 included$4.3 million from exercise of options and warrants and employee purchases underthe employee stock purchase plan. During 2000, we repaid $146,000 in long-term debt and capital leaseobligations.

 

19

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We have various commitments in addition to ourdebt.  The following table summarizesour contractual obligations at December 31,2002 (in thousands):

 
| **Contractual obligations:**                     |   | **Total** |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   |
|--------------------------------------------------|--------|-----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                                             |   |      |   |     |   |     |   |     |   |     |   |     |   |
| Debt (notes  payable)*                           |   | $         | 43,164 |     | $      | 12,073   |   | $        | 31,090 |     | $      | —   |   | $ | — |   | $ | — |   |
|                                             |   |      |   |     |   |     |   |     |   |     |   |     |   |
| Capital lease  obligations                       |   | $         | 6,860  |     | $      | 2,714    |   | $        | 3,015  |     | $      | 1,514    |   | $ | — |   | $ | — |   |
|                                             |   |      |   |     |   |     |   |     |   |     |   |     |   |
| Operating leases  for office space and equipment |   | 7,569     |   | 2,452    |   | 2,094    |   | 1,718    |   | 959      |   | 346      |   |

 

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*Excludes short-term debt of $29,282 to Counsel which is to beconverted into common stock in 2003.

 

 

**CurrentPosition/Future Requirements **

 

We have incurred substantialoperating losses and negative cash flows from operations since inception andhad a net capital deficiency of $63.9 million and negative working capital of$17.2 million at December 31, 2002. We financed our operations during 2002through related party debt with an outstanding balance of $59.3 million and arevolving credit facility with an outstanding balance of $9.1 million as ofDecember 31, 2002. We have taken steps to improve our cash flow fromoperations, which include the curtailment of our Draper, Utah operation, thesale of our former telecommunications segment to Buyers United Inc. that wascompleted in May 2003 and the acquisition of RSL. We are pursuing additionalthird party funding and have also taken steps to improve our capital structure,which include the conversion of amounts owed to Counsel of $29.3 million toequity as described below.   Thisconversion is subject to shareholder approval, which is expected to occur atthe next shareholders’ meeting.  Theremaining $30.0 million of related party debt which is not subject to the debtrestructuring, matures on June 30, 2004. We also have an ongoing commitmentfrom Counsel to fund, through long-term intercompany advances or equitycontributions, all capital investment, working capital or other operationalcash requirements of the Company through April 15, 2004.

 

At December 31, 2002, we had $59.3million of related party debt.  In orderto reduce our cash requirements to pay this debt, we entered into an amendeddebt restructuring agreement with Counsel whereby approximately $29.3 millionwill be converted into common stock, reducing our debt obligation and relatedinterest charges without expending cash. Additionally, in March 2003, Counsel extended the due date of a $9.4million note from I-Link to June 30, 2004. As a result, the remaining $30.0 million of related party debt matureson June 30, 2004. Subsequent to April 15, 2004, should Counsel not extend itscommitment to provide financial support to the Company, and in the event cashflow from operations is insufficient to cover the maturing debt, we will be requiredto restructure our debt with Counsel to further extend payments of principaland interest or find alternative funding to replace the Counsel debt.

 

The acquisition of RSL addedadditional business channels and customers and we believe will begin generatingpositive cash flows in the latter part of 2003.  The sale of our telecommunications segment, which contributed themost significant portion of our negative cash flows in prior years, and theclosure of our Draper, Utah operation will also help reduce our negative cashflow from operations.

 

There is no assurance that we willbe able to improve our cash flow from operations, obtain additional third partyfinancing, extend, repay or refinance on acceptable terms amounts owing toCounsel that are due on June 30, 2004 or obtain an extension of the existingfunding commitment from Counsel. Additionally, there is no assurance thatCounsel will continue to provide financial support to the Company.  These matters raise substantial doubt aboutour ability to continue as a going concern. We have received a report from our independent auditors for the yearended December 31, 2002 containing an explanatory paragraph that describes theuncertainty as to our ability to continue as a going concern due to our net operatinglosses, negative cash flows from operations and capital deficiency.

 

 

 

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**Other Items**

 

**RecentAccounting Pronouncements**

 

See Note 4 to the Consolidated Financial Statementsfor recent accounting pronouncements and how we anticipate they will impact ourfinancial statements

 

 

**Item 7A****.       Quantitative and Qualitative Disclosuresabout Market Risk**

 

Our exposure to market risk is limited to interestrate sensitivity, which is affected by changes in the general level of U.S.interest rates.  Our cash equivalentsare invested with high quality issuers and limit the amount of credit exposureto any one issuer.  Due to the short-termnature of the cash equivalents, we believe that we are not subject to any materialinterest rate risk as it relates to interest income.  As to interest expense, we have two debt instruments that havevariable interest rates based on the prime rate of interest.  Assuming debt amounts at December 31, 2002were constant during the next twelve-month period, the impact of a one percentincrease in the prime interest rate would be an increase in interest expense ofapproximately $110,000 for the next twelve-month period.  However, as one debt instrument is subjectto an interest rate floor, a one percent decrease in the prime interest ratewould only reduce interest expense by $20,000 during the next twelve-monthperiod.

 

We did not have any foreign currency hedges or otherderivative financial instruments as of December 31, 2002.  We do not enter into financial instrumentsfor trading or speculative purposes and do not currently utilize derivativefinancial instruments. Our operations are conducted primarily in the UnitedStates and as such are not subject to material foreign currency exchange raterisk.

 

 

**Item8.****          Financial Statements and SupplementaryData**

 

                See Consolidated FinancialStatements and supplementary data beginning on pages F-1 and S-1.

 

 

**Item9.****          Changesin and Disagreements with Accountants on Accounting and Financial Disclosure**

 

None

 

**PART III**

 

**Item10.****                       Directors,Executive Officers, Promoters, and Control Persons; Compliance with Section16(a) of the Exchange Act**

** **

 I-Link’sArticles of Incorporation provide that the Board of Directors shall be dividedinto three classes, and that the total number of directors shall not be lessthan five but no more than nine. Each director shall serve a term of threeyears.  At the December 6, 2002 meeting,the Board of Directors of I-Link resolved, among other items, to expand thesize of the Board of Directors by adding one seat to the existing Board ofDirectors and to appoint Mr. John Walter to the Board of Directors to serve asa Class III director.  At the February12, 2003 meeting, the Board of Directors appointed Ms. Kelly Murumets to fillthe vacancy created by the resignation of Norman Chirite, a Class IIdirector.  As of April 25, 2003, theBoard of Directors currently consists of eight members: two Class I Directors(Messrs. Shimer and Wasserson), three Class II Directors (Messrs. Toh, Heatonand Silber), and three Class III Directors (Messrs. Reichmann and Walter andMs. Murumets).  Messrs. Shimer andWasserson, the Class I Director

 

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nominees, will stand forelection for another three-year term at the 2003 Annual Meeting.  Messrs. Shimer and Wasserson were appointedon April 15, 2001 to fill two vacancies of the Class I Directors created by theresignation in 2001 of a former director and an unfilled board seat.

 

Biographical information with respect to the presentexecutive officers, directors, and key employees are set forth below.  There are no family relationships betweenany present executive officers and directors.

 
| **Name**            |   | **Age(1)** |   | **Title**                                                                                |   |
|---------------------|--------|------------|--------|------------------------------------------------------------------------------------------|--------|
| Allan C. Silber     |   | 54         |   | Chairman of the Board and Director, Interim Chief  Executive Officer and President       |   |
| Hal B. Heaton       |   | 52         |   | Director                                                                                 |   |
| Albert Reichmann    |   | 72         |   | Director                                                                                 |   |
| Samuel L. Shimer    |   | 39         |   | Director and Senior Vice President, Mergers &  Acquisitions and Business Development |   |
| Henry Y.L. Toh.     |   | 45         |   | Director                                                                                 |   |
| John R. Walter      |   | 55         |   | Director                                                                                 |   |
| Gary J.  Wasserson  |   | 45         |   | Director, President of Acceris Communications  Technologies, Inc.                        |   |
| Ralph Brandifino    |   | 58         |   | Chief Financial Officer, WorldxChange Corp.                                              |   |
| Gary M. Clifford    |   | 34         |   | Vice President of Finance and Chief Financial  Officer                                   |   |
| James Ducay         |   | 44         |   | President, Acceris Communications Solutions                                              |   |
| Kenneth L.  Hilton  |   | 50         |   | Chief Executive Officer, WorldxChange Corp.                                              |   |
| Barbara  Jamaleddin |   | 56         |   | Senior Vice President of Network Operations, WorldxChange  Corp.                         |   |
| Kelly Murumets      |   | 39         |   | Executive Vice President                                                                 |   |

 

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(1)           As of April 25, 2003

 

Allan C. Silber, Chairman of the Board and Director;Interim Chief Executive Officer and President. Mr. Silber was elected to the Board of Directors as a Class II directorin September 2001 and appointed as chairman of the board in November 2001.  Mr. Silber is the chairman and CEO ofCounsel Corporation, which he founded in 1979. Mr. Silber attended McMaster University and received a Bachelor ofScience degree from the University of Toronto.

 

Hal B. Heaton, Director.  Dr. Heaton was appointed by the Board of Directors as a Class IIdirector on June 14, 2000 to fill a board vacancy.  From 1982 to present he has been a professor of Finance atBrigham Young University and between 1988 and 1990 was a visiting professor ofFinance at Harvard University.  Dr.Heaton is a director of MITY Enterprises, Inc., a publicly traded manufacturerof furniture in Orem, Utah.  Dr. Heatonholds a Bachelor’s degree in Computer Science/Mathematics and a Master’s inBusiness Administration from Brigham Young University, as well as a Master’sdegree in Economics and a Ph.D. in Finance from Stanford University.

 

Albert Reichmann, Director.  Mr. Reichmann was elected to the Board of Directors as a ClassIII director in September 2001.  From1996 to present, Mr. Reichmann served as the Chairman and Chief ExecutiveOfficer of Heathmount A.E. Corporation, a company established for the creationand development of sports and amusement parks in North America and Asia.  Mr. Reichmann is internationally recognizedfor his humanitarian and charitable efforts which range from Armenianearthquake relief to medical relief for child victims of the Chernobyl nucleardisaster to arranging the first cabinet-level meetings between the governmentsof Israel and the Soviet Union since the end of the Six-Day War.  Mr. Reichmann holds an honorary Degree ofLaws from the Faculty of Administrative Studies of York University.  Mr. Reichmann has served on the SteeringCommittee of York University’s International 

 

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Management Center locatedin Budapest, Hungary since 1988 and is an Advisor to its East-West EnterpriseExchange initiative.  Mr. Reichmann is afounder of the Canada-USSR Business Council established in 1989 byintergovernmental agreement.

 

Samuel L. Shimer, Director, Senior Vice President,Merger & Acquisitions and Business Development.  Mr. Shimer was appointed by the Board of Directors as a Class Idirector on April 15, 2001 to fill a board vacancy and was appointed SeniorVice President, Merger & Acquisitions and Business Development on February12, 2003.  From 1997 to present he hasbeen employed by Counsel Corporation, serving as a Managing Director since1998.  Mr. Shimer is currently servingas a director of Counsel Communications, the parent of I-Link.  From 1991 to 1997, Mr. Shimer worked at twomerchant banking funds affiliated with Lazard Frères & Co., Centre Partnersand Corporate Partners, ultimately serving as a Principal.  Mr. Shimer earned a Bachelor of Science inEconomics degree from The Wharton School of the University of Pennsylvania, anda Master’s of Business Administration degree from Harvard Business School.

 

Henry Y.L. Toh, Director.  The Board of Directors elected Mr. Toh as a Class II director andas Vice Chairman of the Board of Directors in April 1992.  Mr. Toh became President of I-Link in May1993, Acting Chief Financial Officer in September 1995 and Chairman of theBoard in May 1996, and served as such through September 1996.  Mr. Toh has served as a director of:National Auto Credit, Inc. (previously an originator of sub-prime automobilefinancing that is transitioning into new lines of business) from 1998 throughthe present; Bigmark Inc., a pharmaceutical company, since early 2002, andTeletouch Communications, Inc., a retail provider of internet, cellular andpaging services, beginning in November 2001. He is also a director of Four M International Inc., a private investmentfirm.  He is a graduate of RiceUniversity.

 

John R. Walter, Director.  Mr. Walter was appointed by the Board of Directors as a Class IIIDirector on December 6, 2002.  Mr.Walter is the retired President and Chief Operating Officer of AT & T,where he was responsible for day-to-day operations of the company’s corelong-distance, local, wireless and on-line services businesses, as well as itscredit card and outsourcing businesses. He is Chairman of Ashlin Management Company, a private managementconsulting firm with an emphasis on corporate strategic planning anddevelopment of corporate employee and management culture.  Mr. Walter began his career in 1969 at R.R.Donnelley & Sons, becoming President in 1987.  In 1989, he was appointed Chairman, President, and ChiefExecutive Officer, a position he retained through 1996, when he resigned tojoin AT&T.  He serves on the boardof directors of Abbott Laboratories, Deere & Company, Manpower, Inc.,Applied Graphics Technologies and SNP Corporation of Singapore.  He is a trustee of the Chicago SymphonyOrchestra and Northwestern University. Mr. Walter also serves on the International Advisory Council of theSingapore Economic Development Board and is a director of the EvanstonNorthwestern Healthcare Corporation, the Executives’ Club of Chicago, ChicagoCouncil on Foreign Relations and Steppenwolf Theatre.  He is a member of the Board of Advisors of Brookfield Zoo.

 

Gary J. Wasserson, Director, President of AccerisCommunications Technologies, Inc..  Mr.Wasserson was appointed by the Board of Directors as a Class I Director onApril 15, 2001 to fill a Board vacancy. In May 2001, Mr. Wasserson was appointed CEO of I-Link which position heheld until his resignation in December 2001. In June 2001, Mr. Wasserson became President and CEO of WorldxChangeCorp which position he held until May 2002. From December 2002, Mr. Wasserson has served as President of AccerisCommunications Technologies, Inc.  From1999 to October 31, 2001, he was President and Chief Executive Officer ofCounsel Communications and since November 1, 2001 he has been a ManagingDirector of Counsel Corporation (US)). From 1997 to 1999, he was President and Chief Executive Officer of CallSciencesTM/VirtelTM, a major provider of enhanced telecommunications servicesdeliverable over global intelligent networks. From 1992 to 1997, he served as Chief Executive Officer of GlobalLinks/GTS, a company instrumental in creating the calling card industry tradeassociation and its regulatory initiatives within the industry. Mr. Wassersonholds a Bachelor’s degree from Babson College. On February 13, 2003, a grandjury empanelled in the United States District Court for the Eastern District ofPennsylvania issued an indictment (the “Indictment”) against Mr. Wassersoncharging him with three felony counts of violations of the ResourceConservation and Recovery Act (“RCRA”) which is administered by the UnitedState Environmental Protection Agency, and one count of aiding and abetting.

 

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The Indictment allegesviolations of RCRA in connection with the unauthorized transportation anddisposal of hazardous substances (specifically, dry cleaning supplies) in anun-permitted municipal landfill facility. The municipal landfill quickly identified the disposal of hazardoussubstances and remediated the site.  Mr.Wasserson reimbursed the landfill for the cleanup.  Mr. Wasserson has informed I-Link that at no time was there arisk to the public as a result of the disposal of the hazardoussubstances.  Mr. Wasserson is contestingthe charges and has informed I-Link that he believes he has substantialdefenses.

 

Ralph Brandifino, Chief Financial Officer/Treasurer ofWorldxChange Corp., I-Link’s wholly owned subsidiary. Mr. Brandifino joinedWorldxChange Corporation in July 2001 after serving as Chief Financial Officerfor three other international telecommunication organizations over the pastfive years: Justice Telecommunications, Pittsburgh International Telecom, andWorldxChange Communications.  Prior tothose appointments, he served as the Senior Vice President and Chief FinancialOfficer for Terex Corporation, a Fortune 500 global producer of industrialequipment.  He also served as SeniorVice President and Chief Financial Officer for Long Island Lighting Company, aFortune 500 company and the 20th largest utility in the United States, and forChicago Pneumatic Tool Company, a Fortune 500 multinational manufacturer ofdiverse capital goods products.  Mr.Brandifino received a Bachelor’s Degree in business from Hofstra University in1966 and a Master’s Degree from the Wharton School of Business in 1980.  He also earned a Juris Doctor degree fromSt. John’s University and is a member of the New York Bar.

 

Gary M. Clifford, Vice President of Finance, ChiefFinancial Officer.  Mr. Clifford joinedCounsel Corporation in November 2002 as and presently is its Chief FinancialOfficer.  From June 1998 to October2002, Mr. Clifford has held various senior roles at Leitch Technology Corporationin Finance, Operations and Corporate Development.  From February 1996 to June 1996, Mr. Clifford worked for NetStarCommunications Inc.  Mr. Clifford is aChartered Accountant, who articled with Coopers & Lybrand.  A graduate of the University of Toronto,with a Bachelor degree in Management, he has also lectured at RyersonPolytechnic University in Toronto, Canada. Mr. Clifford was appointed as Vice President of Finance of I-Link onDecember 6, 2002 and Chief Financial Officer on February 12, 2003.

 

James Ducay. Jim Ducay was named President of Acceris Communications Solutions onDecember 10, 2002.  Previously, Mr.Ducay was Executive Vice President and Chief Operating Officer of RSL COM USAwith responsibility for Marketing, Sales and Account Services, Engineering andOperations, and Information Technology. Before joining RSL COM USA, Mr. Ducay was Vice President of Marketingand Sales for Ameritech Interactive Media Services where he was responsible formanaging Ameritech’s Internet products and related sales channels.  He also served as Managing Director and VicePresident for Bell Atlantic/NYNEX.  Mr.Ducay has a Master’s Degree in Engineering from the University of Illinois anda Master’s Degree in Business Administration from the University of Chicago.

 

Kenneth L. Hilton, Chief Executive Officer ofWorldxChange Corp.  Kenneth L. Hiltonwas appointed Chief Executive Officer of WorldxChange Corporation in May2002.  From June 1999 to December 2001,Mr. Hilton served as the Chief Executive Officer of Handtech.com, anInternet-based start-up company in Austin, TX. that provided customizedE-commerce storefronts, supply chain management and back office services tovalue-added resellers. Prior to Handtech, from October 1995 to May 1999, he wasthe Executive Vice President of North American Consumer Sales for ExcelCommunications, where he also served as the Chairman of the Board for ExcelCanada.  Prior to his 5 years at Excel,he ran North America operations for PageMart Wireless where he launched theCanadian business and also served as the Chairman of the Canadian Board. Priorto PageMart, Mr. Hilton held numerous sales and management positions with IBM.His 14-year career with IBM included sales, sales management, branch managementand regional management positions.

 

Barbara Jamaleddin, Senior Vice President for NetworkOperations of WorldxChange Corp.  Priorto this position, Ms. Jamaleddin held the position of Senior Vice President forWorldxChange Communications from 1995 to 2001. Prior to WorldxChange, Ms. Jamaleddin spent seven years with Sprint,where she served as Director of Product Development & Support and Director,National Operations Control Center. While at Sprint, Ms. Jamaleddin was named inventor of a patent forenhanced services and was the founder of the Women’s Organization.  Ms. Jamaleddin’s early career was withMichigan Bell, and

 

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from 1966 through 1987,she led Michigan Bell’s quest to upgrade more than 200 of its central officesto Stored Program Control. Ms. Jamaleddin attended Wayne State University.

 

Kelly Murumets, Executive Vice President.  Ms. Murumets joined Counsel Corporation in2002 as Executive Vice President.  Overthe past fifteen years, most recently as a Vice President with ManagerialDesign, Ms. Murumets was an advisor to clients throughout North America givingleaders the insight and guidance required to achieve consensus, build cohesiveand committed leadership teams, and implement change.  Ms. Murumets received her BA from Bishop’s University in 1985,her MBA from the University of Western Ontario’s Ivey School of Business in1988 and her MSW from Wilfrid Laurier University in 1996.  Ms. Murumets was appointed as Executive VicePresident of I-Link on December 6, 2002.

 

Each officer of I-Link is appointed by the Board ofDirectors and holds his office at the pleasure and direction of the Board ofDirectors or until such time of his/her resignation or death.

 

Thereare no material proceedings to which any director, officer or affiliate ofI-Link, any owner of record or beneficially of more that five percent of anyclass of voting securities of I-Link, or any associate of any such director,officer, affiliate of I-Link or security holder is a party adverse to I-Link orany of its subsidiaries or has a material interest adverse to I-Link or any ofits subsidiaries.

 

Duringthe 2002 fiscal year, all members of the Board of Directors attended 75% ormore of the Board meetings except for Mr. Reichmann who attended two out ofthree meetings.

 

**Section 16(a) Beneficial OwnershipReporting Compliance**

 

Section 16(a) of the Exchange Act requires ourofficers and directors, and persons who own more than ten percent of aregistered class of our equity securities, to file reports of ownership andchanges in ownership of equity securities of I-Link with the SEC.  Officers, directors, and greater than tenpercent stockholders are required by the SEC regulation to furnish us withcopies of all Section 16(a) forms that they file.

 

Based solely upon a review of Forms 3 and Forms 4furnished to us pursuant to Rule 16a-3 under the Exchange Act during our mostrecent fiscal year, to I-Link’s knowledge, all reporting persons complied withall applicable filing requirements of Section 16(a) of the Securities ExchangeAct of 1934, as amended, with the following exceptions: A. Silber, K. Murumets,G. Clifford, Stephen Weintraub (Senior Vice President and Secretary of I-Link),J. Walter, K. Hilton, J. Ducay each inadvertently failed to file theirrespective Forms 3 upon their appointments as officers or directors of I-Linkor subsidiaries in December 2002.  As ofthe date of this Annual Report, the foregoing reporting persons have regainedcompliance with Section 16(a) reporting requirements.

 

**Audit Committee Financial Expert**

 

The I-Link Board of Directors has determined thatI-Link does not have an audit committee financial expert serving on its AuditCommittee.  I-Link does not have anaudit committee financial expert because it has been unable to attract such aperson.

 

**Code of Ethics**

 

I-Link has adopted a code of ethics that applies toits principal executive, financial and accountingofficers.  I-Link will provide a copy of its code of ethics,without charge, to any person that requests it.  Requests should be addressed in writing to Mr. Stephen Weintraub, Corporate Secretary, The Exchange Tower, 130 King Street West, Suite 1300,P.O. Box 435, Toronto, Ontario M5X1E3

 

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**Item 11. Executive Compensation**

 

The following table sets forth the aggregate cashcompensation paid for services rendered during the last three years by eachperson serving as our Chief Executive Officer during the last year and ourother most highly compensated executive officers serving as such at the end ofthe year ended December 31, 2002 whose compensation was in excess of $100,000(Named Executive Officers).

 
|                             |   |                    |   |          |   |         |   |                               |   | **Long-Term Compensation**       |   |                                          |   |
|----------------------------------|--------|-------------------------|--------|---------------|--------|--------------|--------|------------------------------------|--------|----------------------------------|--------|-----------------------------------------------|--------|
|                             |   | **Annual Compensation** |   | **Awards**    |   | **Payouts**  |   |                               |   |
| **Name and  Principal Position** |   | **Year**                |   | **Salary($)** |   | **Bonus($)** |   | **Other  Annual  Compensation($)** |   | **Restricted  Stock  Awards($)** |   | **Securities  Underlying  Options/  SARs(#)** |   | **LTIP  Payouts($)** |   | **All Other Compensation($)** |   |
| Allan Silber(1)                  |   | 2002                    |   | —        |   | —       |   | —                             |   | —                           |   | —                                        |   | — |   | — |   |
|                             |   | 2001                    |   | —        |   | —       |   | —                             |   | —                           |   | —                                        |   | — |   | — |   |
|                             |   | 2000                    |   | —        |   | —       |   | —                             |   | —                           |   | —                                        |   | — |   | — |   |
|                             |   |                    |   |          |   |         |   |                               |   |                             |   |                                          |   |   |   |   |   |
| Helen Seltzer(2)                 |   | 2002                    |   | 267,360       |   | 309,375      |   | —                             |   | —                           |   | —                                        |   | — |   | — |   |
|                             |   | 2001                    |   | —        |   | —       |   | —                             |   | —                           |   | —                                        |   | — |   | — |   |
|                             |   | 2000                    |   | —        |   | —       |   | —                             |   | —                           |   | —                                        |   | — |   | — |   |
|                             |   |                    |   |          |   |         |   |                               |   |                             |   |                                          |   |   |   |   |   |
| Ralph Brandifino(5)              |   | 2002                    |   | 226,050       |   | 63,025       |   | —                             |   | —                           |   | —                                        |   | — |   | — |   |
| Chief Financial Officer,         |   | 2001                    |   | 95,897        |   | 15,250       |   | —                             |   | —                           |   | —                                        |   | — |   | — |   |
| WorldxChange Corp.               |   | 2000                    |   | —        |   | —       |   | —                             |   | —                           |   | —                                        |   | — |   | — |   |
|                             |   |                    |   |          |   |         |   |                               |   |                             |   |                                          |   |   |   |   |   |
| Kenneth L. Hilton(6)             |   | 2002                    |   | 183,333       |   | 183,333      |   | —                             |   | —                           |   | —                                        |   | — |   | — |   |
| Chief Executive                  |   | 2001                    |   | —        |   | —       |   | —                             |   | —                           |   | —                                        |   | — |   | — |   |
| Officer, WorldxChange            |   | 2000                    |   | —        |   | —       |   | —                             |   | —                           |   | —                                        |   | — |   | — |   |
| Corp.                            |   |                    |   |          |   |         |   |                               |   |                             |   |                                          |   |   |   |   |   |
|                             |   |                    |   |          |   |         |   |                               |   |                             |   |                                          |   |   |   |   |   |
| Barbara Jamaleddin               |   | 2002                    |   | 205,500       |   | 67,750       |   | —                             |   | —                           |   | —                                        |   | — |   | — |   |
| Senior Vice President of         |   | 2001                    |   | 115,256       |   | 18,092       |   | —                             |   | —                           |   | —                                        |   | — |   | — |   |
| Network Operations,              |   | 2000                    |   | —        |   | —       |   | —                             |   | —                           |   | —                                        |   | — |   | — |   |
| WorldxChange                     |   |                    |   |          |   |         |   |                               |   |                             |   |                                          |   |   |   |   |   |

 

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(1)                                  Mr.Silber was appointed as Interim Chief Executive Officer and President of I-Linkas of December 19, 2002.

(2)                                  Ms.Seltzer served as the Chief Executive Officer of I-Link from January 3, 2002through December 19, 2002.  Bonus amountincludes severance payment of $171,875.

(3)                                  Mr.Brandifino became the Chief Financial Officer of WorldxChange Corp. on July 25,2001.

(4)                                  Mr.Hilton became the Chief Executive Officer of WorldxChange Corp. on May 1, 2002.

(5)                                  Ms.Jamaleddin became the Senior Vice President for Network Operations ofWorldxChange on June 4, 2001.

 

**Option/SARGrants in Last Fiscal Year (2002)**

 

No options were granted to any of the Named ExecutiveOfficers during the year ended December 31, 2002.

** **

**AggregatedOption/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values**

 

None of the Named Executive Officers exercised anyoptions during 2002; nor did any of them hold any unexercised options at theend of 2002.

 

**CompensationCommittee Report on Executive Compensation**

 

The Compensation Committee administers thecompensation program for executive officers and other senior management ofI-Link and bases its decisions on both individual performance and the financial

 

26

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results achieved by I-Link.

 

The principal elements of the compensation program forexecutive officers are base salary and stock options. The goals of the programare to give the executive officers incentives to work toward the improvedfinancial performance of I-Link and to reward them for their contributions toI-Link’s success. For a summary of fiscal 2002 compensation, see “Compensationof Executive Officers and Directors” above.

 

*BaseSalaries*.  Thecommittee has based its decisions on salaries for I-Link’s executive officers,including the Chief Executive Officer and President on a number of factors,both objective and subjective. Objective factors considered include increases in the cost of living,I-Link’s overall historical performance and comparable industry data, althoughno specific formulas based on such factors have been used to determinesalaries.  Salary decisions are basedprimarily on the committee’s subjective analysis of the factors contributing toI-Link’s long-term success and of the executives’ individual contributions tosuch success.

 

*StockOptions*.  Thecommittee views stock options as its primary long-term compensation vehicle forI-Link’s executive officers.  Stockoptions generally are granted at the prevailing market price on the date of grantand will have value only if I-Link’s stock price increases.  Options granted to executive officersgenerally vest in quarterly increments over three years beginning on the dateof the grant.  Some options vest inincrements upon the attainment by I-Link of certain performancebenchmarks.  Grants of stock optionsgenerally are based upon the performance of I-Link, the level of theexecutive’s position within I-Link and an evaluation of the executive’s pastand expected future performance.  Thecommittee grants stock options periodically, but not necessarily on an annualbasis.

 
|   | By the Compensation Committee: |
|--------|--------------------------------|
|   |                           |
|   | Hal B. Heaton                  |

 

 

**Comparisonof Cumulative Total Return Among I-Link Incorporated, The Russell 2000 Indexand A Peer Group**

 

 

**PerformanceGraph**

 

The following graph compares I-Link’s cumulative totalstockholder return with that of the Russell 2000 index of small-capitalizationcompanies and a peer group index. During 2002 and beginning with this ProxyStatement, I-Link reevaluated the composition of its performance peer group anddetermined that a change was appropriate. I-Link is making this change in light of the most recent changes in thestrategic direction of the company and re-orientation of its businesspriorities.

 

During this transition year, both the 2001 peer group(consisting of IDT Corporation, ICG Communications, Inc. and AlphaNetSolutions, Inc.) and the new 2003 peer group (consisting of ATX Communications,Inc., deltathree, Inc., Universal Access Global Holdings, Inc., IDT Corporation,Buyers United, Inc. and Primus Telecommunications Group, Inc.) indexes areshown so that stockholders may compare them for the most recent 5 yearperformance period. I-Link chose the companies comprising the 2003peer group because they are similar in size, are similar in their lines ofbusiness to I-Link and represent I-Link’s competitors in various geographicalmarkets subsequent to the most recent changes in I-Link’s business.  The graph assumes an initial investment of$100.00 made on December 31, 1997, and the reinvestment of dividends (whereapplicable). I-Link has never paid a dividend on its common stock.

 

27

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**Total ReturnAnalysis**

 
|          |   | **12/31/97** |   | **12/31/98** |   | **12/31/99** |   | **12/31/00** |   | **12/31/01** |   | **12/31/02** |   |
|---------------|--------|--------------|--------|--------------|--------|--------------|--------|--------------|--------|--------------|--------|--------------|--------|
| ILINK, Inc.   |   | $            | 100.00 |         | $      | 34.69        |   | $            | 45.41  |         | $      | 12.76        |   | $ | 1.22 |   | $ | 2.04 |   |
| New Peergroup |   | $            | 100.00 |         | $      | 89.82        |   | $            | 153.18 |         | $      | 114.46       |   | $ | 145.55 |   | $ | 144.46 |   |
| Old Peergroup |   | $            | 100.00 |         | $      | 55.05        |   | $            | 53.11  |         | $      | 17.97        |   | $ | 30.40 |   | $ | 26.80 |   |
| Russell 2000  |   | $            | 100.00 |         | $      | 96.55        |   | $            | 115.50 |         | $      | 110.64       |   | $ | 111.78 |   | $ | 87.66 |   |

 

 

**DirectorCompensation**

 

On the first business day in January of each yearprior to 2002, each director then serving was to receive an option to purchase20,000 shares of common stock and for each committee on which the directorserves an option to purchase 5,000 shares of common stock.  The exercise price of such options is equalto the fair market value of the common stock on the date of grant. Thedirectors are also eligible to receive options under our stock option plans atthe discretion of the Board of Directors.

 

In 2002 the Board of Directors voted to only awardoptions to the independent directors in accordance with the above-describedarrangement. In addition, each independent director will be paid $1,000 foreach in-person board meeting attended and $500 for each telephonic boardmeeting attended. In addition, during 2002, Messrs. Heaton and Toh received$22,500 and $34,000, respectively, in connection with the services that theyrendered for the Special Committee.

 

**EmploymentContracts and Termination of Employment and Change-in-Control Arrangements**

 

Helen Seltzer Employment Contract.* *On January 3, 2002, Springwell Capital Corporation, I-Link,Counsel and Helen Seltzer entered into an agreement whereby Ms. Seltzer becameI-Link’s Chief Executive Officer.  Theterm of the agreement was four years at an annual base salary of $275,000. Ms.Seltzer is eligible for a discretionary bonus in an amount to be determined bythe Board of Directors of WorldxChange Corp. up to 100% of her annual basesalary. In 2002, she was guaranteed a minimum bonus of $137,500.  Ms. Seltzer also entered into an agreementon January 3, 2002 with Counsel Communications and Counsel.  Under that agreement, Ms. Seltzer was issuedapproximately 0.2% of the common units of Counsel Communications, which commonunits vest over a four-year period commencing on January 3, 2003.  In addition to serving as CEO of I-Link, Ms.Seltzer agreed to serve as a member of the Management Executive Committee ofCounsel Communications.  Mr. Seltzeralso had the right to

 

28

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participate in Counsel’s2001 Executive Stock Purchase Plan.  Ms.Seltzer was terminated as I-Link’s Chief Executive Officer on December 12,2002.  As of the date of this report,all obligations under Ms. Seltzer employment agreement have been satisfied.

 

Kenneth Hilton Employment Contract*. *On May 1, 2002, WorldxChange Corp. and Kenneth L. Hiltonentered into a four-year employment agreement pursuant to which Mr. Hiltonbecame the Chief Executive Officer of WorldxChange Corp., I-Link’s wholly-ownedsubsidiary. Mr. Hilton’s annual salary is $275,000, and he is eligible for adiscretionary bonus in an amount to be determined by the Board of Directors ofWorldxChange Corp. up to 100% of his annual salary.  Counsel Communications and Counsel also entered into an agreementwith Mr. Hilton dated May 1, 2002, under which agreement, Mr. Hilton was issuedapproximately 0.2% of the common units of Counsel Communications, which commonunits vest over a four-year period commencing on May 1, 2003.  In addition to serving as CEO ofWorldxChange Corp., Mr. Hilton agreed to serve as a member of the ManagementExecutive Committee of Counsel Communications. For disclosure of a loan to Mr. Hilton see Item 13.

 

James Ducay Employment Contract.  On July 1, 2002, WorldxChange Corp. andJames Ducay entered into an employment agreement, which became effective onDecember 10, 2002, the date on which WorldxChange completed its acquisition ofthe assets of RSL, and expires on December 10, 2003.  Mr. Ducay’s annual salary is $275,000, and he is eligible for adiscretionary bonus in an amount to be determined by the Board of Directors ofWorldxChange Corp. up to 100% of his annual salary.  Mr. Ducay also agreed to serve as a member of the ManagementExecutive Committee of Counsel Communications.

 

**DirectorStock Option Plan**

 

I-Link’s Director Stock Option Plan (DSOP) authorizesthe grant of stock options to directors of I-Link. Options granted under theDSOP are non-qualified stock options exercisable at a price equal to the fairmarket value per share of common stock on the date of any such grant. Optionsgranted under the DSOP are exercisable not less than six (6) months or morethan ten (10) years after the date of grant.

 

 

As of December 31, 2002, options for the purchase of4,668 shares of common stock at prices ranging from $0.875 to $3.875 per sharewere outstanding.  As of the same date,options to purchase 15,895 shares of common stock have been exercised.  In connection with adoption of the 1995Director Plans (as defined below) the board of directors authorized thetermination of future grants of options under the DSOP; however, outstandingoptions granted under the DSOP will continue to be governed by the termsthereof until exercise or expiration of such options.

 

**1995Director Stock Option Plan**

 

In October 1995, the stockholders of I-Link approvedadoption of I-Link’s 1995 Director Stock Option and Appreciation Rights Plan,which plan provides for the issuance of incentive options, non-qualifiedoptions and stock appreciation rights (1995 Director Plan).

 

The 1995 Director Plan provides for automatic anddiscretionary grants of stock options which qualify as incentive stock options(Incentive Options) under Section 422 of the Internal Revenue Code of 1986, asamended (Code), as well as options which do not so qualify (Non-QualifiedOptions) to be issued to directors.  Inaddition, stock appreciation rights (SARs) may be granted in conjunction withthe grant of Incentive Options and Non-Qualified Options. No SARs have beengranted to date.

 

The 1995 Director Plan provides for the grant ofIncentive Options, Non-Qualified Options and SARs to purchase up to 250,000shares of common stock (subject to adjustment in the event of stock dividends,stock splits and other similar events). To the extent that an Incentive Option or Non-Qualified Option is notexercised within the period of exercisability specified therein, it will expireas to the then-unexercised portion.  Ifany Incentive Option, Non-Qualified Option or SAR terminates prior to exercisethereof and during the duration of the 1995 Director Plan, the shares of commonstock as to which such option or right was not exercised will become availableunder the 1995 Director Plan for the grant of

 

29

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additional options orrights to any eligible employees.  Theshares of common stock subject to the 1995 Director Plan may be made availablefrom either authorized but unissued shares, treasury shares, or both.

 

The 1995 Director Plan also provides for the grant ofNon-Qualified Options on a non-discretionary basis pursuant to the following formula:each member of the board of directors then serving shall receive aNon-Qualified Option to purchase 10,000 shares of common stock at an exerciseprice equal to the fair market value per share of the common stock on thatdate.  Pursuant to such formula,directors received options to purchase 10,000 shares of common stock as ofOctober 17, 1995, options to purchase 10,000 shares of common stock on January2, 1996, and will receive options to purchase 10,000 shares of common stock onthe first business day of each January. The number of shares granted to each board member was increased to20,000 in 1998.  In addition, the boardmember will receive 5,000 options for each committee membership. Each option isimmediately exercisable for a period of ten years from the date of grant.  I-Link has 190,000 shares of common stockreserved for issuance under the 1995 Director Plan.  As of December 31, 2002, options exercisable to purchase 170,000shares of common stock at prices ranging from $1.00 to $1.25 per share areoutstanding under the 1995 Director Plan. As of December 31, 2002, options to purchase 60,000 shares have beenexercised under the 1995 Director Plan.

 

**1995Employee Stock Option Plan**

 

In October 1995, the stockholders of I-Link approvedadoption of I-Link’s 1995 Employee Stock Option and Appreciation Rights Plan(1995 Employee Plan), which plan provides for the issuance of IncentiveOptions, Non-Qualified Options and SARs.

 

Directors of I-Link are not eligible to participate inthe 1995 Employee Plan.  The 1995Employee Plan provides for the grant of stock options which qualify asIncentive Stock Options under Section 422 of the Code, to be issued to officerswho are employees and other employees, as well as Non-Qualified Options to beissued to officers, employees and consultants. In addition, SARs may be granted in conjunction with the grant ofIncentive Options and Non-Qualified Options. No SARs have been granted to date.

 

The 1995 Employee Plan provides for the grant ofIncentive Options, Non-Qualified Options and SARs of up to 400,000 shares ofcommon stock (subject to adjustment in the event of stock dividends, stocksplits and other similar events).  Tothe extent that an Incentive Option or Non-Qualified Option is not exercisedwithin the period of exercisability specified therein, it will expire as to thethen-unexercised portion.  If anyIncentive Option, Non-Qualified Option or SAR terminates prior to exercisethereof and during the duration of the 1995 Employee Plan, the shares of commonstock as to which such option or right was not exercised will become availableunder the 1995 Employee Plan for the grant of additional options or rights toany eligible employee.  The shares ofcommon stock subject to the 1995 Employee Plan may be made available fromeither authorized but unissued shares, treasury shares, or both. I-Link has400,000 shares of common stock reserved for issuance under the 1995 EmployeePlan.  As of December 31, 2002, optionsto purchase 302,000 shares of common stock have been granted under the plan and135,250 were outstanding with an exercise price of $3.90 per share have beengranted under the 1995 Employee Plan. As of December 31, 2002, 119,250 options have been exercised under the1995 Employee Plan.

 

**1997Recruitment Stock Option Plan**

 

In October 1997, the stockholders of I-Link approvedadoption of I-Link’s 1997 Recruitment Stock Option and Appreciation RightsPlan, which plan provides for the issuance of incentive options, non-qualifiedoptions and SARs (1997 Plan).

 

The 1997 Plan provides for automatic and discretionarygrants of stock options, which qualify as incentive stock options (IncentiveOptions) under Section 422 of the Code, as well as options which do not soqualify (Non-Qualified Options).  Inaddition, stock appreciation rights (SARs) may be granted in conjunction withthe grant of Incentive Options and Non-Qualified Options.  No SARs have been granted to date.

 

30

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The 1997 Plan, as amended in 2000, provides for thegrant of Incentive Options, Non-Qualified Options and SARs to purchase up to7,400,000 shares of common stock (subject to adjustment in the event of stockdividends, stock splits and other similar events).  The price at which shares of common stock covered by the optioncan be purchased is determined by I-Link’s board of directors; however, in allinstances the exercise price is never less than the fair market value ofI-Link’s common stock on the date the option is granted.  To the extent that an Incentive Option orNon-Qualified Option is not exercised within the period of exercisabilityspecified therein, it will expire as to the then unexercised portion.  If any Incentive Option, Non-QualifiedOption or SAR terminates prior to exercise thereof and during the duration ofthe 1997 Plan, the shares of common stock as to which such option or right wasnot exercised will become available under the 1997 Plan for the grant ofadditional options or rights.  The sharesof common stock subject to the 1997 Plan may be made available from eitherauthorized but unissued shares, treasury shares, or both.  As of December 31, 2002, options to purchase5,938,563 shares of common stock have been granted under the plan and 2,118,024were outstanding with exercise prices of $0.07 to $13.88 per share.  As of December 31, 2002, 411,545 optionshave been exercised under the 1997 Plan.

 

**2000Employee Stock Purchase Plan**

 

In October 2000, the stockholders of I-Link approvedadoption of I-Link’s 2000 Employee Stock Purchase Plan which plan provides forthe purchase and issuance of common stock to all eligible employees (StockPurchase Plan).

 

The purpose of the Stock Purchase Plan is to induceall eligible employees of I-Link (or any of its subsidiaries) who have beenemployees for at least three months to encourage stock ownership of I-Link byacquiring or increasing their proprietary interest in I-Link.  The Stock Purchase Plan is designed toencourage employees to remain in the employ of I-Link.  It is the intention of I-Link to have theStock Purchase Plan qualify as an “employee stock purchase plan” within themeaning of Section 423 of the Code, as amended (Code) to issue shares of commonstock to all eligible employees of I-Link (or any of I-Link’s subsidiaries) whohave been employees for at least three months.

 

The Stock Purchase Plan provides for the purchase ofcommon stock in the aggregate, up to 2,500,000 shares of common stock (whichnumber is subject to adjustment in the event of stock dividends, stock splitsand other similar events).  As ofDecember 31, 2002, 58,012 shares of common stock had been purchased under theStock Purchase Plan.  To the extent thatan option is not exercised within the period of exercisability specified in theoption, it will expire as to the then unexercised portion.  If any option terminates prior to itsexercise and during the duration of the Stock Purchase Plan, the shares ofcommon stock as to which the option or right was not exercised will becomeavailable under the Stock Purchase Plan for the grant of additional options orrights to any eligible employee.

 

**2001Stock Option and Appreciation Rights Plan**

 

Under this plan, I-Link may issue options which willresult in the issuance of up to an aggregate of 14,000,000 shares of I-Linkcommon stock, par value $.007 per share. The Plan provides for options whichqualify as incentive stock options (Incentive Options) under Section 422 of theInternal Revenue Code of 1986, as well as the issuance of non-qualified options(Non-Qualified Options). The shares issued by I-Link under the Plan may beeither treasury shares or authorized but unissued shares as I-Link’s board ofdirectors may determine from time to time.

 

Pursuant to the terms of the Plan, I-Link may grantNon-Qualified Options and SARs only to officers, directors, employees andconsultants of I-Link or any of I-Link’s subsidiaries as selected by the boardof directors or a committee appointed by the board.  The Plan also provides for the Incentive Options available onlyto officers, directors, employees and consultants of I-Link or any of I-Link’ssubsidiaries as selected by the board of directors or a committee appointed bythe board.

 

Options granted under the Plan must be evidenced by astock option agreement in a form consistent with the provisions of thePlan.  In the event that employment orservice provided by a Plan participant is terminated for cause, any vested orunvested options, rights to any options, or SARs of the

 

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Plan participant willterminate immediately regardless of whether the option is qualified ornon-qualified.  In the event a Planparticipant is terminated for any reason other than for cause, death ordisability, any non-qualified or qualified options, options rights or SARs heldby the Plan participant may be exercised for three months after termination orat any time prior to the expiration of the of the option, whichever is shorter,but only to the extent vested on the termination date.

 

The price at which shares of common stock covered bythe option can be purchased is determined by I-Link’s board of directors;however, in all instances the exercise price is never less than the fair marketvalue of I-Link’s common stock on the date the option is granted.  To the extent that an Incentive Option orNon-Qualified Option is not exercised within the period in which it may beexercised in accordance with the terms and provisions of the Plan describedabove, the Incentive Option or Non-Qualified Option will expire as to the thenunexercised portion. To exercise an option, the Plan participant must tender anamount equal to the total option exercise price of the underlying shares andprovide written notice of the exercise to the Company.  The right to purchase shares is cumulativeso that once the right to purchase any shares has vested, those shares or anyportion of those shares may be purchased at any time thereafter until theexpiration or termination of the Option.

 

The Company intends to approve a new stock option planat its 2003 annual meeting.  In theevent the new plan is approve, it is the intent of the Company to withdraw this2001 Stock Option and Appreciation Rights Plan.

 

**CompensationCommittee Interlocks and Insider Participation**

 

Messrs. Heaton, Toh, Reichmann and Walter arenon-employee directors of I-Link. Messrs. Silber, Weintraub, Clifford and Ms. Murumets areemployee-officers of Counsel.  Messrs.Hilton and Brandafino and Ms. Jamaleddin are officers of WorldxChange Corp.,I-Link’s subsidiary.

 

**Item12. Security Ownership of Certain Beneficial Owners and Management**

 

The following table shows, as of March 18, 2003, thecommon stock and any preferred stock owned by each director, executive officerand to the best of our knowledge, all other parties know to be beneficialowners of more than 5% of the common stock. As of the same date, there were116,549,667 shares of common stock and 769 shares of Series N preferred stockissued and outstanding.  As of the samedate, all of the present directors, as a group of eight persons, ownbeneficially 526,182 shares (a beneficial ownership of less than 1%) and all ofour present directors and executive officers, as a group of 13 persons, ownbeneficially 526,182 shares (a beneficial ownership of less than 1%) of ourcommon stock.

 
| **Name and Address of Beneficial  Owner (1)** |   | **Number of  Shares  Beneficially Owned** |   | **% of  Common Stock  Beneficially Owned(2)** |   |
|-----------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------------------|--------|
|                                          |   |                                      |   |                                          |   |
| Ralph Brandafino                              |   | 0                                         |   | *                                             | %      |
| Gary M. Clifford                              |   | 0                                         | (3)    | *                                             | %      |
| James Ducay                                   |   | 0                                         | (4)    | *                                             | %      |
| Hal B. Heaton                                 |   | 123,958                                   | (5)    | *                                             | %      |
| Kenneth L.  Hilton                            |   | 0                                         | (11)   | *                                             | %      |
| Barbara  Jamaleddin                           |   | 0                                         | (12)   | *                                             | %      |
| Kelly Murumets                                |   | 0                                         | (6)    | *                                             | %      |
| Albert Reichmann                              |   | 49,548                                    | (5)    | *                                             | %      |
| Samuel L. Shimer                              |   | 0                                         | (7)    | *                                             | %      |
| Allan C. Silber                               |   | 0                                         | (8)    | *                                             | %      |
| Henry Y.L. Toh                                |   | 341,494                                   | (9)    | *                                             | %      |
| John R. Walter                                |   | 25,329                                    | (5)    | *                                             | %      |

 

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| **Name and Address of Beneficial  Owner (1)**                                 |   | **Number of  Shares  Beneficially Owned** |   | **% of  Common Stock  Beneficially Owned(2)** |   |
|-------------------------------------------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------------------|--------|
| Gary J.  Wasserson                                                            |   | 0                                         | (10)   | *                                             | %      |
| Counsel  Communications LLC One Landmark Square, Suite 315 Stamford, CT 06901 |   | 222,647,837                               | (13)   | 86                                            | %      |
| All Executive  Officers and Directors as a Group (13 people)                  |   | 540,329                                   | (14)   | *                                             | %      |

 

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| *    |   | Indicates less than one percent                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)  |   | Unless otherwise noted, all listed shares of common  stock are owned of record by each person or entity named as beneficial owner  and that person or entity has sole voting and dispositive power with respect  to the shares of common stock owned by each of them.  All addresses are c/o I-Link Incorporated  unless otherwise indicated.                                                                                                                                                                                                                                                                                               |
| (2)  |   | As to each person or entity named as beneficial  owners, that person’s or entity’s percentage of ownership is determined based  on the assumption that any options or convertible securities held by such  person or entity which are exercisable or convertible within 60 days have  been exercised or converted, as the case may be.                                                                                                                                                                                                                                                                                                 |
| (3)  |   | Mr. Clifford is the Chief Financial Officer of  Counsel Corporation, the parent corporation and majority owner of interest in  Counsel Communications LLC.  At the  December 6, 2002 meeting of the Board of Directors of I-Link, Mr. Clifford  was appointed to the office of Vice President of Finance of I-Link.  At the Board’s February 12, 2003 meeting,  Mr. Clifford was appointed Chief Financial Officer of I-Link.  Mr. Clifford disclaims beneficial  ownership of the shares of I-Link’s common stock beneficially owned by  Counsel via its majority ownership of its subsidiary, Counsel Communications. |
| (4)  |   | Mr. Ducay is the President of Acceris Communications  Solutions, a division of WorldxChange Corp., a subsidiary of I-Link.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (5)  |   | Represents shares of common stock issuable pursuant  to options and warrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (6)  |   | Ms. Murumets is an Executive Vice President of  Counsel.  At the December 6, 2002  meeting of the Board of Directors of I-Link, Ms. Murumets was appointed to  the office of Executive Vice President of I-Link.  Ms. Murumets is a Class III director of I-Link.  Ms. Murumets disclaims beneficial  ownership of the shares of I-Link’s common stock beneficially owned by  Counsel via its majority ownership of Counsel Communications LLC.                                                                                                                                                                              |
| (7)  |   | Mr. Shimer is a managing director of Counsel and was  appointed as a Senior Vice President, Mergers & Acquisitions and business  Development of I-Link effective February 12, 2003.  Mr. Shimer disclaims beneficial ownership of I-Link’s common  stock beneficially owned by Counsel via its majority ownership of Counsel  Communications LLC.                                                                                                                                                                                                                                                                                  |
| (8)  |   | Allan C. Silber is the Chairman, Chief Executive  Officer and a stockholder of Counsel. Mr. Silber was elected to I-Link’s  Board of Directors in September 2001 and became Chairman in November  2001.  Mr. Silber was appointed an  Interim Chief Executive Officer and President of I-Link in December 2002 and  is to serve in such capacity at the discretion of the Board of Directors and  until the latter appoints a successor officer.  Mr. Silber disclaims beneficial ownership of the shares of  I-Link’s common stock beneficially owned by Counsel via its majority  ownership of Counsel Communications.     |
| (9)  |   | Represents shares of common stock issuable pursuant  to options.  Does not include shares  held of record by Four M International, Ltd., of which Mr. Toh is a  director.  Mr. Toh disclaims any  beneficial ownership of such shares.                                                                                                                                                                                                                                                                                                                                                                                                 |
| (10) |   | Mr. Wasserson is a director of Counsel  Communications LLC and a managing director of Counsel.  Mr. Wasserson disclaims beneficial  ownership of the shares of I-Link’s common stock beneficially owned by  Counsel Communications LLC and by Counsel via its majority ownership of  Counsel Communications.                                                                                                                                                                                                                                                                                                                           |
| (11) |   | Mr. Hilton is the Chief Executive Officer of  WorldxChange Corp., I-Link’s wholly-owned subsidiary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (12) |   | Ms. Jamalledin is the Senior Vice President of  Network Operations of WorldxChange Corp., I-Link’s wholly-owned subsidiary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

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| (13) |   | Includes 61,966,057 shares of I-Link’s common stock  issued upon conversion of Series M and N redeemable preferred stock in March  2001 which were obtained from Winter Harbor L.L.C. on March 7, 2001, based on  information included in a Schedule 13D filed by Counsel on March 13, 2001 and  amended by Counsel and filed with the SEC on May 2, 2001.  Also includes 36,207,490 shares of  I-Link’s common stock issuable upon conversion of a convertible promissory  note in the principal amount (and including accrued interest) of $14,261,406  loaned to I-Link as of December 31, 2002, at the conversion price of $0.39  per share, under the terms of the Senior Convertible Loan and Security  Agreement, dated March 1, 2001, as amended on May 8, 2001 (Loan Agreement).  Under the terms of the Loan Agreement,  Counsel may convert the aggregate principal amount and interest loaned to  I-Link into shares of I-Link’s common stock. Also includes 17,434,489 shares  of I-Link’s common stock issued on April 17, 2001 to Counsel under the terms  of the Agreement and Plan of Merger, dated April 17, 2001.  Also includes 92,039,801 shares of  I-Link’s common stock issuable upon conversion of the loan from Counsel  Communications to I-Link, which loan is convertible into the shares of  I-Link’s common stock at the conversion rate of $0.084 per share, which rate  represented the average closing price of I-Link’s common stock for 20 trading  days preceding the date of the purchase agreement by and between Counsel  Communications and RSL COM U.S.A., Inc. (see Proposal 3 of this Proxy  Statement for additional information on this loan and transaction).  Also includes 15,000,000 warrants to  purchase shares of I-Link’s common stock issued to Counsel in connection with  its loan to I-Link dated June 4, 2001 at the exercise price of $0.60 per  share. The beneficial ownership figure excludes approximately 158,258,000 (as  of December 31, 2002) shares issuable if the Amended Debt Restructuring  Agreement is approved by the stockholders at the next annual meeting.  The issuance of shares under the Amended  Debt Restructuring Agreement would also cause a reset to the conversion price  of the convertible promissory note ($14,261,406 as of March 18, 2003)  referred to above, from $0.39 to approximately $0.23 which would result in an  additional 25,530,000 shares of common stock being issued, which shares have  also been excluded. |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (14) |   | Represents 540,329 of shares of common stock that  may be obtained pursuant to options and warrants exercisable within 60 days  of the date hereof.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

**EquityCompensation Plan Information**

 

                The followingtable sets forth, as of December 31, 2002, with respect to compensation plans(including individual compensation arrangements) under which equity securitiesof I-Link are authorized for issuance. 

 
| **Plan Category**                                                                                          |   | **Number of  securities to   be issued upon exercise  of outstanding options,   warrants and rights  (a)** |   | **Weighted-average  exercise price of  outstanding options,   warrants and rights  (b)** |   | **Number of  securities  remaining available  for future issuance  under equity  compensation plans  (excluding securities  reflected in column (a))   (c)** |       |
|------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Equity compensation plans approved  by security holders:**                                               |   |                                                                                                       |   |                                                                                     |   |                                                                                                                                                         |       |
| 2001  Stock option and Appreciation Rights Plan                                                            |   | none                                                                                                       |   | —                                                                                   |   | 14,000,000                                                                                                                                                   |       |
| 1997  Recruitment Stock Option Plan                                                                        |   | 2,118,026                                                                                                  |   | $                                                                                        | 3.67   |                                                                                                                                                         | 3,607,449  |   |
| 1995  Directors Stock Option and Appreciation Rights Plan                                                  |   | 170,000                                                                                                    |   | $                                                                                        | 1.13   |                                                                                                                                                         | 0          |   |
| 1995  Employee Stock Option and Appreciation Rights Plan                                                   |   | 135,250                                                                                                    |   | $                                                                                        | 3.90   |                                                                                                                                                         | 145,500    |   |
| Director  Stock Option Plan                                                                                |   | 4,668                                                                                                      |   | $                                                                                        | 2.38   |                                                                                                                                                         | 0          |   |
|                                                                                                       |   |                                                                                                       |   |                                                                                     |   |                                                                                                                                                         |       |
| **Equity compensation plans not  approved by security holders:**                                           |   |                                                                                                       |   |                                                                                     |   |                                                                                                                                                         |       |
| Series N  preferred Stock convertible into common stock                                                    |   | 615,200                                                                                                    |   | $                                                                                        | 1.25   |                                                                                                                                                         | 0          |   |
| Convertible debt  to Counsel in connection with RSL purchase                                               |   | 90,099,502                                                                                                 |   | $                                                                                        | 0.08   |                                                                                                                                                         |       | * |
| Convertible debt  to Counsel in connection with loan to I-Link in 2001                                     |   | 35,341,107                                                                                                 |   | $                                                                                        | 0.39   |                                                                                                                                                         |       | ** |
| Warrants issued  to Counsel in connection with WorldxChange purchase                                       |   | 15,000,000                                                                                                 |   | $                                                                                        | 0.60   |                                                                                                                                                         | 0          |   |
| Debt to Counsel  to be converted into common stock subject to shareholder approval at next  Annual Meeting |   | 155,226,800                                                                                                |   | $                                                                                        | 0.19   |                                                                                                                                                         |       | *** |
| Warrants issued  in connection with private placement in 1998                                              |   | 408,000                                                                                                    |   | $                                                                                        | 5.27   |                                                                                                                                                         | 0          |   |
| Issuance of non  -qualified options to employees and outside consultants                                   |   | 7,333,330                                                                                                  |   | $                                                                                        | 3.55   |                                                                                                                                                         | 0          |   |
| Total                                                                                                      |   | 306,451,883                                                                                                |   | $                                                                                        | 0.32   |                                                                                                                                                         | 17,752,949 |   |

 

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*                               Additionalshares will be issuable in the future related to accrued interest on theprincipal balance.

**                        Additionalshares will be issuable in the future related to accrued interest on theprincipal balance and changes in the conversion price allowed for in the debtinstrument.

***                 Additional shareswill be issuable in the future related to accrued interest on the principalbalance. Conversion of this loan has been approved by the Board of Directorsand is to be voted upon by the shareholders at the next Annual Meeting

 

 

**Item13. Certain Relationships and Related Transactions**

 

**Transactionswith Management and Others**

 

See Item 11 hereoffor descriptions of the terms of employment, consulting and other agreementsbetween us and certain officers, directors and other related parties.  Additionally, in June 2002, the Company madea relocation loan of $100,000 (non-interest bearing) to Mr. Hilton.  The loan is due on the

 

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earlier of June 2007 or upon sale of his former residence.  While the loan is outstanding, payments arerequired, equal to 20% of any incentive awards (after the first $50,000) paidto Mr. Hilton.  As of December 31, 2002,no payments on the loan had been made.

 

**Transactions with Counsel Corporation**

 

General

 

**Amendments to the Articles of Incorporation . **In July 2002, the Board ofDirectors approved an amendment to I-Link’s Amended and Restated Articles ofIncorporation (Articles of Incorporation) to delete Article VI thereof. ArticleVI of the Articles of Incorporation was added pursuant to an amendment andrestatement of the Articles of Incorporation dated March 1, 1989 to read asfollows:

 

“Any liquidation,reorganization, merger, consolidation, sale of substantially all of thecorporation’s assets, or the reclassification of its securities shall beapproved by (a) holders of at least a majority of the issued and outstandingCommon Stock held by other than officers, directors, and those persons who hold5% or more of the outstanding Common Stock, and (b) a vote of a majority ofshares of issued and outstanding Common Stock held by the Company’s officers,directors, and those persons who hold 5% or more of the outstanding CommonStock.”

 

Subsequently, the following “required vote” clause wasadded to Article VI as a result of the March 14, 1989 amendment to the Articlesof Incorporation:

 

“Notwithstanding anythingcontained in these Articles of Incorporation to the contrary, the affirmativevote of the holders of at least 67% of the outstanding shares of thecorporation then entitled to vote in the election of directors shall berequired to amend, alter, or repeal, or to adopt any provision inconsistentwith this Article VI.”

 

The original purpose of this Article VI was to providean additional measure designed to reduce I-Link’s vulnerability to unsolicitedtakeover attempts through amendment of the corporate charter or bylaws orotherwise. Since Counsel Communications holds in excess of 68% of the Company’svoting equity securities, the Board of Directors believes that Article VI is nolonger required to fulfill its original purpose and instead effectivelyrestricts I-Link’s ability to enter into transactions that may be in the bestinterests of its stockholders. Furthermore, under the terms and provisions of the Debt RestructuringAgreement (as discussed below), the Board of Directors is required to recommendapproval and adoption of this proposal to stockholders and to include thisproposal in the proxy statement materials distributed to I-Link stockholders inconnection with the Annual Meeting of Stockholders..

 

If this proposal is approved, Counsel will be able tocause the stockholder approval of any liquidation, reorganization, merger,consolidation, sale of substantially all of the assets of I-Link, or thereclassification of its securities.  Inaddition, Counsel might be able to take I-Link private.  Under Section 607.1104 of the Florida Act,if Counsel Communications owned more than 80% of each class of I-Link’s equitysecurities and if Proposal 3 is approved (the mechanics of theparent-subsidiary merger under the Florida Act is described below in thisProposal 3).  Counsel Communicationswould be able to merge I-Link into Counsel Communications without the approvalof stockholders other than Counsel Communications.  However, under the terms of the Amended Debt RestructuringAgreement, Counsel Communications has agreed not take any such action at anytime prior to June 30, 2003.

 

**The Amended Debt Restructuring Agreement**.  Historically, I-Link has sufferedsubstantial operating deficits and has required substantial infusions ofworking capital on an on-going basis. In early 2001, having been notified of its then majority stockholder’sunwillingness to commit more funds to the company, I-Link commenced efforts toseek alternative financing.  Soonthereafter, I-Link commenced negotiations with Counsel in contemplation ofCounsel making an investment in the company. Counsel is a publicly traded company engaged primarily in the ownershipand development of companies providing services and products in the UnitedStates and Canada.  In February 2000,Counsel formed Counsel Communications LLC, a Delaware limited liability companyand wholly owned subsidiary of Counsel, to

 

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focus on acquiring, consolidating and operating Internet telephony andother telecommunications-related businesses. (Counsel Communications LLC subsequently changed its name to CounselSpringwell Communications LLC, but has recently reverted to its original nameand is referred to below as Counsel Communications.)

 

On March 1, 2001, Counsel through CounselCommunications acquired an approximate 65% interest in I-Link from thecompany’s then majority stockholder in exchange for $5,000,000.  I-Link entered into a Senior ConvertibleLoan and Security Agreement (Senior Loan Agreement) with Counsel Communicationsunder the terms and provisions of which agreement Counsel Communications wasrequired to make periodic loans to I-Link in an aggregate principal amount notto exceed $10,000,000 (this agreement was amended in May 2001 to increase theaggregate principal amount to $12,000,000). During 2001, the full $12,000,000 was loaned to I-Link pursuant to thisagreement and was utilized by it for working capital purposes.

 

On June 6, 2001, I-Link and Counsel entered into aLoan and Security Agreement (Security Agreement) under the terms of whichagreement Counsel agreed to advance up to $10,000,000 to I-Link. In connectionwith the Security Agreement, I-Link executed a note in favor of Counsel due andpayable June 6, 2002 and secured the note with all of I-Link’s assets.Outstanding balances (including any accrued and unpaid interest) under the loancarried interest at 10% per annum which interest was payable quarterly inarrears on the last business day of each quarter.  However, at its sole election, Counsel could allow interest onthe loan to accrue and to become payable at the end of the term.  The full amount available under the SecurityAgreement was advanced to I-Link during 2001. Under the terms of an April 15, 2001 letter, Counsel committed to I-Linkto fund, through long-term inter-company advances or equity contributions, allcapital investment working capital or other operational cash requirements ofI-Link to continue as a going concern through April 15, 2002, and Counseldelivered a similar letter dated April 3, 2002 committing to provide such fundsas might be required in order for I-Link to continue as a going concern throughApril 15, 2003 (Keep Well Letters). Counsel and I-Link agreed that the conditions and terms of repayment ofamounts advanced pursuant to the Keep Well Letters would be similar to thosecontained in the Security Agreement. Accordingly, on June 27, 2002, I-Link and Counsel amended the SecurityAgreement, effective October 5, 2002, to increase the indebtedness represented therebyto $24,306,865*.*

 

**WorldxChange Transaction.*** *On December 10, 2002, I-Link’swholly-owned subsidiary, WorldxChange Corp. (WorldxChange), completed thepurchase of the Direct and Agent businesses of RSL COM U.S.A. Inc. (RSL).  The acquisition included the assets used byRSL to provide long distance voice and data services, including frame relay, tosmall and medium size businesses (Direct Business), and the assets used toprovide long distance and other voice services to small businesses and theconsumer/residential market (Agent Business), together with the existingcustomer base of the Direct and Agent Businesses.

 

The purchase agreement was originally entered intobetween Counsel Communications and RSL and was assigned to WorldxChange in May2002.  The closing occurred on December10, 2002 following receipt of all regulatory approvals.  WorldxChange paid a purchase price ofapproximately $7.5 million, subject to certain closing balance sheetadjustments, and agreed to pay up to an additional $3 million on March 31,2004, which contingent upon the achievement of certain revenue levels by theDirect and Agent Businesses for the year 2003. The purchase price of $7.5 million was financed by a loan from I-Link toWorldxChange that is due March 1, 2004. I-Link’s loan to WorldxChange wasfinanced by a convertible loan from Counsel Communications.  The loan from Counsel Communications isconvertible into common stock of I-Link at the exchange rate of $0.084 pershare, which rate represented the average closing price of I-Link’s commonstock for the twenty trading days preceding December 10, 2002.

 

Of the additional $3.0 million purchase price, aminimum of $1 million was payable March 31, 2004.  The remaining $2 million payment was contingent upon achievementof certain revenue levels by the Direct and Agent Businesses for the year2003.  The actual amount due will beprorated based upon 2003 Direct and Agent Businesses revenues between $44million ($0 amount payable) to $55 million ($2.0 million payable).

 

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**Debt Restructuring Agreement.*** *Under the terms of the DebtRestructuring Agreement by and among I-Link, Counsel and Counsel Communicationsdated July 25, 2002 (Original Agreement), $25.9 million of indebtedness thatwas due on June 6, 2002 would have been exchanged for shares of common stock ofI-Link at a price of $0.18864 per share, the average closing transaction pricefor the month of May 2002.  Interest onthe $25.9 million would have ceased to accrue after July 12, 2002.  The balance of the indebtedness, $13.4million, was owed under the Senior Loan Agreement between CounselCommunications and I-Link and would have continued to be convertible, at theoption of Counsel Communications, into shares of common stock of I-Linkpursuant to the existing terms of that convertible indebtedness.  The conversion price was set at $0.56 pershare, but, as a result of the issuance of the shares of common stock inexchange for the $25.9 million of I-Link indebtedness, the conversion pricewould have been adjusted to $0.39221.

 

The Original Agreement also provided that I-Link’sguarantee of indebtedness in the amount of $12.5 million owed by WorldxChangeto Counsel would be cancelled.  Inaddition, Counsel Communications agreed to surrender for cancellation by I-Link,warrants to purchase 15,000,000 shares of common stock of I-Link which wereissued in connection with the loan by Counsel to WorldxChange.  I-Link would also have transferred toCounsel Communications all the outstanding shares of capital stock of WorldxChange.  Finally, Counsel Communications also agreedto pay I-Link $1.0 million for expenses incurred by I-Link in connection withthe acquisition of WorldxChange.

 

Under the terms of the Original Agreement, CounselCommunications also agreed to continue to provide I-Link with funding in theamount of $2.3 million through December 31, 2002 to fund I-Link’s operatingcash needs.  Such funding would haveconstituted additional purchases of I-Link’s common stock at a purchase priceof $0.18864 per share.  CounselCommunications also agreed to pay I-Link’s expenses incurred in connection withthis transaction.  In addition, Counseland Counsel Communications’s current commitment under the Keep Well Letters tofund all capital investment, working capital or other operational cashrequirements of I-Link would have been extended from April 15, 2003 to December31, 2003. Under the terms of the Original Agreement, such funding in 2003 wouldhave constituted purchases of additional shares of I-Link’s common stock at apurchase price equal to the average closing transaction price for a share ofI-Link’s common stock for the immediately preceding month.

 

**Amended and Restated Debt Restructuring Agreement.*** *I-Link’s Board of Directorssubsequently determined that the Original Agreement was not in the bestinterests of the stockholders.  As aresult, the parties entered into an Amended and Restated Debt RestructuringAgreement dated October 15, 2002 (Amended Agreement).  The issuance of I-Link’s common stock pursuant to the AmendedAgreement will result in a weighted average conversion price adjustmentpursuant to the provisions of the Senior Loan Agreement, i.e., the conversionprice under the Senior Loan Agreement had been $0.56, the new conversion pricewill be approximately $0.38.  TheAmended Agreement includes the following terms:

 

•                  Theprincipal amount of $24,306,866 outstanding under the Security Agreement,together with accrued and unpaid interest, and any additional amounts advancedby Counsel to I-Link since July 25, 2002 under the Keep Well Letters, togetherwith interest accrued on such amounts at a rate of 10% per annum, will beexchanged for common stock of the company at a price of $0.18864 per share(Effective Price);

 

•                  Amountsadvanced by Counsel to I-Link under the Keep Well Letters from July 25 toDecember 31, 2002 will constitute additional purchases of I-Link’s common stockat the Effective Price, and such funding in 2003 would constitute purchases ofadditional shares of I-Link’s common stock at a purchase price equal to theaverage closing price for a share of I-Link’s common stock for the twenty (20)trading days preceding the funding; provided that in the event that the Boardof Directors determines to acquire the assets or equity interests of any otherentity, I-Link and Counsel Communications agree that any acquisition costrelated to such acquisition will be financed, at the option of CounselCommunications, either by way of equity from Counsel Communicationsconstituting a purchase of additional shares of I-Link’s common stock for apurchase price per share equal to the average closing transaction price of ashare of common stock on the twenty (20) trading days preceding the funding or

 

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alternatively a purchasemoney loan arrangement similar in form and substance to the Security Agreement;

 

•                  CounselCommunications will advance to I-Link all amounts paid or payable by I-Link toits stockholders that exercise their dissenters’ rights in connection with thetransactions subject to the debt restructuring transaction and theamount for the annual premium to renew the existing directors and officersinsurance coverage through November 2003.

 

•                  CounselCommunications further agreed to reimburse I-Link for all costs, fees andexpenses in connection with the Amended Agreement, whether incurred and yet tobe incurred, including the Special Committee’s costs to negotiate the AmendedAgreement and costs related to obtaining stockholder approval.  The costs, fees and expenses to be soreimbursed to I-Link will not be treated as advances, loans or stock purchases;nor will such amounts be subject to conversion into I-Link’s common stock.

 

I-Link agreed to solicit the approval of itsstockholders for this agreement and for a proposal to increase the authorizedcapital of I-Link.  I-Link also agreedto increase its authorized capital to make available shares of common stockinto which debt owed to Counsel and its affiliates could be converted intostock pursuant to the Amended and Restated Debt Restructuring Agreement.

 

I-Link’s Special Committee, consisting of twoindependent directors, negotiated and approved the Amended Agreement on behalfof I-Link, recommended its adoption and approval to the I-Link Board of Directorsand has also recommended that it be approved by the stockholders ofI-Link.  The Special Committee retaineda financial advisor, who advised the Special Committee that the AmendedAgreement was fair, from a financial point of view, to the stockholders ofI-Link, other than Counsel and its affiliates. The Board of Directors of I-Link unanimously approved and recommendedthe Amended Agreement and also unanimously approved and recommended anamendment to the Articles of Incorporation of I-Link to delete Article VI.

 

 

If the debt restructuring transaction is consummated,Counsel Communications will own 86% (based on advances through March 18, 2003)of voting equity securities of I-Link. If Counsel Communications owned more than 80% of each class of I-Link’sequity securities and if this agreement is approved, it could, under Section607.1104 of the Florida Act, merge I-Link into Counsel Communications withoutthe approval of stockholders other than Counsel Communications.  However, under the terms of the AmendedAgreement, Counsel Communications has agreed not take any such action at anytime prior to June 30, 2003.

 

**PART IV**

 

**Item14.  Controls and Procedures**

 

In accordance with Item 307 ofRegulation S-K promulgated under the Securities Act of 1933, as amended, andwithin 90 days of the date of this Annual Report on Form 10-K, the ChiefExecutive Officer and Chief Financial Officer of the Company (the “CertifyingOfficers”) have conducted evaluations of the Company’s disclosure controls andprocedures. As defined under Sections 13a-14(c) and 15d-14(c) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), the term “disclosurecontrols and procedures” means controls and other procedures of an issuer thatare designed to ensure that information required to be disclosed by the issuerin the reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theCommission’s rules and forms. Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by an issuer in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the issuer’smanagement, including its principal executive officer or officers and principalfinancial officer or officers, or persons performing similar functions, asappropriate to allow timely decisions regarding required disclosure.

 

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On March 13, 2003, theCertifying Officers conducted an evaluation of the Company’s internal controlsand disclosure controls and procedures and concluded that the Company’sdisclosure controls and procedures were not effective.  An explanation of the deficiencies andremedies is set forth below.  Incompliance with Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350),each of the Certifying Officers executed an Officer’s Certification included inthis Annual Report on Form 10-K.

 

As of the March 13, 2003evaluation, the Chief Executive Officer and Chief Financial Officer determinedthat the following matters involving internal controls constituted materialweaknesses.  The deficiencies related tothe process of calculating allowance for doubtful accounts, the timeliness ofgeneral ledger account reconciliations and analysis, and financial reportingexpertise. A material weakness is a condition in which the design or operationof one or more of the internal control components does not reduce to arelatively low level the risk that misstatements caused by error or fraud inamounts that would be material in relation to the financial statements mayoccur and not be detected within a timely period by employees in the normalcourse of performing their assigned functions. More specific discussion is set forth below.

 

Allowance For DoubtfulAccounts.  WorldxChange’s informationsystems necessary to analyze its reserves for uncollectible accounts receivablewere not effective.  Primarily, informationsystems necessary to analyze the allowance for doubtful accounts related todirect-billed accounts were not effective as a result of the rapid growth ofthe direct-billed revenues and related accounts receivable during the year.  Following the date of the CertifyingOfficers’ evaluation, the Company has undertaken to generate system-basedreports to assist in the timely and informed evaluation of necessary allowancefor doubtful accounts related to direct-billed accounts and has increased themonitoring of that information.

 

General Ledger AccountReconciliation and Analysis.  CertainWorldxChange general ledger accounts were not reconciled on a timelybasis.  Following the date of theCertifying Officers’ evaluation, WorldxChange implemented procedures to requirethe timely preparation and review of reconciliations and analysis of thesegeneral ledger accounts on a monthly basis.

 

Financial Reporting Expertise.  Over thecourse of the last two years the Company has grown through acquisitions and theCompany is positioning itself for further revenue growth.  That growth continues to place significantburdens on the Company’s financial reporting systems and resources.  The Certifying Officers have determined thatthe Company did not have sufficient financial expertise and appropriatesystems, and consequently that controls did not operate effectively on acontinuous basis throughout the reporting period.  As a result, the Certifying Officers determined that the Companydid not have an effective internal control environment.  The Certifying Officers, with Company’smanagement, have evaluated and are modifying its systems and financialfunctions as deemed appropriate in an attempt to ensure the internal controlsand disclosure controls and procedures are effective in the future. Inaddition, the Certifying Officers have determined that the financialmanagement team should be augmented to include an internal audit function.  In 2003, the Company appointed a new ChiefFinancial Officer, recently hired a new corporate controller and is in theprocess of hiring a new controller at WorldxChange, (all with recent experiencein generally accepted accounting principles, the rules and regulations of theCommission, financial reporting practices, and internal controls), in an effortto address this deficiency.

 

The Company has a continuousimprovement program in place relating to the internal controls and disclosurecontrols and procedures of the Company and its subsidiaries. The program isdesigned to review and modify, as determined appropriate, the design andoperation of internal controls and disclosure controls and procedures as theoperating processes change in relation to the changes of the Company’s businessresulting from acquisitions, discontinued operations, reorganization ofmanagement and the addition of new lines of business. As of the date of thisAnnual Report on Form 10-K, except as disclosed above, there have not been anysignificant changes in the Company’s internal controls or in other factors thatcould significantly affect these controls subsequent to the date of theirevaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

On July 13, 2003, under the supervision and with theparticipation of the Company’s management, 

 

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including the company’sChief Executive Officer (CEO) and Chief Financial Officer (CFO), the Companycarried out a subsequent evaluation of the effectiveness of its “disclosurecontrols and procedures” (as the term is defined in the Securities Exchange Actof 1934 Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, the CEO and CFO have concluded that thecompany’s disclosure controls and procedures are effective to ensure that materialinformation is recorded, processed, summarized and reported by management ofthe company on a timely basis in order to comply with the company’s disclosureobligations under the Securities Exchange Act of 1934, as amended, and therules and regulations promulgated thereunder.

 

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

 

(a)                                  Thefollowing financial statements and those financial statement schedules requiredby Item 8 hereof are filed as part of this report:

 

1.                                       FinancialStatements:

 

Report of IndependentAccountants

Consolidated Balance Sheetsas of December 31, 2002 and 2001

ConsolidatedStatements of Operations for the years ended December 31, 2002, 2001 and 2000

ConsolidatedStatement of Changes in Stockholders’ Equity (Deficit) for the years endedDecember 31, 2002, 2001 and 2000

ConsolidatedStatements of Cash Flows for the years ended December 31, 2002, 2001 and 2000

Notes toConsolidated Financial Statements

 

2.                                       FinancialStatement Schedule:

 

Schedule II – Valuation and Qualifying Accounts

 

All other schedules areomitted because of the absence of conditions under which they are required orbecause the required information is presented in the Financial Statements orNotes thereto.

 

(b)                                 Reportson Form 8-K during the fourth quarter of 2002.

 

A Current Report on Form8-K was filed on December 16, 2002 to announce I-Link’s agreement to sell theoperations of I-Link’s subsidiary, I-Link Communications, Inc.

 

A Current Report on Form8-K was filed on December 26, 2002 to announce that I-Link’s subsidiaryWorldxChange Corp. completed the purchase of the Enterprise and Agent businessof RSL Com U.S.A. Inc.

 

(c)                                  Thefollowing exhibits are filed as part of this Registration Statement:

 
| **Number** |   | **Title of  Exhibit**                                                                                                                                                                     |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                      |
| 3.1(6)     |   | Amended and Restated Articles of Incorporation, as  further amended.                                                                                                                      |
| 4.2(3)     |   | Securities Purchase Agreement by and between I-Link  and Winter Harbor, dated as of September 30, 1997.                                                                                   |
| 4.3(7)     |   | Amended and Restated Registration Rights Agreement  dated as of January 15, 1999 by and between I-Link and Winter Harbor,  amending Registration Rights Agreement dated October 10, 1997. |
| 4.4(3)     |   | Form of Shareholders Agreement by and among I-Link  and Winter Harbor and certain holders of I-Link’s securities, which  constitutes Exhibit D to the Purchase Agreement.            |
| 4.5(3)     |   | Form of Warrant Agreement by and between Medcross,  Inc. and Winter Harbor, which                                                                                                         |

 

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|      |   | constitutes Exhibit F to the Purchase Agreement.                                                                                                                                                      |
|-----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.6(10)   |   | Senior Convertible Loan and Security Agreement dated  March 1, 2001, by and between Counsel Communications, LLC and I-Link  Incorporated.                                                             |
| 4.7(10)   |   | Loan Note, dated as of March 1, 2001, by and between  Counsel Communications LLC and I-Link Incorporated.                                                                                             |
| 4.8(10)   |   | Security Agreement, dated as of March 1, 2001, by  and between I-Link Communications, MiBridge Inc and Counsel Communications,  LLC.                                                                  |
| 10.1(1)   |   | 1997 Recruitment Stock Option Plan.                                                                                                                                                                   |
| 10.2(2)   |   | 2001 Stock Option and Appreciation Rights Plan                                                                                                                                                        |
| 10.3(5)   |   | Agreement dated April 14, 1998, by and between  I-Link and Winter Harbor.                                                                                                                             |
| 10.4(5)   |   | Pledge Agreement dated April 14, 1998, by and  between I-Link and Winter Harbor.                                                                                                                      |
| 10.5(5)   |   | Security Agreement dated April 14, 1998, by and  among certain of I-Link’s subsidiaries and Winter Harbor.                                                                                       |
| 10.6(5)   |   | Form of Promissory Notes issued to Winter Harbor.                                                                                                                                                     |
| 10.7(5)   |   | Warrant to purchase 250,000 shares of Common Stock  of I-Link, dated June 30, 1998, issued to JNC.                                                                                                    |
| 10.8(5)   |   | Warrant to purchase 100,000 shares of Common Stock  of I-Link, dated July 28, 1998, issued to JNC.                                                                                                    |
| 10.9(7)   |   | Loan Agreement dated as of January 15, 1999 by and  between I-Link and Winter Harbor.                                                                                                                 |
| 10.10(7)  |   | First Amendment to Loan Agreement dated March 4,  1999 by and between I-Link and Winter Harbor.                                                                                                       |
| 10.11(7)  |   | Promissory Note dated November 10, 1998, in  principal amount of $8,000,000 executed by I-Link in favor of Winter Harbor.                                                                             |
| 10.12(7)  |   | Series K Warrant Agreement dated as of January 15,  1999 by and between I-Link and Winter Harbor and form of Series K Warrant.                                                                        |
| 10.13(7)  |   | Agreement dated as of January 15, 1999 by and  between I-Link and Winter Harbor.                                                                                                                      |
| 10.14(7)  |   | First Amendment to Security Agreement dated as of  January 15, 1999, by and among I-Link, five of its wholly-owned subsidiaries  and Winter Harbor, amending Security Agreement dated April 14, 1997. |
| 10.15(7)  |   | First Amendment to Pledge Agreement dated as of January  15, 1999, by and among I-Link and Winter Harbor, amending Pledge Agreement  dated April 14, 1997.                                            |
| 10.16(7)  |   | Series D, E, F, G, H, I and J Warrant Agreement  dated as of January 15, 1999 by and between I-Link and Winter Harbor, and  related forms of warrant certificates.                                    |
| 10.17(4)  |   | Amended and Restated Employment Agreement with Helen  Seltzer dated January 3, 2002                                                                                                                   |
| 10.18(8)  |   | Form of Wholesale Service Provider and Distribution  Agreement between I-Link and Big Planet, Inc. dated February 1, 2000                                                                             |
| 10.19(9)  |   | Form of Cooperation and Framework Agreement between  I-Link Incorporated and CyberOffice International AG dated May 8, 2000                                                                           |
| 10.20(9)  |   | Form of Revenue Sharing Agreement between I-Link  Incorporated and Red Cube International AG (formerly known as CyberOffice  International AG.) dated June 30, 2000.                                  |
| 10.21(9)  |   | Form of Letter dated June 30, 2000, clarifying a  Cooperation and Framework Agreement issue.                                                                                                          |
| 10.22(11) |   | Loan and Security Agreement, dated December 10,  2001, by and among WorldxChange Corp. and Foothill Capital Corporation.                                                                              |
| 10.23(13) |   | Employment agreement with James Ducay dated July 1,  2002                                                                                                                                             |
| 10.24(13) |   | Employment agreement with Kenneth Hilton dated May  1, 2002                                                                                                                                           |
| 10.25(12) |   | Form of Asset Purchase Agreement by and between  Counsel Springwell Communications LLC and RSL Com U.S.A., Inc.                                                                                       |
| 10.26(12) |   | Form of Amendment No. 1 to Asset Purchase Agreement  between Counsel Springwell Communications LLC and RSL U.S.A., Inc.                                                                               |
| 10.27(13) |   | Amended and Restated Debt Restructuring Agreement  dated October 15, 2002.                                                                                                                            |
| 10.28(13) |   | Form of Asset Purchase Agreement between Buyer’s  United Inc., I-Link Communications Inc., and I-Link Incorporated dated  December 6, 2002                                                       |
| 10.29(13) |   | I-Link Convertible Promissory Note for $7,500,000  between I-Link and Counsel Corporation (US) dated December 10, 2002                                                                                |
| 23.1(14)  |   | Consent of Independent Accountants.                                                                                                                                                                   |

 

42

----

 
| 31.1(14) |   | Certification pursuant to Rule 13a-14(a) and  15d-14(a)                                                                       |
|----------|--------|-------------------------------------------------------------------------------------------------------------------------------|
| 31.2(14) |   | Certification pursuant to Rule 13a-14(a) and  15d-14(a)                                                                       |
| 32.1(14) |   | Certification pursuant to Section 1350 of Chapter 63  of title 18 of the United States Code                                   |
| 32.2(14) |   | Certification pursuant to Section 1350 of Chapter 63  of title 18 of the United States Code                                   |
| 99.1(10) |   | Warrant Exchange Agreement, dated as of March 1, 2001,  by and between Winter Harbor, LLC and I-Link Incorporated.            |
| 99.2(10) |   | Securities Support Agreement, dated as of March 1,  2001, by and between Counsel Communications, LLC and I-Link Incorporated. |

 

----

(1)                                                                      Incorporatedby reference to our Annual Report on Form 10-KSB for the year ended December31, 1996, file number 0-17973.

(2)                                                                      Incorporatedby reference to our Quarterly Report on Form 10-Q for the period endedSeptember 30, 2001, file number 0-17973.

(3)                                                                      Incorporatedby reference to our Current Report on Form 8-K, dated September 30, 1997, filenumber 0-17973.

(4)                                                                      Incorporatedby reference to our Quarterly Report on Form 10-Q for the period ended March31, 2002, file number 0-17973.

(5)                                                                      Incorporatedby reference to our Quarterly Report on Form 10-Q for the period ended June 30,1998, file number 0-17973.

(6)                                                                      Incorporatedby reference to our Annual report on Form 10-K for the year ended December 31,1998, file number 0-17973.

(7)                                                                      Incorporatedby reference to our Current Report on Form 8-K filed on March 23, 1999, filenumber 0-17973.

(8)                                                                      Incorporatedby reference to our Quarterly Report on Form 10-Q for the period ended March31, 2000, file number 0-17973.

(9)                                                                      Incorporatedby reference to our Quarterly Report on Form 10-Q for the period ended June 30,2000, file number 0-17973.

(10)                                                                Incorporatedby reference to our Current Report on Form 8-K filed on March 16, 2001, filenumber 0-17973.

(11)                                                                Incorporated by reference to our Annual report on Form 10-K for the year endedDecember 31, 2001, file number 0-17973.

(12)                                                                Incorporatedby reference to our Current Report on Form 8-K filed on December 26, 2002,2001, file number 0-17973.

(13)                                                                Incorporatedby reference to our Annual report on Form 10-K for the year ended December 31,2002, file number 0-17973.

(14)                                                                Filedherewith.

 

43

----

 

**SIGNATURES**

 

In accordance withSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on our behalf by the undersigned, hereuntoduly authorized.

 
|                     | I-LINK INCORPORATED |
|--------------------------|---------------------|
|                     | (Registrant)        |
|                     |                |
| Dated: September 8, 2003 |                | By: | /s/ Allan Silber |   |
|                     |                |  Allan  Silber, President and |
|                     |                |  Chief  Executive Officer |

 

In accordance withSection 13 of the Securities Exchange Act of 1934, this report has been signedby the following persons on behalf of the registrant and in the capacities andon the dates indicated.

 
| **Signature**         |   | **Title**                             |                               | **Date** |              |
|-----------------------|--------|---------------------------------------|------------------------------------|----------|-------------------|
|                  |   |                                  |                               |     |              |
| /s/ Allan C. Silber   |   |                                  | Chairman of the Board, Director,   |     | September 8, 2003 |   |
| Allan C. Silber       |   | President and Chief Executive Officer |                               |     |              |
|                  |   |                                  |                               |     |              |
| /s/ Gary M. Clifford  |   |                                  | Chief  Financial Officer and VP of |     | September 8, 2003 |   |
| Gary M. Clifford      |   | Finance                               |                               |     |              |
|                  |   |                                  |                               |     |              |
| /s/ Henry Y. L. Toh   |   |                                  | Director                           |     | September 8, 2003 |   |
| Henry Y.L. Toh        |   |                                  |                               |     |              |
|                  |   |                                  |                               |     |              |
| /s/ Hal B. Heaton     |   |                                  | Director                           |     | September 8, 2003 |   |
| Hal B. Heaton         |   |                                  |                               |     |              |
|                  |   |                                  |                               |     |              |
| /s/ Gary J. Wasserson |   |                                  | Director                           |     | September 8, 2003 |   |
| Gary J. Wasserson     |   |                                  |                               |     |              |
|                  |   |                                  |                               |     |              |
| /s/ Samuel L. Shimer  |   |                                  | Director                           |     | September 8, 2003 |   |
| Samuel L. Shimer      |   |                                  |                               |     |              |
|                  |   |                                  |                               |     |              |
| /s/ John R. Walter    |   |                                  | Director                           |     | September 8, 2003 |   |
| John R. Walter        |   |                                  |                               |     |              |
|                  |   |                                  |                               |     |              |
| /s/ Albert Reichmann  |   |                                  | Director                           |     | September 8, 2003 |   |
| Albert Reichmann      |   |                                  |                               |     |              |
|                  |   |                                  |                               |     |              |
| /s/ Kelly Murumets    |   |                                  | Director                           |     | September 8, 2003 |   |
| Kelly Murumets        |   |                                  |                               |     |              |

 

44

----

 

**INDEX OFFINANCIAL STATEMENTS & SUPPLEMENTAL SCHEDULES**

 
| **Title of Document**                                                                                                           |
|---------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                            |
| Report of Independent  Accountants                                                                                              |
|                                                                                                                            |
| Consolidated Balance Sheets  as of December 31, 2002 and 2001                                                                   |
|                                                                                                                            |
| Consolidated  Statements of Operations for the years ended December 31, 2002, 2001 and 2000                                     |
|                                                                                                                            |
| Consolidated  Statement of Changes in Stockholders’ Equity (Deficit) for the years ended  December 31, 2002, 2001 and 2000 |
|                                                                                                                            |
| Consolidated Statements  of Cash Flows for the years ended December 31, 2002, 2001 and 2000                                     |
|                                                                                                                            |
| Notes to Consolidated  Financial Statements                                                                                     |
|                                                                                                                            |
| Schedule of Valuation  and Qualifying Accounts                                                                                  |

 

----

 

***REPORT OF INDEPENDENT ACCOUNTANTS***

 

To the Board of Directors and Stockholders ofI-Link Incorporated and Subsidiaries:

 

 

In our opinion, the consolidated financialstatements listed in the accompanying index present fairly, in all materialrespects, the financial position of I-Link Incorporated and its subsidiaries atDecember 31, 2002 and 2001, and the results of their operations and their cashflows for each of the three years in the period ended December 31, 2002 inconformity with accounting principles generally accepted in the United Statesof America.  In addition, in ouropinion, the financial statement schedule listed in the accompanying indexpresents fairly, in all material respects, the information set forththerein when read in conjunction with the related consolidated financialstatements.  These financial statementsand financial statement schedule are the responsibility of the Company’s management;our responsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits.  We conducted our audits of these statements in accordance withauditing standards generally accepted in the United States of America, whichrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

The accompanying consolidated financialstatements have been prepared assuming that the Company will continue as agoing concern.  As discussed in Note 2to the consolidated financial statements, the Company has suffered recurringlosses and negative cash flows from operations and has a net capitaldeficiency.  These matters raisesubstantial doubt about the Company’s ability to continue as a goingconcern.  Management’s plans in regardto these matters are also described in Note 2. The consolidated financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.

 

As explained in Note 3 to the consolidatedfinancial statements, the Company has restated its financial statements for theyear ended December 31, 2002.

 

PricewaterhouseCoopers LLP

Salt Lake City, Utah

March25, 2003, except for Notes 2 and 3as to which the date is September 8, 2003

 

F-1

----

 

**I-LINKINCORPORATED AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**as ofDecember 31, 2002 and 2001**

 
|                                                                                                                                                                                                |   | **2002**          |       | **2001**     |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|--------------|--------|
|                                                                                                                                                                                                |   | **(as restated)** |       |         |   |
|                                                                                                                                                                                                |   |              |       |         |   |
| ASSETS                                                                                                                                                                                              |   |              |       |         |   |
| Current assets:                                                                                                                                                                                     |   |              |       |         |   |
| Cash and cash  equivalents                                                                                                                                                                          |   | $                 | 3,619,642  |         | $      | 4,662,532 |   |
| Accounts receivable,  less allowance for doubtful accounts of $2,783,571 and $1,862,988 as of  December 31, 2002 and 2001, respectively                                                             |   | 16,924,149        |       | 16,009,386   |   |
| Other current  assets                                                                                                                                                                               |   | 3,063,986         |       | 2,632,629    |   |
| Total current assets                                                                                                                                                                                |   | 23,607,777        |       | 23,304,547   |   |
|                                                                                                                                                                                                |   |              |       |         |   |
| Furniture, fixtures,  equipment and software, net                                                                                                                                                   |   | 11,479,111        |       | 21,023,696   |   |
|                                                                                                                                                                                                |   |              |       |         |   |
| Other assets:                                                                                                                                                                                       |   |              |       |         |   |
| Intangible assets, net                                                                                                                                                                              |   | 2,747,262         |       | 1,330,839    |   |
| Other assets                                                                                                                                                                                        |   | 2,261,887         |       | 1,121,067    |   |
| Net assets of  discontinued operations                                                                                                                                                              |   | 1,350,000         |       | —       |   |
|                                                                                                                                                                                                |   |              |       |         |   |
| Total assets                                                                                                                                                                                        |   | $                 | 41,446,037 |         | $      | 46,780,149 |   |
|                                                                                                                                                                                                |   |              |       |         |   |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                          |   |              |       |         |   |
|                                                                                                                                                                                                |   |              |       |         |   |
| Current liabilities:                                                                                                                                                                                |   |              |       |         |   |
| Accounts payable                                                                                                                                                                                    |   | $                 | 7,016,628  |         | $      | 7,719,595 |   |
| Accrued liabilities                                                                                                                                                                                 |   | 18,090,312        |       | 12,270,231   |   |
| Unearned revenue                                                                                                                                                                                    |   | 958,185           |       | 1,986,675    |   |
| Revolving credit  facility and other current debt                                                                                                                                                   |   | 12,073,374        |       | 10,004,862   |   |
| Notes payable to a  related party                                                                                                                                                                   |   | —            |       | 29,101,163   |   |
| Current portion of  obligations under capital leases                                                                                                                                                |   | 2,713,650         |       | 3,034,293    |   |
| Total current  liabilities                                                                                                                                                                          |   | 40,852,149        |       | 64,116,819   |   |
|                                                                                                                                                                                                |   |              |       |         |   |
| Notes payable                                                                                                                                                                                       |   | 1,033,024         |       | 1,147,364    |   |
| Notes payable to a  related party                                                                                                                                                                   |   | 30,057,635        |       | 11,527,512   |   |
| Obligations under  capital leases                                                                                                                                                                   |   | 4,145,711         |       | 6,986,308    |   |
| Note payable to a  related party, to be converted into common stock                                                                                                                                 |   | 29,281,984        |       | —       |   |
| Total liabilities                                                                                                                                                                                   |   | 105,370,503       |       | 83,778,003   |   |
|                                                                                                                                                                                                |   |              |       |         |   |
| Commitments and  contingencies  (notes 11 and 16)                                                                                                                                              |   |              |       |         |   |
|                                                                                                                                                                                                |   |              |       |         |   |
| Stockholders’ equity  (deficit):                                                                                                                                                               |   |              |       |         |   |
| Preferred stock, $10  par value, authorized 10,000,000 shares, issued and outstanding 769 as of  December 31, 2002 and 2001, respectively; liquidation preference of $761,310  at December 31, 2002 |   | 7,690             |       | 7,690        |   |
| Common stock, $.007 par  value, authorized 300,000,000 shares, issued and outstanding 116,549,547 at  December 31, 2002 and 2001                                                                    |   | 815,849           |       | 815,849      |   |
| Additional paid-in  capital                                                                                                                                                                         |   | 129,552,725       |       | 128,942,389  |   |
| Accumulated deficit                                                                                                                                                                                 |   | (194,300,730      | )          | (166,763,782 | )      |
| Total stockholders’  deficit                                                                                                                                                                   |   | (63,924,466       | )          | (36,997,854  | )      |
|                                                                                                                                                                                                |   |              |       |         |   |
| Total liabilities and  stockholder’s deficit                                                                                                                                                   |   | $                 | 41,446,037 |         | $      | 46,780,149 |   |

 

The accompanying notesare an integral part of these consolidated financial statements

 

F-2

----

 

**I-LINKINCORPORATED AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**for theyears ended December 31, 2002, 2001 and 2000**

 
|                                                                       |   | **2002**           |        | **2001**    |   | **2000**    |   |
|----------------------------------------------------------------------------|--------|--------------------|-------------|-------------|--------|-------------|--------|
|                                                                       |   | **(as  restated)** |        |        |   |        |   |
| Revenues:                                                                  |   |               |        |        |   |        |   |
| Telecommunication  services                                                |   | $                  | 85,252,480  |        | $      | 50,288,917  |   | $ | — |   |
| Marketing  services                                                        |   | —             |        | —      |   | 463,740     |   |
| Technology  licensing and development                                      |   | 2,836,655          |        | 5,696,893   |   | 8,972,828   |   |
| Other                                                                      |   | —             |        | —      |   | 400,000     |   |
| Total  revenues                                                            |   | 88,089,135         |        | 55,985,810  |   | 9,836,568   |   |
|                                                                       |   |               |        |        |   |        |   |
| Operating  costs and expenses:                                             |   |               |        |        |   |        |   |
| Telecommunication  network expense (exclusive of depreciation shown below) |   | 50,935,474         |        | 35,545,611  |   | —      |   |
| Marketing  services                                                        |   | —             |        | —      |   | 456,354     |   |
| Selling,  general, administrative and other                                |   | 33,015,176         |        | 30,789,736  |   | 14,682,985  |   |
| Provision  for doubtful accounts                                           |   | 5,999,422          |        | 2,860,892   |   | —      |   |
| Depreciation  and amortization                                             |   | 4,270,302          |        | 6,408,817   |   | 3,990,584   |   |
| Research  and development                                                  |   | 1,398,809          |        | 2,332,593   |   | 4,220,333   |   |
| Total  operating costs and expenses                                        |   | 95,619,183         |        | 77,937,649  |   | 23,350,256  |   |
|                                                                       |   |               |        |        |   |        |   |
| Operating  loss                                                            |   | (7,530,048         | )           | (21,951,839 | )      | (13,513,688 | )      |
|                                                                       |   |               |        |        |   |        |   |
| Other  income (expense):                                                   |   |               |        |        |   |        |   |
| Interest  expense                                                          |   | (7,893,754         | )           | (4,692,974  | )      | (1,486,676  | )      |
| Interest  and other income                                                 |   | 395,228            |        | 81,015      |   | 487,132     |   |
| Gain  on sale of subsidiary                                                |   | —             |        | 588,943     |   | —      |   |
| Settlement  expense                                                        |   | —             |        | —      |   | (639,565    | )      |
| Total  other expense                                                       |   | (7,498,526         | )           | (4,023,016  | )      | (1,639,109  | )      |
|                                                                       |   |               |        |        |   |        |   |
| Loss  from continuing operations                                           |   | (15,028,574        | )           | (25,974,855 | )      | (15,152,797 | )      |
|                                                                       |   |               |        |        |   |        |   |
| Loss  from discontinued operations (net of $0 tax):                        |   | (12,508,374        | )           | (19,614,588 | )      | (10,599,381 | )      |
|                                                                       |   |               |        |        |   |        |   |
| Loss  before extraordinary gain                                            |   | (27,536,948        | )           | (45,589,443 | )      | (25,752,178 | )      |
|                                                                       |   |               |        |        |   |        |   |
| Extraordinary  gain on extinguishment of debt (net of $0 tax)              |   | —             |        | 1,092,818   |   | —      |   |
|                                                                       |   |               |        |        |   |        |   |
| Net  loss                                                                  |   | $                  | (27,536,948 | )           | $      | (44,496,625 | )      | $ | (25,752,178 | ) |

 

The accompanying notesare an integral part of these consolidated financial statements

 

F-3

----

 
|                                                                                                                                      |   | **2002**           |        | **2001**   |   | **2000**    |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-------------|------------|--------|-------------|--------|
|                                                                                                                                      |   | **(as  restated)** |        |       |   |        |   |
| **Calculation  of net loss per common share:**                                                                                            |   |               |        |       |   |        |   |
|                                                                                                                                      |   |               |        |       |   |        |   |
| Loss  from continuing operations                                                                                                          |   | $                  | (15,028,574 | )          | $      | (25,974,855 | )      | $ | (15,152,797 | ) |
| Cumulative  preferred stock dividends not paid in current year                                                                            |   | —             |        | (27,610    | )      | (1,646,818  | )      |
| Dividends  accrued and paid on Class M redeemable preferred stock                                                                         |   | —             |        | (269,027   | )      | —      |   |
| Net  effect on retained earnings of redemption and reissuance of Class M and N  preferred stock, including beneficial conversion features |   | —             |        | 15,512,473 |   | —      |   |
|                                                                                                                                      |   |               |        |       |   |        |   |
| Loss  from continuing operations applicable to common stock                                                                               |   | $                  | (15,028,574 | )          | $      | (10,759,019 | )      | $ | (16,799,615 | ) |
|                                                                                                                                      |   |               |        |       |   |        |   |
| Basic  and diluted weighted average shares outstanding                                                                                    |   | 116,549,547        |        | 99,184,427 |   | 26,669,058  |   |
|                                                                                                                                      |   |               |        |       |   |        |   |
| Net  loss per common share – basic and diluted:                                                                                      |   |               |        |       |   |        |   |
|                                                                                                                                      |   |               |        |       |   |        |   |
| Loss  from continuing operations                                                                                                          |   | $                  | (0.13       | )          | $      | (0.11       | )      | $ | (0.63 | ) |
| Loss  from discontinued operations                                                                                                        |   | (0.11              | )           | (0.20      | )      | (0.40       | )      |
| Extraordinary  gain from extinguishment of debt                                                                                           |   | —             |        | 0.01       |   | —      |   |
| Net  loss per common share                                                                                                                |   | $                  | (0.24       | )          | $      | (0.30       | )      | $ | (1.03 | ) |

 

The accompanying notesare an integral part of these consolidated financial statements

 

F-4

----

 

**I-LINKINCORPORATED AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**

**for theyears ended December 31, 2002, 2001 and 2000**

 
|                                                                                                      |              |       |       |     |       | **Additional  Paid-in  Capital** |       | **Deferred  Compensation** |   | **Accumulated  Deficit** |   |
|-----------------------------------------------------------------------------------------------------------|-------------------|------------|------------|----------|------------|----------------------------------|------------|----------------------------|--------|--------------------------|--------|
| **Preferred  Stock**                                                                                      | **Common  Stock** |
| **Shares**                                                                                                |              | **Amount** | **Shares** |     | **Amount** |
|                                                                                                      |              |       |       |     |       |                             |       |                       |   |                     |   |   |   |   |   |
| **Balance at  December 31, 1999**                                                                         |              | 49,992     |       | $        | 499,920    |                             | 24,150,829 |                       | $      | 169,056                  |   | $ | 98,734,475 |   | $ | (499,377 | ) | $ | (109,953,971 | ) |
|                                                                                                      |              |       |       |     |       |                             |       |                       |   |                     |   |   |   |   |   |
| Conversion of preferred stock into common stock                                                           |              | (25,805    | )          | (258,050 | )          | 2,158,413                        |       | 15,109                     |   | 242,941                  |   | — |   | — |   |
| Reclassification of Series F redeemable preferred  stock from mezzanine due to conversion to common stock |              | 248        |       | 2,480    |       | —                           |       | —                     |   | 2,336,305                |   | — |   | — |   |
| Common stock dividend paid to holders of Series F  redeemable preferred stock                             |              | —     |       | —   |       | 87,477                           |       | 612                        |   | 195,721                  |   | — |   | (196,333 | ) |
| Exercise of stock options, warrants and issuances  under stock purchase plan                              |              | —     |       | —   |       | 1,589,810                        |       | 11,129                     |   | 4,330,530                |   | — |   | — |   |
| Stock options issued for services                                                                         |              | —     |       | —   |       | —                           |       | —                     |   | 42,605                   |   | (42,605 | ) | — |   |
| Common stock issued as payment of settlement and  interest expense                                        |              | —     |       | —   |       | 149,977                          |       | 1,051                      |   | 739,537                  |   | — |   | — |   |
| Amortization of deferred compensation on stock  options issued for services                               |              | —     |       | —   |       | —                           |       | —                     |   | —                   |   | 541,982 |   | — |   |
| Net loss                                                                                                  |              | —     |       | —   |       | —                           |       | —                     |   | —                   |   | — |   | (25,752,178 | ) |
|                                                                                                      |              |       |       |     |       |                             |       |                       |   |                     |   |   |   |   |   |
| **Balance at December 31, 2000**                                                                          |              | 24,435     |       | $        | 244,350    |                             | 28,136,506 |                       | $      | 196,957                  |   | $ | 106,622,114 |   | $ | — |   | $ | (135,902,482 | ) |

 

The accompanying notesare an integral part of these consolidated financial statements

 

F-5

----

 
|                                                                                                                      |   | **Preferred  Stock** |   | **Common  Stock** |    | **Additional  Paid-in Capital** |        | **Accumulated  Deficit** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|----------------------|--------|-------------------|---------|---------------------------------|-------------|--------------------------|--------|
| **Shares**                                                                                                                |   | **Amount**           |   | **Shares**        |    | **Amount**                      |
|                                                                                                                      |   |                 |   |              |    |                            |        |                     |   |   |   |   |   |
| **Balance at  December 31, 2000**                                                                                         |   | 24,435               |   | $                 | 244,350 |                            | 28,136,506  |                     | $      | 196,957 |   | $ | 106,622,114 |   | $ | (135,902,482 | ) |
| Conversion of convertible debt and accrued  interest into Class M mezzanine preferred stock and common warrants           |   | —               |   | —            |    | —                          |        | —                   |   | 6,377,673 |   | — |   |
| Common stock issued and accumulated deficit  acquired as a result of WebToTel acquisition and conversion of notes payable |   | —               |   | —            |    | 17,454,333                      |        | 122,182                  |   | 11,822,812 |   | (1,246,835 | ) |
| Stock issued – employee stock purchase plan                                                                          |   | —               |   | —            |    | 34,518                          |        | 241                      |   | 15,338 |   | — |   |
| Repurchase of Class M mezzanine preferred stock                                                                           |   | —               |   | —            |    | —                          |        | —                   |   | — |   | — |   |
| Repurchase of Class N preferred stock                                                                                     |   | (14,404              | )      | (144,040          | )       | —                          |        | —                   |   | (14,164,060 | ) | — |   |
| Net contribution from repurchase/settlement with  stockholders of Class M and N preferred stock                           |   | —               |   | —            |    | —                          |        | —                   |   | (5,000,000 | ) | 30,292,319 |   |
| Contingent beneficial conversion feature on Class  N preferred stock                                                      |   | —               |   | —            |    | —                          |        | —                   |   | 9,779,846 |   | (9,779,846 | ) |
| Issuance of common shares to related party to  repurchase warrants outstanding                                            |   | —               |   | —            |    | 5,000,000                       |        | 35,000                   |   | (35,000 | ) | — |   |
| Reissuance and conversion of Class M redeemable  preferred stock into common stock                                        |   | —               |   | —            |    | 50,442,857                      |        | 353,100                  |   | 3,696,900 |   | — |   |
| Reissuance and conversion of Class N preferred  stock into common stock                                                   |   | —               |   | —            |    | 11,523,159                      |        | 80,662                   |   | 869,338 |   | — |   |
| Beneficial conversion feature on the reissuance of  Class M and N preferred stock                                         |   | —               |   | —            |    | —                          |        | —                   |   | 5,000,000 |   | (5,000,000 | ) |
| Other conversions of Class N preferred stock into  common stock                                                           |   | (13                  | )      | (130              | )       | 9,143                           |        | 64                       |   | 66 |   | — |   |
| Warrants issued in connection with notes payable  to related party                                                        |   | —               |   | —            |    | —                          |        | —                   |   | 2,170,059 |   | — |   |
| Beneficial conversion feature on certain  convertible note payable to related party                                       |   | —               |   | —            |    | —                          |        | —                   |   | 1,092,143 |   | — |   |
| Conversion of Class C preferred stock into common  stock                                                                  |   | (9,249               | )      | (92,490           | )       | 3,415,015                       |        | 23,905                   |   | 68,585 |   | — |   |
| Dividend on Class C preferred stock paid in the  form of common stock                                                     |   | —               |   | —            |    | 534,016                         |        | 3,738                    |   | 626,575 |   | (630,313 | ) |
| Net loss                                                                                                                  |   | —               |   | —            |    | —                          |        | —                   |   | — |   | (44,496,625 | ) |
| **Balance at December 31, 2001**                                                                                          |   | 769                  |   | $                 | 7,690   |                            | 116,549,547 |                     | $      | 815,849 |   | $ | 128,942,389 |   | $ | (166,763,782 | ) |
|                                                                                                                      |   |                 |   |              |    |                            |        |                     |   |   |   |   |   |
| Beneficial conversion feature on certain  convertible notes payable to related party                                      |   | —               |   | —            |    | —                          |        | —                   |   | 111,940 |   | — |   |
| I-Link costs paid by related party                                                                                        |   | —               |   | —            |    | —                          |        | —                   |   | 498,396 |   | — |   |
| Net loss, as restated                                                                                                     |   | —               |   | —            |    | —                          |        | —                   |   | — |   | (27,536,948 | ) |
| **Balance at December 31, 2002, as  restated**                                                                            |   | 769                  |   | $                 | 7,690   |                            | 116,549,547 |                     | $      | 815,849 |   | $ | 129,552,725 |   | $ | (194,300,730 | ) |

 

The accompanying notesare an integral part of these consolidated financial statements

 

F-6

----

 
|                                                                                 |   | **Preferred  Stock** |   | **Common  Stock** |   | **Additional  Paid-in Capital** |        | **Accumulated  Deficit** |   |
|--------------------------------------------------------------------------------------|--------|----------------------|--------|-------------------|--------|---------------------------------|-------------|--------------------------|--------|
| **Shares**                                                                           |   | **Amount**           |   | **Shares**        |   | **Amount**                      |
|                                                                                 |   |                 |   |              |   |                            |        |                     |   |   |   |   |   |
| **Balance at December 31, 2001**                                                     |   | 769                  |   | $                 | 7,690  |                            | 116,549,547 |                     | $      | 815,849 |   | $ | 128,942,389 |   | $ | (166,763,782 | ) |
|                                                                                 |   |                 |   |              |   |                            |        |                     |   |   |   |   |   |
| Beneficial conversion feature on certain  convertible notes payable to related party |   | —               |   | —            |   | —                          |        | —                   |   | 111,940 |   | — |   |
| I-Link costs paid by related party                                                   |   | —               |   | —            |   | —                          |        | —                   |   | 498,396 |   | — |   |
| Net loss, as restated                                                                |   | —               |   | —            |   | —                          |        | —                   |   | — |   | (27,536,948 | ) |
| **Balance at December 31, 2002, as  restated**                                       |   | 769                  |   | $                 | 7,690  |                            | 116,549,547 |                     | $      | 815,849 |   | $ | 129,552,725 |   | $ | (194,300,730 | ) |

 

The accompanying notesare an integral part of these consolidated financial statements

 

F-7

----

 

**I-LINKINCORPORATED AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**for theyears ended December 31, 2002, 2001 and 2000**

 
|                                                                                                                       |   | **2002**           |        | **2001**    |   | **2000**    |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-------------|-------------|--------|-------------|--------|
|                                                                                                                       |   | **(as  restated)** |        |        |   |        |   |
| Cash flows from operating activities:                                                                                      |   |               |        |        |   |        |   |
| Net loss                                                                                                                   |   | $                  | (27,536,948 | )           | $      | (44,496,625 | )      | $ | (25,752,178 | ) |
| Adjustments  to reconcile net loss to net cash provided by (used in) operating activities:                                 |   |               |        |        |   |        |   |
| Depreciation  and amortization                                                                                             |   | 8,135,291          |        | 10,166,790  |   | 6,399,318   |   |
| Provision  for doubtful accounts                                                                                           |   | 6,109,863          |        | 4,066,690   |   | 113,168     |   |
| Impairment  of long-lived assets                                                                                           |   | 3,608,770          |        | 8,040,054   |   | —      |   |
| Amortization  of discount and debt issuance costs on notes payable and capital leases                                      |   | 1,463,789          |        | 1,518,443   |   | —      |   |
| Accrued  interest added to loan principal                                                                                  |   | 3,650,973          |        | 1,267,223   |   | —      |   |
| Amortization  of deferred compensation on stock options issued for services                                                |   | —             |        | —      |   | 541,982     |   |
| Common  stock issued as payment of settlement and interest expense                                                         |   | —             |        | —      |   | 740,588     |   |
| Loss  on disposal of assets                                                                                                |   | 266,259            |        | —      |   | —      |   |
| Extraordinary  gain on extinguishment of debt                                                                              |   | —             |        | (1,092,818  | )      | —      |   |
| Gain  on sale of subsidiary                                                                                                |   | —             |        | (588,943    | )      | —      |   |
| Increase  (decrease) from changes in operating assets and liabilities, net of effects  of acquisitions:                    |   |               |        |        |   |        |   |
| Accounts  receivable                                                                                                       |   | (1,269,178         | )           | (4,527,719  | )      | 873,382     |   |
| Other  assets                                                                                                              |   | (1,164,173         | )           | (1,126,625  | )      | (429,260    | )      |
| Accounts  payable, accrued liabilities and interest payable                                                                |   | 3,507,057          |        | 12,056,323  |   | 2,830,096   |   |
| Unearned  revenue                                                                                                          |   | (1,643,167         | )           | (14,565,584 | )      | 16,552,259  |   |
| Net  cash provided by (used in) operating activities                                                                       |   | (4,871,464         | )           | (29,282,791 | )      | 1,869,355   |   |
|                                                                                                                       |   |               |        |        |   |        |   |
| Cash  flows from investing activities:                                                                                     |   |               |        |        |   |        |   |
| Purchases  of furniture, fixtures, equipment and software                                                                  |   | (1,648,868         | )           | (1,963,115  | )      | (6,881,466  | )      |
| Business  acquisitions (net of cash of $286,910 and $233,787 in 2002 and 2001  respectively, acquired in the acquisitions) |   | (8,275,539         | )           | (13,447,213 | )      | —      |   |
| Cash  received from sale of building                                                                                       |   | 691,513            |        | —      |   | —      |   |
| Net  cash used in investing activities                                                                                     |   | (9,232,894         | )           | (15,410,328 | )      | (6,881,466  | )      |
|                                                                                                                            |        |                    |             |             |        |             |        |  |  |  |

 

The accompanying notesare an integral part of these consolidated financial statements

 

F-8

----

 
|                                                                                                                   |   | **2002**   |       | **2001**   |      | **2000**   |      |
|------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|------------|-----------|------------|-----------|
|                                                                                                                   |   |       |       |       |      |       |      |
| Cash flows from financing activities:                                                                                  |   |       |       |       |      |       |      |
| Proceeds from issuance of notes payable to a related party                                                             |   | $          | 16,823,345 |       | $         | 43,920,320 |      | $ | 2,600,000 |   |
| Payment  of notes payable to related party                                                                             |   | (3,000,000 | )          | (2,500,000 | )         | (2,600,000 | )         |
| Proceeds  from revolving credit facility, net                                                                          |   | 2,089,448  |       | 6,996,604  |      | —     |      |
| Proceeds  from advance under strategic marketing agreement                                                             |   | —     |       | —     |      | 1,751,183  |      |
| Payment  of advance under strategic marketing agreement                                                                |   | —     |       | —     |      | (1,751,183 | )         |
| Payment  of capital lease obligations                                                                                  |   | (2,544,350 | )          | (1,052,387 | )         | (141,728   | )         |
| I-Link  costs paid by related party                                                                                    |   | 498,396    |       | —     |      | —     |      |
| Payment  of long-term debt                                                                                             |   | (805,371   | )          | (180,093   | )         | (3,992     | )         |
| Proceeds  from exercise of stock options and warrants and issuances under stock  purchase plan                         |   | —     |       | 15,579     |      | 4,341,659  |      |
| Other                                                                                                                  |   | —     |       | —     |      | (24,204    | )         |
| Net  cash provided by financing activities                                                                             |   | 13,061,468 |       | 47,200,023 |      | 4,171,735  |      |
|                                                                                                                   |   |       |       |       |      |       |      |
| Increase  (decrease) in cash and cash equivalents                                                                      |   | (1,042,890 | )          | 2,506,904  |      | (840,376   | )         |
|                                                                                                                   |   |       |       |       |      |       |      |
| Cash  and cash equivalents at beginning of year                                                                        |   | 4,662,532  |       | 2,155,628  |      | 2,996,004  |      |
|                                                                                                                   |   |       |       |       |      |       |      |
| Cash  and cash equivalents at end of year                                                                              |   | $          | 3,619,642  |       | $         | 4,662,532  |      | $ | 2,155,628 |   |
|                                                                                                                   |   |       |       |       |      |       |      |
| **Supplemental schedule of non-cash investing and financing  activities:**                                             |   |       |       |       |      |       |      |
| RSL acquisition costs  financed through note payable to seller                                                         |   | $          | 875,000    |       | —    |       | —    |   |
| Reclassification of Series  F redeemable preferred stock from mezzanine                                                |   | —     |       | —     |      | $          | 2,338,785 |   |
| Warrants issued in connection with notes payable  to related party                                                     |   | —     |       | $          | 2,170,059 |       | —    |   |
| Conversion of notes  payable to a related party and associated accrued interest to Class M  redeemable preferred stock |   | —     |       | 10,305,072 |      | —     |      |
| Reclassification of Class  M redeemable preferred stock from Mezzanine                                                 |   | —     |       | 22,039,892 |      | —     |      |
| Conversion of notes  payable to a related party and associated accrued interest to common stock                        |   | —     |       | 10,326,938 |      | —     |      |
| Building mortgage incurred                                                                                             |   | —     |       | —     |      | 840,000    |      |
| Stock  options issued for services                                                                                     |   | —     |       | —     |      | 42,605     |      |
| Equipment  acquired under capital lease obligations and note payable                                                   |   | —     |       | 9,887,835  |      | —     |      |
|                                                                                                                   |   |       |       |       |      |       |      |
| **Supplemental cash flow information:**                                                                                |   |       |       |       |      |       |      |
| Interest  paid                                                                                                         |   | $          | 2,164,472  |       | $         | 1,269,605  |      | $ | 287,941 |   |

 

The accompanying notesare an integral part of these consolidated financial statements

 

F-9

----

 

**I-LINKINCORPORATED AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1 – Description of Business, Principles of Consolidationand Liquidity**

 

The consolidated financial statements include the accounts of I-LinkIncorporated and its wholly-owned subsidiaries WorldxChange, Corp.(“WorldxChange”), I-Link Communications Inc. (“ILC”) which is included indiscontinued operations and the Enterprise and Agent business of RSL Com U.S.A.Inc (“RSL”) which the Company purchased on December 10, 2002 (see note 8).  These entities combined are referred toas  “I-Link “or the “Company” in thesefinancial statements.

 

At the next shareholdersmeeting, I-Link intends to change its name to Acceris Communications, Inc.(“Acceris”)

 

For the past six years, I-Link developed and marketed enhancedcommunications products and services utilizing its own private intranet andboth owned and leased network switching and transmission facilities.  The communications solutions are deliveredthrough I-Link’s proprietary technologies. Enhanced communications products and services were marketed throughmaster agent and wholesale distributor arrangements with ILC, which is an FCClicensed long-distance carrier.  TheCompany developed and licensed communications applications products and softwarethat support multimedia communications (voice, fax and audio) over the publicswitched network, local area networks and the Internet.  The second principal operation began on June4, 2001, when I-Link, through its wholly owned subsidiary WorldxChange Corp.(WorldxChange), purchased certain assets and assumed certain liabilities ofWorldxChange Communications, Inc. from a bankruptcy proceeding.  WorldxChange is a facilities-basedtelecommunications carrier that provides international and domestic long-distanceservice to retail customers. Telecommunication services provided by WorldxChange consisted primarilyof a dial-around product, which allows a customer to make a call from any phoneby dialing a 10-10-XXX prefix, and a 1+ product (1+ is when a customer can pickup the phone and directly dial a long distance number by pushing 1-areacode-phone number). Billings to these customers are primarily done through thecustomers’ local exchange carrier (LEC). Marketing of the WorldxChange products is primarily done through a MLMchannel.

 

On March 1, 2001, I-Link became a majority-owned subsidiary of CounselCommunications, LLC (subsequently reorganized and renamed CounselCommunications LLC), which is a majority-owned subsidiary of CounselCorporation, (collectively, Counsel).  Since taking a controlling position in I-Link, Counsel has advancedapproximately $62 million in cash and cash equivalents to I-Link.  Of this amount, approximately $20 millionwas utilized to acquire the assets of WorldxChange and RSL, while the remainingapproximate $42 million has been used directly in operations, principally tobring the technology to market. To date, $3 million of these advances have beenrepaid and pursuant to a debt restructuring agreement Counsel has agreed toconvert $29 million of its existing debt to capital.

 

In December 2002, I-Link through its subsidiary WorldxChange, completedthe purchase of the Enterprise and Agent business of RSL. (see note 8). The acquisition included the assets used by RSLto provide long distance voice and data services, including frame relay, tosmall and medium size businesses (“Direct” business), and the assets used toprovide long distance and other voice services to small businesses and theconsumer/residential market (“A&R” business), together with the existingcustomer base of the Enterprise and Agent business.

 

In order to reduce I-Link’s need for continuous infusion of capital andto refocus its efforts, I-Link began, over the past year, to resize ILC’soperations (which offered enhanced communications services) in relationship toits revenue base.  This processculminated in the sale of the business operations of ILC to Buyer’s United inDecember 2002 (see note 6).  Futureoperational results of I-Link will consist primarily of the operational resultsof WorldxChange and RSL, and the technology licensing business of I-Link.

 

All significantintercompany accounts and transactions have been eliminated in consolidation.

 

F-10

----

 

**Note – 2  Liquidityand Capital Resources**

 

The Company incurred substantial operating losses andnegative cash flows from operations since inception and had a net capitaldeficiency of $63,924,466 and negative working capital of $17,244,372 atDecember 31, 2002. The Company financed its operations during 2002 throughrelated party debt with an outstanding balance of $59,339,620 and a revolvingcredit facility with an outstanding balance of $9,086,051 as of December 31,2002.

 

The Company has taken steps to improve its cash flow fromoperations, which include the curtailment of its Draper, Utah operation, thesale of its former telecommunications segment to Buyers United Inc. that wascompleted in May 2003 (note 6) and the acquisition of RSL (note 8). The Companyis pursuing additional third party funding and has also taken steps to improveits capital structure, which include the conversion of amounts owed to itscontrolling shareholder of $29,281,984 to equity as described below.   This conversion is subject to shareholderapproval, which is expected to occur at the next shareholders’ meeting.  The remaining $30,057,636 of related partydebt which is not subject to the debt restructuring, matures on June 30, 2004.  The Company also has an ongoing commitmentfrom its controlling shareholder to fund, through long-term intercompanyadvances or equity contributions, all capital investment, working capital orother operational cash requirements of the Company through April 15, 2004.

 

At December 31, 2002, the Company had $59,339,620 of relatedparty debt.  In order to reduce the cashrequirements to pay this debt, the Company entered into an amended debtrestructuring agreement with its controlling shareholder whereby $29,281,984will be converted into common stock, reducing the Company’s debt obligation andrelated interest charges without expending cash.** **Additionally, in March 2003, the controlling shareholderextended the due date of a $9,350,000 note from the Company to June 30,2004.  As a result, the remaining $30,057,636of related party debt matures on June 30, 2004. Subsequent to April 15, 2004,should the controlling shareholder not extend its commitment to providefinancial support to the Company, and in the event cash flow from operations isinsufficient to cover the maturing debt, the Company will be required torestructure its debt with the controlling shareholder to further extendpayments of principal or interest or find alternative funding to replace therelated party debt.

 

There is no assurance that the Company will be able toimprove its cash flow from operations, obtain additional third party financing,extend, repay or refinance on acceptable terms amounts owing to its controllingshareholder that are due on June 30, 2004 or obtain an extension of theexisting funding commitment from its controlling shareholder. Additionally,there is no assurance that the controlling shareholder will continue to providefinancial support to the Company.  Thesematters raise substantial doubt about the Company’s ability to continue as agoing concern.  The accompanyingconsolidated financial statements do not include any adjustments to reflect thepossible future effects on the recoverability of assets and liquidation ofliabilities that may result from this uncertainty.

 

**Note 3- Amendment of Form 10-K for the Year Ended December31, 2002**

 

The accompanying consolidated financial statements asof December 31, 2002 and for the year then ended have been restated from thosepreviously issued to account for revenues from the Company’s network serviceoffering when the actual cash collections to be retained by the Company arefinalized. The restatement had no effect on loss from discontinued operationsor net loss per share from discontinued operations.  The restatement increased the net loss for the fourth quarter andyear ended December 31, 2002 by $3,505,043 and the net loss per share by $0.03.

 

In November 2002, the Company, through its AccerisPartners segment, began to offer a network service offering. The Company ceasedoffering this network service offering on July 23, 2003.  The Company initially recorded the revenueand expenses related to this service offering using the accrual method ofaccounting.  In the second quarter of2003, the Company determined that collectibility of the amounts billed tocustomers was not reasonably assured at the time of billing.  Accordingly, the Company has revised itsmethod of accounting for revenues from this network service offering from theaccrual method to recognition of revenue when the amount of our actual cashcollections are known and retained by the Company.  Under the Company’s agreements with the LEC’s, cash collectionsremitted to the Company are subject to adjustment, generally within two to fourmonths.  Commissions (included inselling, general and administrative expense) and estimated bad debt expensesassociated with the eliminated revenues have also been eliminated.  All other direct expenses such astelecommunications network expenses are expensed as incurred.  Commission expense (which is based on cashcollected) will be recognized when amounts collected can be reasonablyestimated.

 

The following sets forth the effect of theserestatements on the net loss and net loss per share for the year ended December31, 2002.

 
| Net  loss as originally reported                                                  |   | $          | (24,031,905 | ) |
|-----------------------------------------------------------------------------------|--------|------------|-------------|---|
| Reduction  of telecommunication services revenue                                  |   | (5,158,460 | )           |
| Reduction  of provision for doubtful accounts                                     |   | 331,783    |        |
| Reduction  of commissions included in selling, general and administrative expense |   | 1,321,634  |        |
| Net  loss as restated                                                             |   | $          | (27,536,948 | ) |
|                                                                              |   |       |        |
| Net  loss per share as originally reported                                        |   | $          | (0.21       | ) |
| Net  loss per share as restated                                                   |   | $          | (0.24       | ) |

 

F-11

----

 

The following sets forth the effect of these restatements on theconsolidated balance sheet as of December 31, 2002.

 
|                       |   | **As Originally  Reported** |       | **Adjustments** |   | **As Restated** |   |
|----------------------------|--------|-----------------------------|------------|-----------------|--------|-----------------|--------|
| Accounts receivable, net   |   | $                           | 21,750,826 |            | $      | (4,826,677      | )      | $ | 16,924,149 |   |
| Accrued liabilities        |   | 19,411,946                  |       | (1,321,634      | )      | 18,090,312      |   |
| Shareholders’ deficit |   | (60,419,423                 | )          | (3,505,043      | )      | (63,924,466     | )      |
|                            |        |                             |            |                 |        |                 |        |  |  |  |

 

**Note 4 - Summary of Significant Accounting Policies**

 

**Revenue recognition**

 

Revenue is recognizedwhen persuasive evidence of an arrangement exists, delivery has occurred orservices have been rendered, the Company’s price to the customer is fixed ordeterminable, and collection of the resulting receivable is reasonablyassured.  Revenue is derived fromtelecommunications usage, based on minutes of use.  Revenue derived from usage is recognized as services areprovided, based on agreed upon usage rates. Revenue is recorded net of estimated customer credits and billingerrors, which are recorded at the same time the corresponding revenue isrecognized.  Revenues from billings forservices rendered where collectibility is not assured are recognized when thefinal cash collections to be retained by the Company are finalized.

 

Revenue from the sale ofsoftware licenses is recognized when a non-cancelable agreement is in force,the license fee is fixed or determinable, acceptance has occurred andcollectibility is reasonably assured. Maintenance and support revenues are recognized ratably over the term ofthe related agreements.  When a licenseof I-Link technology requires continued support or involvement of I-Link,contract revenues are spread over the period of the required support orinvolvement.  In the event thatcollectibility is in question, revenue (deferred or recognized) is recordedonly to the extent of cash receipts.

 

During the second quarterof 2000, the Company entered into an agreement with Red Cube International AG(“Red Cube”).  The agreement with RedCube consisted of a $7,500,000 licensing fee and $2,500,000 for consultingservices.  This $10,000,000 aggregateamount was nonrefundable and was recorded as revenue ratably over a two-yearperiod.  Accordingly, $1,666,667,$5,000,000 and $3,333,333 were recorded as technology licensing revenue in2002, 2001 and 2000, respectively.  InJuly 2000, the Company received an additional nonrefundable payment of$10,000,000.  This payment was a serviceprepayment that was to be credited against services performed for and/orprovided to Red Cube by June 30, 2001. As of June 30, 2001, there remained$9,543,000 which had not been used by Red Cube and as the Company had nofurther obligation under the prepayment arrangement, the $9,543,000 wasrecognized as revenue as of June 30, 2001.

 

Marketing servicesrevenues from the network marketing channel primarily included revenuesrecognized from Independent Representatives (“IRs”) for promotional andpresentation materials and national conference registration fees.  Revenue from the sale of promotional andpresentation materials (included in Marketing services revenue) was recognizedat the time the materials were shipped. The portion of the sign-up fee, including a normal profit margin,relating to on-going administrative support was deferred and recognized overtwelve months (the initial term of the IRs agreement).  Marketing services revenues are presentednet of estimated refunds on returns of network marketing materials.

 

**Use of estimates**

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period.  Actual resultscould differ from those estimates.

 

Examples of significant estimates include revenue recognition, theallowance for doubtful accounts, the ultimate recoverability of intangibles andother long-lived assets.

 

F-12

----

 

**Cash and cash equivalents**

 

The Company considers allhighly liquid investments with an original maturity of three months or less tobe cash equivalents. The Company maintains its cash and cash equivalentsprimarily with financial institutions in Utah, California, andPennsylvania.  These accounts may fromtime to time exceed federally insured limits. The Company has not experienced any losses on such  accounts.

 

**Provisionfor doubtful accounts**

 

TheCompany evaluates the collectibility of its receivables at least quarterly,based upon various factors including the financial condition and paymenthistory of major customers, and overall review of collections experience onother accounts and economic factors or events expected to affect the Company’sfuture collections experience.

 

**Furniture, fixtures, equipment andsoftware**

 

Furniture, fixtures,equipment and software are stated at cost. Depreciation is calculated using the straight-line method over thefollowing estimated useful lives:

 
| Telecommunications  network equipment     |   | 3-5 years  |   |
|-------------------------------------------|--------|------------|--------|
| Furniture,  fixtures and office equipment |   | 3-10 years |   |
| Software                                  |   | 3 years    |   |

 

Long-lived assets that are to be disposed of by sale are measured atthe lower of book value or estimated net realizable value

less costs to sell.

 

Betterments and renewalsthat extend the life of the assets are capitalized.  Other repairs and maintenance charges are expensed asincurred.  The cost and relatedaccumulated depreciation applicable to assets retired are removed from theaccounts and the gain or loss on disposition is recognized in operations.  The Company regularly evaluates whetherevents or circumstances have occurred that indicate the carrying value of itsfurniture, fixtures, equipment and software may not be recoverable.  When factors indicate the asset may not berecoverable, the Company compares the related undiscounted future net cashflows to the carrying value of the asset to determine if impairment exists.  If the expected future net cash flows areless than the carrying value, impairment is recognized based on the fair valueof the asset.

 

**Intangible assets**

 

Effective January 1, 2002, the Company accounts for intangible assetsin accordance with Statement of Financial Accounting Standards (“SFAS”) No.141, “Business Combinations” (“SFAS 141”) and SFAS No. 142, “Goodwill and OtherIntangible Assets” (“SFAS 142”).  Theadoption of SFAS 141 and 142 did not materially impact the results ofoperations or financial condition of the Company.  All business combinations are accounted for using the purchasemethod and goodwill and intangible assets with indefinite useful lives are notamortized, but are tested for impairment at least annually.

 

The Company regularlyevaluates whether events or circumstances have occurred that indicate thecarrying value of its intangible assets may not be recoverable.  When factors indicate the asset may not berecoverable, the Company compares the related undiscounted future net cashflows to the carrying value of the asset to determine if impairmentexists.  If the expected future net cashflows are less than carrying value, impairment is recognized based on the fairvalue of the asset.  Amortization ofintangible assets is calculated using the straight-line method over thefollowing periods:

 
| Customer  contracts and relationships |   | 60 months |   |
|---------------------------------------|--------|-----------|--------|
| Agent  relationships                  |   | 36 months |   |
| Agent  contracts                      |   | 12 months |   |

 

As discussed in Note 9, the Company recorded an $8,040,054 impairmentcharge in 2001, representing the remaining balance of the goodwill associatedwith the WebToTel acquisition.

 

F-13

----

 

**Advertising costs**

 

Advertising production costs are expensed the first time theadvertisement is run.  Media (TV andprint) placement costs are expensed in the month the advertising appears.  The Company incurred $1.59 million, $7.27million and  $0 in advertising costs inthe years ended December 31, 2002, 2001 and 2000, respectively.

 

**Research and development costs**

 

The Company expenses internal research and development costs, whichprimarily consist of salaries.

 

**Computer software costs**

 

The Company capitalizesqualified costs associated with developing computer software for internaluse.  Such costs are amortized over theexpected useful life, usually three years.

 

**Concentrations of credit risk**

 

TheCompany’s retail telecommunications subscribers are primarily residential andsmall business subscribers in the United States.  The Company’s customers are generally concentrated in the areasof highest population in the United States, more specifically California,Florida, New York, Texas and Illinois. The Company’s wholesale customers are primarily based in Utah.  No single customer accounted for over 10% ofthe revenues in 2002.  The only customerthat accounted for over 10% of the revenues for the year 2001 was Red Cube,which accounted for approximately 18% of revenues.  In 2000, a single wholesale customer, Big Planet, accounted forapproximately 36% of revenues (including discontinued operations revenues) andRed Cube accounted for approximately 11% of revenues (including discontinuedoperations revenues).

 

**Concentrationof third party service providers**

 

WorldxChangeutilizes the services of certain Local Exchange Carriers (“LECs”) to bill andcollect from customers.  Substantiallyall of revenues in the year ended December 31, 2002 and the period from June 5,2001 (inception) to December 31, 2001 were derived from customers billed toLECs.  If the LECs were to refuse toprovide such services in the future, the Company would be required tosignificantly enhance its billing and collection capabilities in a short amountof time and its collection experience could be adversely affected during thistransition period.

 

TheCompany depends on certain large telecommunications carriers to provide networkservices for significant portions of the Company’s telecommunicationstraffic.  If these carriers were torefuse to provide such services in the future, the Company’s ability to provideservices to its customers would be adversely affected and the Company might notbe able to obtain similar services from alternative carriers on a timely basis.

 

**Income taxes**

 

The Company recordsdeferred taxes in accordance with Statement of Financial Accounting Standards(SFAS) 109, “Accounting for Income Taxes.” The statement requires recognition of deferred tax assets andliabilities for temporary differences between the tax bases of assets andliabilities and the amounts at which they are carried in the financialstatements, based upon the enacted tax rates in effect for the year in whichthe differences are expected to reverse. A valuation allowance is established when necessary to reduce deferredtax assets to the amount expected to be realized.

 

**Stock-basedcompensation**

 

At December 31, 2002, the Company has five stock-based employeecompensation plans, which are described more fully in Note 18. The Companyaccounts for those plans under the recognition and measurement principles ofAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees” (“APB 25”), and related Interpretations.  No stock-based employee compensation cost is reflected in netincome, as all options granted under those plans had an exercise price equal tothe market value of the underlying common stock on the date of grant. Thefollowing table illustrates the effect on

 

F-14

----

 

net income (loss) and earnings (loss) per share if the Company hadapplied the fair value method for the recognition and measurement provisions ofSFAS Statement No. 123, “Accounting for Stock-Based Compensation”, to itsstock-based employee compensation.

 
|                                                                                                   |   | **Year ended  Dec. 31, 2002** |        | **Year ended  Dec. 31, 2001** |   | **Year ended  Dec. 31, 2000** |   |
|--------------------------------------------------------------------------------------------------------|--------|-------------------------------|-------------|-------------------------------|--------|-------------------------------|--------|
|                                                                                                   |   | **(as  restated)**            |        |                          |   |                          |   |
| Net loss as  reported                                                                                  |   | $                             | (27,536,948 | )                             | $      | (44,496,625                   | )      | $ | (25,752,178 | ) |
| Deduct:                                                                                                |   |                          |        |                          |   |                          |   |
| Total  compensation cost determined under fair value based method for all awards,  net of –0- tax |   | (1,300,371                    | )           | (2,933,069                    | )      | (7,510,031                    | )      |
| Pro forma net  loss                                                                                    |   | $                             | (28,837,319 | )                             | $      | (47,429,694                   | )      | $ | (33,262,209 | ) |
|                                                                                                   |   |                          |        |                          |   |                          |   |
| Earning (loss)  per share                                                                              |   |                          |        |                          |   |                          |   |
| Basic and  diluted – as reported                                                                  |   | $                             | (0.24       | )                             | $      | (0.30                         | )      | $ | (1.03 | ) |
| Basic and  diluted – pro forma                                                                    |   | $                             | (0.25       | )                             | $      | (0.32                         | )      | $ | (1.25 | ) |

 

**Segmentreporting**

 

The Company reports its segment information based upon the internalorganization that is used by management for making operating decisions andassessing performance. In late 2002, I-Link was reorganized  into three operating segments.  Acceris Communications Partners (“AccerisPartners”),  Acceris CommunicationsSolutions (“Acceris Solutions”) and Acceris Technologies (“AccerisTechnologies”).  See note 19 for a moredetailed discussion of the segments.

 

**Reclassifications**

 

Certain balances in the December 31, 2001 and 2000 financial statementshave been reclassified to conform to current year presentation.  These changes had no effect on previouslyreported net loss, total assets, liabilities or stockholders’ deficit.

 

**Recentaccounting pronouncements**

 

On August 15, 2001, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS143”). SFAS 143 establishes accounting standards for the recognition andmeasurement of an asset retirement obligation and its associated asset retirementcost.  SFAS 143 is effective January 1,2003 and is not expected to have a material impact on the Company’s results ofoperations or financial condition.

 

In October 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS144”).  SFAS 144 requires thatlong-lived assets that are to be disposed of by sale be measured at the lowerof book value or fair value less costs to sell.  All provisions of SFAS 144 were adopted on January 1, 2002 anddid have an impact on the Company’s results of operations and financialposition (see note 6).

 

In April 2002, the FASB issued SFAS No. 145, “Recission of FAS Nos. 4,44 and 64, Amendment of FAS 13 and Technical Corrections as of April 2002”,which rescinds FAS Nos. 4, 44 and 64 and amends other existing authoritativepronouncements to make various technical corrections, clarify meaning, ordescribe their applicability under changed conditions.  SFAS 145 is effective for fiscal yearsbeginning after May 15, 2002 and will require the modification of the Company’sprior financial statements to reclassify the 2001 gain on debt extinguishmentfrom extraordinary to income from continuing operations.

 

In June 2002, the FASB issued SFAS No. 146 “Accounting for CostsAssociated with Exit or Disposal Activities” (“SFAS 146”).  SFAS 146 requires the recognition of aliability for costs associated with an exit or disposal activity when incurred.SFAS 146 also establishes that the liability should initially be measured andrecorded at fair value. The provisions of SFAS 146 will be effective for anyexit and disposal activities initiated after December 31, 2002 and is notexpected to have a material impact on the Company’s results of operations orfinancial condition.

 

F-15

----

 

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation – Transition and Disclosure – an amendment of FASBStatement No. 123 (“SFAS 148”).  SFAS148, which is effective for years ending after December 15, 2002, providesalternative methods for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation and requires prominentdisclosure about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.  The Company expects to continue followingthe provisions of APB 25 for its stock-based compensation plans.

 

In November 2002, the FASB issued FASB Interpretation Number, or FIN,45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others (an interpretation ofSFAS No. 5, 57, and 107 and rescission of FIN 34).” FIN 45 clarifies therequirements of SFAS No. 5, “Accounting for Contingencies,” relating to aguarantor’s accounting for, and disclosure of, the issuance of certain types ofguarantees. The adoption of FIN 45 is not expected to have a significant effecton the Company’s results of operations or financial condition.

 

On January 17, 2003, the FASB issued FASB Interpretation No. 46,“Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51”(“FIN 46”).  FIN 46 clarifies theapplication of Accounting Research Bulletin No. 51, Consolidated Financial Statements*,*to certain entities in which equity investors do not have the characteristicsof a controlling financial interest or do not have sufficient equity at riskfor the entity to finance its activities without additional subordinatedfinancial support from other parties. FIN 46 is effective for the Company after January 31, 2003 and is notexpected to have a material impact on the Company’s results of operations orfinancial condition.

 

 

**Note 5 – Net Loss per Share**

 

Basic earnings per share is computed based on the weighted averagenumber of common shares outstanding during the period.  Options, warrants, convertible preferredstock and convertible debt are included in the calculation of diluted earningsper share, except when their effect would be anti-dilutive.  As the Company had a net loss fromcontinuing operations for 2002, 2001 and 2000, basic and diluted loss per shareare the same.

 

The basic and diluted net loss per common share for the year endingDecember 31, 2001 includes a net increase to retained earnings of $30,292,319attributable to the redemption on March 1, 2001 of the Class M redeemablepreferred stock and all Class N preferred stock owned by Winter Harbor,including redemption of the beneficial conversion feature related to such preferredstock.  In addition, there was a chargeto retained earnings in 2001 of $9,779,846 representing a contingent beneficialconversion feature on the Class N preferred stock resulting from the reset ofthe conversion price.  The basic anddiluted net loss per common share in 2001 also reflects a $5,000,000 charge toretained earnings for the beneficial conversion feature related to thereissuance on March 1, 2001 of the Class M and Class N preferred stock toCounsel.   The net effect of thesetransactions was a benefit included in the net loss per common share of$15,512,473 for the year ended December 31, 2001.

 

On September 6,2001, all outstanding shares of the Company’s Class C preferred stockautomatically converted into shares of common stock according to the terms ofthe designation of the Class C preferred stock.  Accordingly, 9,249 shares of Class C preferred stock wereconverted into 3,415,015 shares of common stock.  In addition to the conversion of the preferred stock, the Companywas obligated to pay dividends declared but unpaid and other dividends not paidon the preferred stock through the conversion date.  Accordingly, dividends in the amount of $630,313 were satisfiedthrough the issuance of 534,016 shares of common stock.

 

During 2000, holdersof the Series F redeemable preferred stock converted 248 of those preferredshares.  Accordingly, they were paidstock dividends of 87,477 shares of common stock on the converted shares.

 

Potentialcommon shares that were not included in the computation of diluted EPS becausethey would have been anti-dilutive are as follows as of December 31:

 

F-16

----

 
|                                                                         |   | **2002**    |   | **2001**   |   | **2000**   |   |
|------------------------------------------------------------------------------|--------|-------------|--------|------------|--------|------------|--------|
|                                                                         |   |        |   |       |   |       |   |
| Assumed conversion of  Series C preferred stock                              |   | —      |   | —     |   | 374,959    |   |
| Assumed conversion of  Series M convertible preferred stock                  |   | —      |   | —     |   | 8,175,676  |   |
| Assumed conversion of  Series N preferred stock                              |   | 615,200     |   | 615,200    |   | 10,260,810 |   |
| Assumed conversion of  convertible debt                                      |   | 125,440,609 |   | 22,852,506 |   | 7,539,830  |   |
| Assumed exercise of warrants  issued on conversion of convertible debt       |   | —      |   | —     |   | 5,000,000  |   |
| Assumed exercise of  options and warrants to purchase shares of common stock |   | 25,169,274  |   | 28,033,464 |   | 45,354,992 |   |
|                                                                         |   | 151,225,083 |   | 51,501,170 |   | 76,706,267 |   |

 

The above table excludes the potential dilutive effect of the AmendedDebt Restructuring Agreement (see note 15). Should that Agreement be approved by the shareholders at its annualmeeting in 2003, additional shares (as of December 31, 2002) of common stock ofapproximately  25,056,000 would beissued (which are not included in the above table).

 

 

**Note 6 – Discontinued Operations**

 

On December 6, 2002, the Company entered into an agreement to sellsubstantially all of the assets and customer base of I-Link Communications Inc.(“ILC”), a wholly owned subsidiary of I-Link to Buyer’s United.  The sale includes the physical assetsrequired to operate I-Link’s nationwide network using its patented VoIPtechnology (constituting the core business of ILC) and a license in perpetuityto use I-Link’s proprietary software platform. The sale is anticipated to closein the second quarter of 2003. The sale price consists of 300,000 shares ofSeries B convertible preferred stock (8% dividend) of Buyers United, subject toadjustment in certain circumstances, of which 75,000 are subject to an earn-outprovision (contingent consideration) based on future events related to ILC’ssingle largest customer.  The earn-outtakes place over a fourteen-month period beginning January 2003, on a monthlybasis.  The Company will recognize thevalue of the earn-out shares when and if earned.

 

As the transaction had not closed as of December 31, 2002, the assetsto be sold have been reclassified as assets held for sale.  The book value of the assets to be sold as ofDecember 31, 2002 was $2,936,531. The fair value of the 225,000 shares(non-contingent consideration to be received) of Buyer’s United convertiblepreferred stock was determined to be $1,350,000 as of December 31, 2002, basedon the value of the underlying common stock of Buyer’s United and adjusted forother qualitative issues such as the common stock underlying the preferredstock would be restricted by Rule 144 and the common stock is thinlytraded.  As the value of theconsideration to be received is less than the book value of the assets sold,I-Link recorded an impairment charge of $1,586,531 which has been included inthe loss from discontinued operations for 2002.  In prior years, the results of operations related to ILC had beenreported as a part of our Telecommunications segment which segment has beendiscontinued as of December 31, 2002. As the contingent consideration is received, it will be recorded as amodification to the impairment loss or as a gain on the sale of ILC.

 

Net assets of the discontinued operations are as follows:

 

| Furniture,  fixtures equipment and software |   | $          | 2,666,531 |   |
|---------------------------------------------|--------|------------|-----------|--------|
| Intangible  assets                          |   | 270,000    |      |
| Impairment  charge                          |   | (1,586,531 | )         |
| Net assets –  discontinued operations  |   | $          | 1,350,000 |   |

 

Revenues of the discontinued operation were $7,806,000, $26,624,000 and$20,567,000 in 2002, 2001 and 2000, respectively.

 

F-17

----

 

**Note 7 – Composition of CertainFinancial Statements Captions**

 

Furniture,fixtures, equipment and software consisted of the following at December 31:

 

|                                            |   | **2002**   |       | **2001**    |   |
|-------------------------------------------------|--------|------------|------------|-------------|--------|
| Telecommunications  network equipment           |   | $          | 14,361,276 |        | $      | 27,040,503 |   |
| Furniture,  fixtures and office equipment       |   | 2,938,729  |       | 5,680,912   |   |
| Building  /leasehold improvements               |   | 218,727    |       | 1,200,000   |   |
| Software  and information systems               |   | 296,209    |       | 1,848,201   |   |
|                                            |   | 17,814,941 |       | 35,769,616  |   |
| Less  accumulated depreciation and amortization |   | (6,335,830 | )          | (14,745,920 | )      |
|                                            |   | $          | 11,479,111 |        | $      | 21,023,696 |   |

 

Included intelecommunications network equipment are $9,781,469 and $10,137,861 in assetsacquired under capital leases at December 31, 2002 and 2001, respectively.  Accumulated amortization on these leasedassets was $3,930,306 and $1,674,967 at December 31, 2002 and 2001,respectively.

 

Accrued liabilities consisted of the following at December 31:

 

|                                  |   | **2002**  |       | **2001**  |   |
|---------------------------------------|--------|-----------|------------|-----------|--------|
| Telecommunications  and related costs |   | $         | 6,866,396  |      | $      | 4,542,651 |   |
| Regulatory  fees                      |   | 3,123,965 |       | 2,352,772 |   |
| Other                                 |   | 8,099,951 |       | 5,374,808 |   |
|                                  |   | $         | 18,090,312 |      | $      | 12,270,231 |   |

 

 

**Note 8 - Acquisition of Subsidiaries**

 

**Acquisition of WebToTel**

 

On April 17, 2001, I-Link completed its acquisition of WebToTel and itssubsidiary Nexbell, for 17,454,333 shares of I-Link common stock issued toCounsel, the owner of WebToTel.  Theacquisition of I-Link and WebToTel has been accounted for similar to apooling-of-interests using Counsel’s book values of the WebToTel assets andliabilities, effective March 1, 2001, the earliest date that all three entitieswere under common control of Counsel.

 

In December 2001 and subsequent to the time the Company recorded theimpairment of goodwill charge (see note 9) related to Nexbell, the Company soldNexbell to an unrelated party.  The salewas a sale of Nexbell’s common stock and accordingly the assets and liabilitiesof Nexbell were assumed by the purchaser with no further financial obligationto I-Link.  At the time of the sale, theliabilities exceeded the assets of Nexbell and accordingly a gain on sale ofsubsidiary in the amount of $588,943 (the amount by which the liabilities ofNexbell exceeded the assets) was recorded.

 

**Purchaseof certain WorldxChange Communications, Inc. assets and liabilities**

 

On June 4, 2001, I-Link Incorporated, through its wholly-ownedsubsidiary WorldxChange, purchased certain assets and assumed certainliabilities of WorldxChange Communications, Inc. (Debtor) from a bankruptcyproceeding.  The purchased assetsincluded all of the assets employed in the Debtor’s operations in the UnitedStates and consisted of the Debtor’s equipment, inventory, retail long distancebusiness, accounts receivable, deposits, licenses, permits, authorizations,software programs and related technology. On June 4, 2001, the Debtor transferred the purchased assets toWorldxChange in exchange for $13,000,000.

 

To fund the acquisition of the assets and provide working capital,Counsel agreed to provide a collateralized loan to I-Link in the aggregateamount of $15,000,000 (of which $13,000,000 was used for the purchase) as morefully described in Note 10.

 

F-18

----

 

The purchase price was allocated to the fair values of assets acquiredand liabilities assumed as of June 4, 2001 as follows:

 
| Accounts receivable and  other current assets              |   | $          | 12,386,687 |   |
|------------------------------------------------------------|--------|------------|------------|--------|
| Furniture, fixtures,  equipment and other long term assets |   | 4,580,285  |       |
| Accounts payable and  accrued liabilities                  |   | (2,061,753 | )          |
| Obligations under  capital leases                          |   | (1,224,219 | )          |
| Net cash paid                                              |   | $          | 13,681,000 |   |

 

Also, in connection with the acquisition, WorldxChange agreed to pay$727,000 to a supplier for services rendered prior to the acquisition tocontinue services with that vendor.  TheCompany also incurred $681,000 of transaction costs related to the purchase.

 

In the Company’s amended filing for the quarter ended September 30,2002, the Company has recorded corrections of errors related to purchaseaccounting for the acquisition of WorldxChange.  The impact of the errors is primarily a reclassification of noncurrent assets between furniture, fixtures and equipment and deposits recordedas other long term assets.  Thecorrections did not modify the total purchase price paid (see note 20 foradditional discussion).

 

**Purchaseof the Enterprise and Agent business of RSL Com U.S.A. Inc**.

 

On December 10, 2002, I-Link through its subsidiary WorldxChange,completed the purchase of the Enterprise and Agent business of RSL Com U.S.A.Inc (“RSL”). The purchase of RSL was to advance the Company’s commercial agentbusiness, to increase network utilization and to provide an entry into themanagement of information technology services for enterprise clients.  WorldxChangepaid a purchase price of $7,500,000 in cash and assumed a non-interest bearingnote for $1,000,000 which matures on March 31, 2004, subject to certain closingbalance sheet adjustments, and has agreed to pay up to an additional $2,000,000in consideration due on March 31, 2004, which is contingent upon theachievement of  certain revenue levelsby the Direct business for the year 2003. The actual amount due will be prorated based upon 2003 direct businessrevenues between $25,000,000 ($0 amount payable) to $35,000,000 ($2,000,000payable).  The cash element of thepurchase price of $7,500,000 was financed by a loan from I-Link to WorldxChangethat is due March 1, 2004.  I-Link’sloan to WorldxChange was financed by a convertible loan from a wholly ownedsubsidiary of Counsel Corporation (I-Link’s single largest stockholder) toI-Link.  The loan from CounselCorporation’s subsidiary is convertible into common stock of I-Link at theexchange rate of $0.084 per share, which rate represents the average closingprice of I-Link’s common stock for the twenty trading days preceding December10, 2002.

 

Any amount of the $2,000,000 contingent payablewhich is paid in the future will result in a future adjustment to the purchaseprice.

 

The preliminary allocation of fair values of assets acquired andliabilities assumed as of December 10, 2002 are as follows:

 
| Accounts receivable and  other current assets |   | $          | 6,527,108 |   |
|-----------------------------------------------|--------|------------|-----------|--------|
| Furniture, fixtures,  and equipment           |   | 3,101,966  |      |
| Intangible assets                             |   | 2,623,507  |      |
| Accounts payable and  accrued liabilities     |   | (2,815,131 | )         |
| Net cash paid                                 |   | $          | 9,437,450 |   |

 

F-19

----

 

Components of the intangible assets are as follows:

 

|                                        |   | **Amount** |      | **Amortization  Period** |      |
|---------------------------------------------|--------|------------|-----------|--------------------------|-----------|
| Intangible  assets subject to amortization: |   |       |      |                     |      |
| Customer  contracts and relationships       |   | $          | 1,786,000 |                     | 60 months |   |
| Agent  relationships                        |   | 587,507    |      | 36 months                |      |
| Agent contracts                             |   | 250,000    |      | 12 months                |      |
|                                        |   | $          | 2,623,507 |                     |      |   |

 

Unaudited pro forma results of operations for the years ended December31, 2002 and 2001 as if the acquisitions had been completed as of the beginningof each period presented are shown below. The pro forma results for 2002 include the results of operations for RSLfor the period from January 1, 2002 to December 10, 2002.  The pro forma results for 2001 include thehistorical result of operations of WorldxChange for the twelve months endedSeptember 30, 2001 and RSL for the year ended December 31, 2001.  The pro forma results include estimates andassumptions which management believes are reasonable.  However, pro forma results do not include any anticipated costsavings or other effects of the planned integration of the operations, and arenot necessarily indicative of the results which would have occurred if thebusiness combinations had occurred on the dates indicated, or which may resultin the future.

 
|                                       |   | **For the  Year Ended** |        |
|--------------------------------------------|--------|-------------------------|-------------|
|                                       |   | **December  31,  2002** |        | **December  31,  2001** |   |
|                                       |   | **(as  restated)**      |        |   |   |
|                                       |   |                    |        |   |   |
| Revenues                                   |   | $                       | 143,338,000 |   | $ | 200,142,000 |   |
| Net loss from  continuing operations       |   | $                       | (19,442,000 | ) | $ | (85,799,000 | ) |
| Net loss                                   |   | $                       | (31,951,000 | ) | $ | (84,706,000 | ) |
| Loss per share  from continuing operations |   | $                       | (0.17       | ) | $ | (0.71 | ) |
| Loss per share                             |   | $                       | (0.27       | ) | $ | (0.70 | ) |

 

 

**Note 9 – Intangible Assets**

 

**Amortizationof intangibles from WebToTel acquisition**

 

I-Link’s wholly owned subsidiary WebToTel acquired Nexbell on February22, 2001 and accounted for that acquisition using the purchase method ofaccounting.  As part of thatacquisition, WebToTel recorded $9,136,427 of goodwill which was included in ourTelecommunications segment.

 

The Company continuously reviews the products it offers and theircontribution to the Company and its overall strategy.  These reviews resulted in a determination that it was not economicallyjustified to continue to maintain a portion of the Company’s network related toleased lines for local access origination and Nexbell’s METS product.   In the fourth quarter of 2001, the Companyapproved a plan to discontinue offering the METS product.  With this determination, the Companyperformed an impairment analysis of the goodwill recorded in connection withthe acquisition of WebToTel and its subsidiary Nexbell.  The analysis was performed in response toprojected losses on the METS product acquired in the WebToTel acquisition.  As a result of this review, an $8,040,054impairment charge, representing the remaining balance of the goodwill, wasrecorded in September 2001.  This chargeis included in the loss for discontinued operations.

 

F-20

----

 

**Amortization of intangibles from RSLacquisition**

 

I-Link’s whollyowned subsidiary, WorldxChange acquired the Enterprise and Agent Business ofRSL on December 10, 2002 and accounted for that acquisition using the purchasemethod of accounting.  As part of thatacquisition, the Company recorded $2,623,507 of intangible assets (see note 8),of which $1,786,000 and $837,507 are part of the Acceris Solutions and AccerisPartners segments, respectively, as of December 31, 2002.

 

**Other intangible assets**

 

Intangible assetsconsisted of the following at December 31:

 

|                                            |   | **2002**   |      | **2001**   |   |
|-------------------------------------------------|--------|------------|-----------|------------|--------|
| Intangible assets subject to amortization:      |   |       |      |       |   |
| Acquired  technology                            |   | $          | 8,875,000 |       | $      | 8,875,000 |   |
| Customer  contracts and relationships           |   | 1,786,000  |      | —     |   |
| Agent  relationships                            |   | 587,507    |      | —     |   |
| Agent  contracts                                |   | 250,000    |      | —     |   |
| Accumulated  amortization                       |   | (8,924,584 | )         | (7,987,500 | )      |
| Net  intangible asset                           |   | 2,573,923  |      | 887,500    |   |
|                                            |   |       |      |       |   |
| Intangible  assets not subject to amortization: |   |       |      |       |   |
| Goodwill                                        |   | 173,339    |      | 173,339    |   |
| Other  intangible assets                        |   | 0          |      | 270,000    |   |
|                                            |   | 173,339    |      | 443,339    |   |
| Total  intangible assets                        |   | $          | 2,747,262 |       | $      | 1,330,839 |   |

 

Aggregate amortization expense of intangibles for theyear ended December 31, 2002 and 2001 was $937,085 and $3,287,323,respectively.  Anticipated amortizationexpense for intangible assets for the next five years are as follows:

 

| 2003 |   | $       | 1,045,979 |   |
|------|--------|---------|-----------|--------|
| 2004 |   | 472,585 |      |
| 2005 |   | 361,124 |      |
| 2006 |   | 357,200 |      |
| 2007 |   | 337,035 |      |

 

The following represents what the net loss for the years ended December31, 2001 and 2000 would have been exclusive of amortization expense recognizedin that period related to goodwill and intangible assets that are no longerbeing amortized.

 

|                                                                           |   | **2001**   |        | **2000** |   |
|--------------------------------------------------------------------------------|--------|------------|-------------|----------|--------|
| Reported net  loss                                                             |   | $          | (44,496,625 | )        | $      | (25,752,178 | ) |
| Add back:  goodwill amortization                                               |   | 1,456,655  |        | 360,282  |   |
| Add back:  amortization of other intangible assets not subject to amortization |   | 54,000     |        | 54,000   |   |
| Less adjustment  to goodwill impairment                                        |   | (1,096,373 | )           | —   |   |
| Adjusted net  loss                                                             |   | $          | (44,082,343 | )        | $      | (25,337,896 | ) |

 

F-21

----

 

The followingrepresents what the net loss per share applicable to common stock for the yearsended December 31, 2001 and 2000 would have been exclusive of amortizationexpense recognized in that period related to goodwill and intangible assetsthat are no longer being amortized.

 
|                               |   | **2001** |   | **2000** |   |
|------------------------------------|--------|----------|--------|----------|--------|
| Net loss per  share                |   | $        | (0.30  | )        | $      | (1.03 | ) |
| Goodwill  amortization             |   | 0.02     |   | 0.02     |   |
| Other  intangibles amortization    |   | 0.00     |   | 0.00     |   |
| Adjustment to  goodwill impairment |   | (0.01    | )      | 0.00     |   |
| Adjusted net  loss per share       |   | $        | (0.29  | )        | $      | (1.01 | ) |

 

 

**Note 10 – Debt**

 

Debt, the carrying value of which approximates market, consists of thefollowing at December 31:

 
|                                                                                                            |   | **2002**    |       | **2001**    |   |
|-----------------------------------------------------------------------------------------------------------------|--------|-------------|------------|-------------|--------|
|                                                                                                            |   |        |       |        |   |
| Note payable to a service provider, interest at  7.0%, due on demand                                            |   | $           | 746,625    |        | $      | 746,625 |   |
|                                                                                                            |   |        |       |        |   |
| Building  mortgage payable to a bank, interest at 9.84%, payable in monthly  installments of $10,028            |   | —      |       | 797,329     |   |
|                                                                                                            |   |        |       |        |   |
| Note  payable to a network service provider, interest at 10%, payable in monthly  installments of  $22,500 |   | 393,861     |       | 612,454     |   |
|                                                                                                            |   |        |       |        |   |
| Revolving  credit facility                                                                                      |   | 9,086,051   |       | 6,996,603   |   |
|                                                                                                            |   |        |       |        |   |
| Note  payable, Winter Harbor, interest at prime plus 9%                                                         |   | 1,999,215   |       | 1,999,215   |   |
|                                                                                                            |   |        |       |        |   |
| Note  payable, RSL estate, 10% imputed interest, due March 31, 2004                                             |   | 880,645     |       | —      |   |
|                                                                                                            |   |        |       |        |   |
| Note  payable, Counsel Corporation, interest at 9%, due June 30, 2004                                           |   | 13,271,247  |       | 11,527,512  |   |
|                                                                                                            |   |        |       |        |   |
| Note  payable, Counsel Corporation, interest at 10%, due June 6, 2002, (to be  converted into common stock)     |   | 29,281,984  |       | 17,540,140  |   |
|                                                                                                            |   |        |       |        |   |
| Note  payable, Counsel Corporation, interest at 10%, due June  30, 2004                               |   | 9,350,000   |       | 11,561,023  |   |
|                                                                                                            |   |        |       |        |   |
| Note  Payable, Counsel Corporation, interest at 10%, due June 30, 2004                                          |   | 7,436,389   |       | —      |   |
|                                                                                                            |   | 72,446,017  |       | 51,780,901  |   |
| Less current portion                                                                                            |   | (12,073,374 | )          | (39,106,025 | )      |
| Long-term debt, less current portion                                                                            |   | $           | 60,372,643 |        | $      | 12,674,876 |   |

 

Maturitiesof long-term obligations during 2003 and 2004 are $12,073,374 and $31,090,659respectively.  These maturities excludethe June 6, 2002 loan of $29,281,247 as it will be satisfied by the issuance ofcommon stock (see note 15).

 

In December 2001, WorldxChange entered into a three-year loan andsecurity agreement with a financial institution, which consists of an accountsreceivable based revolving credit facility. The facility allows WorldxChange to borrow up to a maximum of $20million subject to certain restrictions and borrowing base limitations.  The maximum available borrowing base isdetermined as a specific percentage of eligible accounts receivable.  The balance outstanding is reduced by theapplication of payments received on collection of accounts receivable.  Outstanding balances under the loan bearinterest at the prime rate plus 1.75% with a minimum interest rate of 6% (rateaveraged 6% in 2002 and 2001 due to the floor) and are

 

F-22

----

 

collateralized by substantially all the assets of theWorldxChange.  At December 31, 2002,$2,634,000 remains available under the revolving credit facility based onborrowing base limitations. Additionally, the loan contains certain financial covenants related toWorldxChange for fiscal 2003 and 2004. In conjunction with executing the credit facility, an IntercreditorAgreement was entered into between WorldxChange and Counsel whereby thepromissory note between WorldxChange and Counsel due June 2004 was subordinatedto the credit facility.  Further, thecumulative principal repayments of the promissory note are not to exceed$11,500,000 during the term of the facility. An intercreditor agreementprohibits repayment under the Counsel note except under the achievement ofspecific financial results at WorldxChange. In 2002, such financial results were achieved and $3,000,000 was repaidto Counsel.

 

As of September 30, 2001, I-Link was in default on an equipmentlease.  This lease was secured by aletter of credit issued by an affiliate of Winter Harbor LLC, a former majorityshareholder of I-Link.  On October 11,2001, the leasing company drew against the letter of credit in the amount of$1,999,215.  As of December 31, 2002 and2001, I-Link has reflected the principal and interest related to this draw onthe letter of credit in its consolidated financial statements.  On October 26, 2001, I-Link received ademand for payment from Winter Harbor LLC for the amount of the draw on theletter of credit and interest (at prime plus 9%) since October 11, 2001.  The Company is evaluating Winter Harbor’sdemand in light of the various agreements entered into between the Company,Counsel Communications LLC and Winter Harbor. While the Company believes that it will not be required to pay cash toWinter Harbor of the amount claimed, there can be no assurance as to the ultimateoutcome of this matter.

 

TheCompany borrowed $12,000,000 under a loan agreement with Counsel Communicationsduring 2001(see note 15).  Interest onthe note (9% per annum) is automatically added to principal at the end of eachcalendar quarter.  The note was dueMarch 1, 2004, but in March 2003, the due date was extended to June 30,2004.  The note is convertible intoI-Link’s common stock at a conversion rate of $0.56 per share, which conversionprice was reset to  $0.39 upon issuanceof  the $7,500,000 convertible loan toCounsel (discussed below ) pursuant to automatic reset provisions of theoriginal loan agreement.  At any timethe Company made a draw on the loan agreement and the market price of theCompany’s common stock was higher than the conversion rate, a debt discount wasrecorded equal to this beneficial conversion feature.   A debt discount of $1,092,143 was recorded on the borrowings of$12,000,000.  This discount is beingaccreted to interest expense over the term (three years) of the loan agreement.

 

On June 6, 2001, I-Link and Counsel entered into a Loan and SecurityAgreement (Loan Agreement).  Any moniesadvanced to I-Link between June 6, 2001 and April 15, 2002, (in the amount notto exceed $10,000,000) will be governed by the Loan Agreement. In connectionwith the Loan Agreement, I-Link executed a note payable to Counsel, due June 6,2002.  The loan is secured by all of theassets of I-Link.  Outstanding balances(including any accrued and unpaid interest of $2,888,318 as of December 31,2002) under the loan bear interest at 10% per annum which interest is payablequarterly in arrears following the last business day of each quarter.  However, Counsel may (and has elected to doso through December 31, 2002) at its sole election allow interest to accrue andbecome payable at the end of the term. This Loan Agreement was amended on June 27, 2002 under which theborrowing amount was increased to $24,306,866. The amended agreement alsoallowed for additional advances as needed to I-Link, which advances totaled$2,086,800 through December 31, 2002 (See more detailed discussion of theAmended Agreement in Footnote 15). Counsel has indicated their intent to convert this note into commonstock as allowed for in the Amended Agreement and as Counsel controlssufficient shares to vote as required to bring to pass the authority to effectthe conversion, the amounts due under this note have been classified as debt tobe converted to common stock in the long-term liability section of the balancesheet as of December 31, 2002.

 

On June 4, 2001, WorldxChange entered into a $15,000,000 loan andsecurity agreement and promissory note with Counsel (as the lender) and I-LinkIncorporated (as the guarantor).  Theloan is collateralized by all assets of WorldxChange.  The  loan is alsoguaranteed by I-Link and collateralized by the assets of I-Link.  Outstanding balances under the loan bearinterest at 10% per annum. The proceeds of the loan were used to purchase andoperate certain of the business assets purchased under the court-supervisedsale in the bankruptcy proceeding of World Access, Inc.  The proceeds were also utilized to pay feesand expenses related to such asset acquisition and operation and pay certainassumed liabilities related to the transaction.  In 2002 and 2001, WorldxChange repaid $3,000,000 and $2,500,000of the principal amount outstanding under the promissory note and as ofDecember 31, 2002, the outstanding balance was $9,350,000, of which $6,000,000is permitted to be repaid under

 

F-23

----

 

certain conditions, during the three-year term of the revolving creditfacility discussed above.  Thepromissory note matured in June 2002, however the loan has been subordinated tothe revolving credit facility.  In March2003, Counsel extended the due date of the note to June 30, 2004

 

In connection with the $15,000,000 loan, I-Link issued to Counsel awarrant to purchase 15,000,000 shares of common stock of I-Link at an exerciseprice of $0.60 per share.  The warrantsexpire on June 4, 2003.  The Companyrecorded $2,170,059 in 2001 as a discount against the $15,000,000 loan fromCounsel representing the relative fair value attributed to the warrant. Thevalue of the warrants was calculated using the Black Scholes Model and is beingamortized over the original one-year term of the loan.  As of December 31, 2002, the debt discountwas fully amortized.

 

In connection with the acquisition of RSL in December 2002, I-Linkentered into a $7,500,000 note payable to Counsel Corporation which isconvertible into common stock of I-Link at a conversion rate of $0.08375 pershare.  The note was due March 1, 2004,but in March 2003, the due date was extended to June 30, 2004. The Companyrecorded $111,874 as a discount against the $7,500,000 loan representing a beneficialconversion feature as the conversion price was less than the market price ofI-Link’s common stock at the date of the note. The beneficial conversionfeature is being amortized to interest expense over the life of the note.  As of December 31, 2002, the unamortizeddiscount was $104,861.

 

**Note 11 – Commitments**

 

Agreements classified asoperating leases have terms ranging from one to six years.  The Company’s rental expense for operatingleases was approximately $4,547,000, $13,547,000, and $6,946,000 for 2002, 2001and 2000, respectively.

 

Future minimum rentalpayments required under non-cancelable capital and operating leases withinitial or remaining terms in excess of one year consist of the following atDecember 31, 2002:

 

|                                         |   | **Capital  Leases** |      | **Operating  Leases** |      |
|----------------------------------------------|--------|---------------------|-----------|-----------------------|-----------|
| Year ending December 31:                     |   |                |      |                  |      |
| 2003                                         |   | $                   | 3,036,000 |                  | $         | 2,452,000 |   |
| 2004                                         |   | 3,015,000           |      | 2,094,000             |      |
| 2005                                         |   | 1,514,000           |      | 1,718,000             |      |
| 2006                                         |   | —              |      | 959,000               |      |
| 2007                                         |   | —              |      | 346,000               |      |
| Total  minimum payments                      |   | 7,565,000           |      | $                     | 7,569,000 |   |
| Less  amount representing interest           |   | (705,000            | )         |                  |      |
| Present  value of net minimum lease payments |   | 6,860,000           |      |                  |      |
| Less  current portion                        |   | (2,714,000          | )         |                  |      |
| Long-term  obligations under capital leases  |   | $                   | 4,146,000 |                  |      |   |

 

Subsequentto year-end, the Company was released from certain operating leases in theamounts of $324,000, $168,000 and $84,000 in 2003, 2004 and 2005, respectively,subject to the closing of the Buyer’s United transaction.

 

I-Link’ssubsidiaries have various agreements with national carriers to lease localaccess spans and to purchase carrier services. The agreements include minimumusage commitments with termination penalties up to 100% of the remainingcommitment.  Minimum usage commitmentsare as follows:

 
| **Year ending  December 31** |   |    |       |
|-----------------------------------|--------|---------|------------|
| 2003                              |   | $       | 14,184,000 |   |
| 2004                              |   | 923,000 |       |
|                                   |        |         |            |  |

 

 

F-24

----

 

**Note 12 – Extraordinary Gain onExtinguishment of Debt**

 

During the third quarter of 2001, Nexbell was in default on two leasesand at the time of settlement, Nexbell was liable for $1,272,818.  The debt was settled during the fourthquarter of 2001 for a one-time payment of $180,000 and accordingly the Companyrecorded an extraordinary gain in the amount of $1,092,818.

 

 

**Note 13– Potential Acquisitions**

 

OnJuly 22, 2002, the Company agreed to purchase certain assets and relatedliabilities of Transpoint Communications, LLC (“Transpoint”) and Local TelecomHoldings, LLC (“Local Telecom”), completion of which is pending subject toregulatory approvals.  The totalpurchase price shall not exceed $1,850,000, $250,000 of which is fixed and theremainder of which is variable depending on revenues achieved by the acquiredbusinesses in June 2003.  At the sametime, the Company and Local Telecom entered into a management agreement,pursuant to which the Company provides certain management services to LocalTelecom for a monthly fee of $15,000, and a wholesale telecommunicationsservices agreement, pursuant to which the Company provides network services toLocal Telecom.  The Company recordedrevenues from Local Telecom for management and wholesale telecommunicationsservices totaling $160,000 during the year ended December 31, 2002.  As part of the management agreement, theCompany collected customer accounts on behalf of Local Telecom and paid certaincosts and expenses of Local Telecom from the date of the agreement throughDecember 31, 2002.  At December 31,2002, the Company had a receivable from Local Telecom of $1,412,000 thatrepresented uncollected revenues from Local Telecom plus costs and expensespaid for Local Telecom, less collections on accounts receivable of LocalTelecom.  This receivable will beapplied against the purchase price and, as a result, has been recorded as along-term asset.

 

 

**Note 14 - Income Taxes**

 

TheCompany recognized no income tax benefit from its losses in 2002, 2001 and2000. The reported benefit from income taxes varies from the amount that wouldbe provided by applying the statutory U.S. Federal income tax rate to the lossfrom continuing operations before taxes for the following reasons:

 

|                                                                 |   | **2002**          |       | **2001**   |   | **2000**   |   |
|----------------------------------------------------------------------|--------|-------------------|------------|------------|--------|------------|--------|
|                                                                 |   | **(as restated)** |       |       |   |       |   |
| Expected federal statutory tax benefit                               |   | $                 | (5,109,715 | )          | $      | (8,831,451 | )      | $ | (5,151,951 | ) |
|                                                                 |   |              |       |       |   |       |   |
| Increase (reduction)  in taxes resulting from:                       |   |              |       |       |   |       |   |
| State income taxes                                                   |   | (495,102          | )          | (525,441   | )      | (425,116   | )      |
| Foreign loss not subject to domestic tax                             |   | 1,071             |       | 233,999    |   | 1,584,313  |   |
| Non-deductible interest on certain notes                             |   | —            |       | 85,876     |   | —     |   |
| Exercise of stock options issued for services                        |   | —            |       | —     |   | (1,277,402 | )      |
| Non-deductible goodwill                                              |   | —            |       | 3,096,030  |   | —     |   |
| Change in valuation allowance attributable to continuing  operations |   | 5,595,837         |       | 7,680,023  |   | 6,142,365  |   |
| Other                                                                |   | 7,909             |       | (1,739,036 | )      | (872,209   | )      |
|                                                                 |   | $                 | —     |       | $      | —     |   | $ | — |   |

 

Thechange in the valuation allowance, including discontinued operations, was$10,259,517, $14,579,186 and $10,090,027 for the years ended 2002, 2001 and2000 respectively.

 

At December 31, 2002, the Company had total net operating losscarryforwards for federal income tax purposes of approximately$137,000,000.  These net operating losscarryforwards expire between 2006 and 2022. The Company’s utilization ofapproximately $79,000,000 of the total net operating loss carryforward againstfuture taxable income will be subject to an annual limitation of approximately$2,246,000 per year because of the change in ownership that occurred in 2001,as required by Internal Revenue Code Section 382.  Due to the expiration of the net operating loss carryforwards,the Company may only be able to utilize approximately $45,000,000 of the total $79,000,000net operating loss carryforward that is subject to the annual limitation underInternal Revenue Code Section 382.   TheCompany also has net operating losses for state income tax purposes.  Certain entities are subject to state incometax in multiple jurisdictions. Available state tax loss carryforwards differ by jurisdiction.

 

F-25

----

 

 

The components of the deferred tax asset and liability of continuingand discontinued operations as of December 31, 2002 and 2001 are as follows:

 
|                                                                |   | **2002**          |       | **2001**    |   |
|---------------------------------------------------------------------|--------|-------------------|------------|-------------|--------|
|                                                                |   | **(as restated)** |       |        |   |
| Deferred tax assets:                                                |   |              |       |        |   |
| Tax net operating loss carryforwards                                |   | $                 | 50,924,889 |        | $      | 43,941,645 |   |
| Acquired in-process research and development and intangible  assets |   | 3,434,686         |       | 3,503,450   |   |
| Amortization of deferred compensation on stock options              |   | 1,933,060         |       | 1,933,060   |   |
| Reserve for loss on disposal of discontinued operations             |   | 304,173           |       | 304,173     |   |
| Reserve for accounts receivable and inventory valuation             |   | 658,555           |       | 694,895     |   |
| Accrued officers wages                                              |   | 74,600            |       | 101,545     |   |
| Accrued vacation                                                    |   | 80,427            |       | 145,511     |   |
| Accrued interest                                                    |   | 444,327           |       | —      |   |
| Unearned revenue                                                    |   | 1,924,106         |       | 741,030     |   |
| Other                                                               |   | 150,317           |       | 20,228      |   |
| Depreciation and amortization                                       |   | 1,707,705         |       | —      |   |
| Valuation allowance                                                 |   | (61,636,845       | )          | (51,377,328 | )      |
| Total deferred tax asset                                            |   | —            |       | 8,209       |   |
| Deferred tax  liability:                                            |   |              |       |        |   |
| Excess tax depreciation and amortization                            |   | —            |       | (8,209      | )      |
| Total deferred tax liability                                        |   |              |       | (8,209      | )      |
| Net deferred tax asset                                              |   | $                 | —     |        | $      | — |   |

 

The valuation allowance at December 31, 2002 and 2001 has been providedto reduce the total deferred tax assets to the amount which is considered morelikely than not to be realized, primarily because the Company has not generatedtaxable income from its business communications services.  The change in the valuation allowance is dueprimarily to the increase in net operating loss carryforwards.

 

**Note 15 – Transactions withSignificant Owners**

 

**Transactions with Winter Harbor:**

 

On March 1, 2001, Winter Harbor elected to convert a note payable fromI-Link for $7,768,000 plus accrued interest of $2,537,072 into 4,122 shares ofClass M convertible redeemable preferred stock of I-Link and 5,000,000 commonstock warrants under the original terms of the loan agreement.  Upon conversion of the note and accruedinterest, current liabilities in the amount of $10,305,072 were satisfiedwithout use of cash.

 

On March 1, 2001 the Company entered into a Warrant Exchange Agreementwith Winter Harbor.  Pursuant to theterms and provisions of this Agreement, Winter Harbor agreed to assign,transfer, convey and deliver to I-Link, warrants to acquire 33,540,000(including the 5,000,000 warrants issued upon conversion of the convertibledebt discussed above) shares of common stock of I-Link beneficially owned byWinter Harbor in exchange for the issuance of 5,000,000 shares of I-Link’scommon stock to Winter Harbor.  Therepurchase of the common warrants was accounted for similar to the repurchaseof treasury stock.

 

**Transactionswith Counsel:**

 

On March 1, 2001, I-Link entered into a Senior Convertible Loan andSecurity Agreement, (the Loan Agreement) with

Counsel Communications, LLC, and a wholly owned subsidiary of CounselCorporation, (collectively, Counsel). Pursuant to the terms and provisions of the Loan Agreement, Counselagreed to make periodic loans to I-Link in the aggregate principal amount notto exceed $10,000,000.  Draw downsagainst the $10,000,000 Loan Agreement are structured as a 3-year convertiblenote with interest at 9% per annum, compounded quarterly.  On May 8, 2001 the aggregate principalamount under the facility was increased to $12,000,000.  Counsel can convert the loan into shares ofcommon stock of I-Link at a

 

F-26

----

 

conversion price of $0.56 per common share.  At any time after September 1, 2002, the outstanding debtincluding accrued interest shall automatically convert into common stock usingthe then current conversion rate, on the first date that is the twentiethconsecutive trading day that the common stock has closed at a price per sharethat is equal to or greater than $1.00 per share. The conversion price issubject to adjustment in accordance with the terms and provisions of the LoanAgreement.  The Loan Agreement providesfor traditional anti-dilution protection and is subject to certain events ofdefault.  Total proceeds available tothe Company were $12,000,000, less debt issuance costs of $600,000, which arebeing amortized over three years.

 

By executing the above Loan Agreement, I-Link granted Counsel a firstpriority security interest in all of I-Link’s assets owned at the time of theexecution of the Loan Agreement or subsequently acquired, including but notlimited to I-Link’s accounts receivable, general intangibles, inventory, equipment,books and records, and negotiable instruments held by the Company(collectively, the Collateral).  TheLoan Agreement also included demand registration rights for common stockissuable upon conversion of the Loan Agreement.

 

In addition to the foregoing agreements, I-Link and Counsel executed aSecurities Support Agreement, dated March 1, 2001 (the Support Agreement) forthe purpose of providing certain representations and commitments by I-Link toCounsel.  In accordance with the termsand provisions of a separate agreement (the Securities Purchase Agreement) withWinter Harbor and First Media L.P., a limited partnership and the parentcompany of Winter Harbor (collectively the Winter Harbor Parties), Counselagreed to purchase from the Winter Harbor Parties all of their equitysecurities in I-Link, including shares of Class M and Class N preferred stockof I-Link, beneficially owned by the Winter Harbor Parties for an aggregateconsideration of $5,000,000 cash.

 

Under the Support Agreement, I-Link also agreed to engage appropriateadvisors and proceed to take all steps necessary to merge NexbellCommunications Inc. (a subsidiary of Counsel) into I-Link.  The merger was completed on April 17, 2001(see note 8).

 

On March 7, 2001, as part of the agreements discussed above, Counselconverted all of the Class M and N convertible preferred stock it obtained fromWinter Harbor for $5,000,000 into 61,966,016 shares of I-Link’s commonstock.  The Class N shares were convertedat $1.25 per common share and Class M at $0.56 per common share, in accordancewith their respective conversion rights.

 

On June 6, 2001, I-Link and Counsel entered into a Loan and SecurityAgreement (Loan Agreement).  Any moniesadvanced to I-Link between June 6, 2001 and April 15, 2002, (in the amount notto exceed $10,000,000) will be governed by the Loan Agreement. In connectionwith the Loan Agreement, I-Link executed a note payable to Counsel, due June 6,2002.  The loan is secured by all of theassets of I-Link. As of December 31, 2001, advances under this loan agreementtotaled $10,000,000. On June 27, 2002 the June 6, 2001 loan was amended to anamount of $24,306,866.  The amendedagreement also allowed for additional advances as needed to I-Link, whichadvances totaled $2,086,800 through December 31, 2002. (see below and note 10)

 

On October 15,2002, I-Link and Counsel entered into an Amended and Restated DebtRestructuring Agreement (“Amended Agreement”) amending an earlier restructuringagreement dated July 25, 2002.   The Amended Agreement includes the followingterms:

 

1.               Principal($24,306,866) and associated accrued interest ($2,284,351), as of October 15,2002, under the June 6, 2001 loan agreement (as amended on June 27, 2002) (the” June 6, 2001 Loan Agreement”) willbe exchanged for common stock of I-Link at $0.18864 (representing the averageclosing price of I-Link’s common stock during May 2002).  This will result in the issuance of140,962,770 shares of I-Link Common stock upon closing.

 

F-27

----

 

2.               Counsel currentlyhas a written commitment to fund, through long-term inter-company advances orequity contributions, all capital investment working capital or otheroperational cash requirements (which amounts are currently unknown) of I-Linkthrough April 15, 2003 (subsequent to this agreement the commitment has beenextended to April 15, 2004).  Inaddition to this commitment, Counsel shall fund the operations of I-Linkthrough the date of adoption of an Operating Plan, which is yet to be adoptedby the I-Link Board of Directors and Counsel. Counsel has also agreed toadvance to I-Link:

 

•                  any and allamounts paid or payable by I-Link to shareholders of I-Link that exercise theirdissenters’ rights in connection with the transactions subject to thisAgreement;

 

•                  the amount forthe annual premium to renew the existing Directors and Officers insurancecoverage (which is and shall be separate and distinct from insurance policiesmaintained by Counsel Entity or their affiliated entities) for an additionalone year from the current date of its expiration in November 2002, and Counselrepresents and covenants that they will do any and all things reasonablynecessary to cause such insurance to be continued in effect until at least November2003 in types and amounts that are, at a minimum, currently in force, so longas such insurance is available on commercially reasonable terms;

 

3.               Counsel shallreimburse I-Link for all costs, fees and expenses, in connection with theAgreement and Amended Agreement and transactions contemplated thereby includingall expenses incurred and yet to be incurred, including the Special Committee’scosts to negotiate the Agreement, Amended Agreement and costs related toobtaining shareholder approval.  During 2002,Counsel reimbursed I-Link $492,323 for certain reimbursable expenses, thereceipt of which has been recorded as additional paid-in capital.

 

4.               The issuance ofcommon stock by I-Link pursuant to this Agreement will result in a weightedaverage conversion price adjustment pursuant to the provisions of the March 1,2002 Loan Agreement.  Whereas theconversion price for the March 1, 2002 Loan Agreement had been $0.56, the newconversion price will be approximately $0.38.

 

5.               Counsel agreesthat, if the Amended Agreement is approved by the I-Link shareholders, it shallnot take any action under Section 607.1104 of the Florida Business CorporationAct prior to June 30, 2003.  Section607.1104 allows a shareholder of 80% or more of the outstanding voting securitiesof a Florida corporation to cause that corporation to be merged with theshareholder or a corporation formed by that shareholder.  The net result of a “Short Form Merger” isthat the minority shareholders are involuntarily removed as shareholders of thecorporation and are paid an amount of money considered to be the fair marketvalue of their shares in the corporation. Upon the closing of the Amended Agreement, Counsel will own over 80% ofI-Link’s outstanding common stock.

 

Funding provided by Counsel pursuant to this Amended Agreement($2,086,800) prior to the closing of this transaction and prior to December 31,2002, shall, together with interest subsequent to October 15, 2002 at 10% perannum on the note amount and borrowings subsequent to October 15, 2002 (whichtotals $1,996,033), constitute a purchase of common stock for a purchase priceper share of $0.18864.  Any fundingprovided by Counsel in each month during the 2003 calendar year (of which therehas been none through March 31, 2003) shall constitute a purchase of additionalshares of common stock for a purchase price per share equal to the averageclosing price of a share of I-Link common stock on the twenty (20) dayspreceding the funding.

 

As a result of Counsel’s purchase of Winter Harbor’s security holdingsin I-Link, Counsel became the single largest shareholder of the Company.  In addition to the above transactions,Counsel Corporation and its subsidiary Counsel LLC committed to fund, throughlong-term intercompany advances or equity contribution, all capital investment,working capital or other operational cash requirements of the Company throughApril 15, 2004.

 

F-28

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To fund the acquisition of the assets purchased and liabilities assumedby WorldxChange, Counsel provided a loan to WorldxChange in the aggregateamount of $15,000,000.  The loan issubordinated to the revolving credit facility described above and iscollateralized against all assets of WorldxChange.  (see note 10)

 

In connection with the acquisition of RSL in December 2002, I-Linkentered into a $7,500,000 note payable to Counsel Corporation which isconvertible into common stock of I-Link at a conversion rate of $0.08375 pershare.  (see note 10)

 

**Accountingtreatment of Counsel and Winter Harbor transactions:**

 

The repurchase of Winter Harbor’s 33,540,000 warrants for 5,000,000common shares was recorded at market value of the common stock issued in theexchange amounting to $3,750,000. The repurchase was accounted for similar tothe repurchase of treasury stock. Accordingly, common stock and additional paid in capital was increasedby $3,750,000 which was offset by a charge to additional paid in capital of$3,715,000 to reflect the warrant repurchase. The net effect of thistransaction was the recording of additional par value of $35,000 for the5,000,000 shares issued.

 

As the conversion price for Class M preferred stock had dropped to$1.25 per share (from its original conversion price of $2.78), an amountreflecting the increase in the beneficial conversion feature was recorded as anincrease in additional paid in capital and a charge to accumulated deficit for$9,779,846.  The purchase and sale ofthe Class M and Class N preferred stock between Winter Harbor and Counsel, asdescribed above, have been imputed in I-Link’s financial statements as if thetransactions had been effected through I-Link as a repurchase of the preferredstock from Winter Harbor and a reissuance to Counsel.  Accordingly, the transaction was considered a repurchase ofWinter Harbor’s Class M and N preferred stock in exchange for $5,000,000.  The difference between the carrying value ofthe Class M and N preferred stock and the $5,000,000 paid was recorded as anadjustment to retained earnings reflected in the form of a $30,292,319contribution from settlement of these transactions between shareholders and hasbeen reflected as such in the statement of changes in stockholders’deficit.  In addition, the transactionconsidered that I-Link resold the Class M and N preferred stock to Counsel for$5,000,000 (Counsel’s payment to Winter Harbor).  However, since the conversion price on the Class M shares wasbelow the market price on the day the transaction closed, a beneficialconversion feature was recorded as the difference between the market price ofthe common shares and the conversion price per share multiplied by the numberof common shares into which the Class M and Class N could convert.  This amount was limited to the proceeds.

 

The Company has also recorded a beneficial conversion feature (debtdiscount) in the amount of $1,017,857 on the convertible debt funded by Counselthat was received through March 31, 2001. The amount of the discount, if applicable, is calculated as thedifference between the conversion price ($0.56) and the market price of thecommon stock (if higher than the conversion price on the date funds are drawnon the loan), multiplied by the number of shares of common stock into which thenote can be converted.  The beneficial conversionfeature is being amortized over the life of the note payable (three years).

 

**Note 16 – Legal Proceedings**

 

On or about January 24, 2001 Red Cube International, AG (“Red Cube AG”)delivered to the Company a written demand for arbitration under the May 2000Cooperation and Framework Agreement between the parties.  Red Cube AG’s demand constituted writtennotice of an alleged breach of the Cooperation and Framework Agreement. TheCompany denied these allegations, filed a counterclaim against Red Cube, AG andfiled a third-party claim against Red Cube, Inc, seeking compensatory and/orpunitive damages for Red Cube Inc.’s default under a subsequent agreement toprovide approximately $60,000,000 in equity funding to us, engaging in a schemeto drive the Company out of business and obtain control of the Company’sproprietary technology, telecommunications network, key employees andcustomers.

 

F-29

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On July 9, 2002 an evidentiary arbitration hearing was held in New Yorkbefore a panel of arbitrators of the AAA and the AAA panel issued its awardeffective October 7, 2002.  The AAApanel dismissed all of Red Cube’s claims with prejudice and determined that RedCube had breached the agreements between the parties.  The arbitration panel awarded I-Link $6,741,835 in damagesagainst Red Cube International AG and Red Cube International, Inc., jointly andseverally.  In addition the AAA panelordered Red Cube to pay I-Link $18,210 as reimbursement for certain administrativefees and expenses and $64,033 as reimbursement for a portion of thearbitrators’ compensation.  Asuncertainty exists at this time as to the ultimate collectibility of theawarded amount, management has not recorded any benefit relating to this rewardin the financial statements.

 

On November 9, 2000 D/Vit, Inc (“Dvit”) filed an action against I-Linkin federal court in Texas alleging that I-Link’s use of the “V-Link” trademarkinfringed upon Dvit’s intellectual property rights in the mark “V Linc”.  Dvit’s complaint sought damages and aninjunction enjoining I-Link’s use of the mark “V-Link”.  On August 22, 2001 the court issued apreliminary injunction enjoining I-Link’s use of the “V-Link” mark.  I-Link had already elected to change thename of its product to “I-Link One Number”. On February 14, 2002 I-Link filed a motion for summary judgment askingthe court to rule as a matter of law that I-Link’s past use of the “V-Link”mark did not constitute an infringement upon Dvit’s intellectual property rightsin the “V Linc” mark.  Also on February14, 2002, Dvit filed a motion for partial summary judgment asking the court todetermine as a matter of law that I-Link’s prior use of the “V-Link” markinfringed upon Dvit’s rights in the “V Linc” mark.  On May 8, 2002 the court issued a Memorandum and Order (“Order”)denying I-Link’s motion for summary judgment and granting Dvit’s partial motionfor summary judgment.  The Orderpermanently enjoined I-Link from using the “V-Link” mark in association withthe sale, marketing, description, development or service of itstelecommunications products.  Thecourt’s Order did not address possible damages. In December 2002, the Companysettled for $180,000 of which $120,000 was previously reserved.

 

On March 10, 2000, the Company and JNC Opportunity Fund, Ltd. (JNC)entered into a settlement and release agreement relating to certain litigationconcerning shares of Series F Preferred stock held by JNC.  The shares of Series F Preferred stock heldby JNC were convertible into 1,104,972 shares of common stock under theoriginal agreement with JNC.  On March10, 2000, the Company issued 531,968 shares of common stock to JNC pursuant tothe settlement agreement in cancellation of the Series F shares held byJNC.  The balance of the shares requiredto be issued pursuant to the settlement agreement required approval at aspecial meeting of the shareholders held on May 23, 2000, at which timeapproval of the shareholders was received. Due to the delay in issuance of the shares required to be issuedpursuant to the settlement agreement until shareholder approval was receivedand the related common shares were registered, the Company issued 20,458“Additional Shares” of common stock in accordance with the agreement.

 

In 2000, I-Link issued 87,477 shares representing dividends associatedwith the Series F stock and has been recorded in the Company’s financialstatements as dividends paid, and 129,519 shares have been recorded assettlement expense.  The Companyrecorded interest expense of $111,021 representing the market value of thecommon stock issued.  The amount of  settlement and interest expense wasdetermined by reference to the market value of the Company’s common stock onthe date of issuance multiplied by the common shares issued.  Accordingly, the total settlement andinterest expense was $639,565 and $111,021, respectively.

 

The Company is involved in litigation relating to other claims arisingout of its operations in the normal course of business. The litigation andarbitration referred to above is not expected, individually or in theaggregate, to have a material adverse affect on the Company.

 

F-30

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**Note 17 - Stockholders’ Equity**

 

**Series N preferred stock**

 

On July 23, 1999, the Company completed its offering of 20,000 sharesof Series N preferred stock.  Theoffering was fully subscribed through cash subscriptions and the Companyexercised its rights to exchange notes payable to Winter Harbor of $8,000,000and $4,000,000, plus accrued interest. In total the Company received $7,281,086 in cash (before expenses of$486,679) and exchanged $12,718,914 in debt and accrued interest.  The Series N conversion price was initiallyset at $2.78. The conversion rate was adjusted to $1.48 as of December 31, 2000and $1.25 in January 2001 based on 110% of the average trading price for any 20day period following the date that Series N preferred stock is first issuedsubject to a floor of $1.25.  The SeriesN preferred stock votes with the common stock on an as converted basis and issenior to all other preferred stock of the Company.  Dividends, if any, will be paid on an as converted basis equal tocommon stock dividends.

 

During 2001 and 2000, holders of the Series Npreferred stock converted 14,417 (including the shares issued to Winter Harbor– see Note 15) and 1,129 of those shares into 11,532,343 and 467,169 shares ofcommon stock, respectively, at conversion prices ranging between $2.78 and$1.25.  As of December 31, 2002 and2001, there were 769 shares of Series N preferred stock outstanding.

 

At December 31, 2002, of the 10,000,000 shares of preferred stockauthorized, 9,486,500 remain undesignated and unissued.

 

**Series C preferred stock**

 

The Company’s Articles of Incorporation provide for up to 240,000shares of preferred stock as Series C Convertible Cumulative preferred stock(the Series C preferred stock).  TheSeries C preferred stock has a par value of $10 per share and holders areentitled to receive cumulative preferential dividends equal to 8% per annum ofthe liquidation preference per share of $60. Unless previously redeemed, the Series C preferred stock was initiallyconvertible into 24 shares of the Company’s common stock (Conversion Shares) atthe option of the holder (subject to certain anti-dilution adjustments).  The Series C stock exchange price did allowfor downward resets based upon certain conditions subject to a floor of $1.25. On September 6, 2001, all outstanding shares ofthe Company’s Class C preferred stock automatically converted into shares ofcommon stock according to the terms of the designation of the Class C preferredstock.  Accordingly, 9,249 shares ofClass C preferred stock were converted into 3,415,015 shares of commonstock.  In addition to the conversion ofthe preferred stock, the Company was obligated to pay dividends declared butunpaid and other dividends not paid on the preferred stock through theconversion date.  Accordingly, dividendsin the amount of $630,313 were satisfied through the issuance of 534,016 sharesof common stock.

 

During 2000, 24,428 of Series C preferred stock were converted intocommon shares.  At December 31, 2002,there were no Series C preferred shares outstanding.

 

**Series Mpreferred stock**

 

On October 10, 1997, the Company closed an agreement with Winter Harborpursuant to which Winter Harbor invested $12,100,000 in a new series of theCompany’s convertible preferred stock (the Series M convertible preferredstock).  The Series M convertiblepreferred stock was entitled to receive cumulative dividends in the amount of10% per annum before any other Series of preferred (other than Series F) orcommon stock receives any dividends. Thereafter, the Series M convertible preferred stock was to participatewith the common stock in the issuance of any dividends on a per sharebasis.  The Series M convertiblepreferred stock had the right to veto the payment of dividends on any otherclass of stock.

 

On March 1, 2001, Winter Harbor elected to convert a note payable fromI-Link for $7,768,000 plus accrued interest of $2,537,072 into 4,122 shares ofClass M convertible redeemable preferred stock of I-Link and 5,000,000 commonstock warrants under the original terms of the loan agreement.  Upon conversion of the note and accrued interest,current liabilities in the amount of $10,305,072 were satisfied without use ofcash.  During 2001, all 8,522 shares ofSeries M preferred stock outstanding were converted into 41,849,107 shares ofcommon stock (at an equivalent common share price of $0.56 in accordance withits conversion features).  In addition,the Company was obligated to pay a dividend in the amount of $4,812,214 on theSeries M preferred stock being converted, which dividend was paid by issuanceof 8,593,239 shares of common stock.  AtDecember 31, 2002, there were no Series M preferred shares outstanding.

 

F-31

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**Series F preferred stock**

 

On July 9, 1998 the Company obtained a $10,000,000 equity investment,net of $530,000 in closing costs, from JNC Opportunity Fund Ltd. (JNC).  Under the original terms of the equityinvestment, JNC purchased 1,000 shares of the Company’s newly created 5% SeriesE convertible preferred stock, which were convertible into the Company’s commonstock.  In addition, JNC obtained awarrant to purchase 250,000 shares of the Company’s common stock at an exerciseprice of $5.873 (equal to 120% of the market price of the Company’s publiclytraded common shares as of the date of closing).

 

On July 28, 1998, the terms of the JNC equity investment were amendedto provide a floor to the conversion price, and to effect the amendment theCompany created a 5% Series F convertible preferred stock for which the SeriesE preferred shares originally issued to JNC were exchanged one for one.  Pursuant to the amendment, the Series Fpreferred shares were originally convertible into common shares at a conversionprice of the lesser of $4.00 per common share or 87% of the moving averagemarket price of the Company’s common shares at the time of conversion, subjectto a $1.25 floor.  JNC also received anadditional warrant to purchase 100,000 shares of the Company’s common stock atan exercise price of $4.00 per common share. In addition, the Company issued warrants to purchase 75,000 shares ofthe Company’s common stock at a price of $4.89 per share to two individuals asa brokerage fee in connection with the JNC equity investment.

 

During 2000, JNC converted 248 shares of Series F redeemable preferredstock into 1,104,972 shares of common stock. In addition, during 2000, JNC was paid a stock dividend of 87,477 sharesof common stock on the converted shares. As of December 31, 2002 all of the Series F redeemable preferred stockhad been converted.

 

**Note 18 - Stock-based CompensationPlans**

 

At December 31, 2002, the Company has several stock-based compensationplans, which are described below.  TheCompany applies APB Opinion No. 25 and related interpretations in accountingfor its plans.  Accordingly, nocompensation cost has been recognized for its fixed option plans.

 

The fair value of each option grant is estimated on the date of thegrant using the Black-Scholes option pricing model with the following weightedaverage assumptions: expected volatility of 150%, 120% and 102% in 2002, 2001and 2000, respectively, risk free rates ranging from 2.02% to 4.40%, 3.17% to6.62% and 4.67% to 6.83% in 2002, 2001 and 2000, respectively, expected livesof 3 years for each year, and dividend yield of zero for each year.

 
|                                                                         |   | **2002**                  |   | **2001**                               |   | **2000**                  |       |
|------------------------------------------------------------------------------|--------|---------------------------|--------|----------------------------------------|--------|---------------------------|------------|
|                                                                         |   | **Options  and Warrants** |   | **Weighted  Average  Exercise  Price** |   | **Options and  Warrants** |       | **Weighted  Average  Exercise  Price** |   | **Options  and  Warrants** |   | **Weighted  Average  Exercise  Price** |   |
| Outstanding at  beginning of year                                            |   | 28,033,464                |   | $                                      | 2.27   |                      | 45,354,992 |   | $ | 2.57 |   | 41,945,091 |   | $ | 2.67 |   |
| Granted                                                                      |   | 95,000                    |   | 0.07                                   |   | 20,509,559                |       | 0.76 |   | 5,508,339 |   | 4.13 |   |
| Exercised                                                                    |   | —                    |   | —                                 |   | —                    |       | — |   | (1,612,231 | ) | 3.10 |   |
| Expired                                                                      |   | (2,605,410                | )      | 6.34                                   |   | (1,643,177                | )          | 3.43 |   | (180,144 | ) | 3.56 |   |
| Forfeited                                                                    |   | (353,780                  | )      | 4.27                                   |   | (36,187,910               | )          | 1.42 |   | (306,063 | ) | 3.40 |   |
| Outstanding at end of  year                                                  |   | 25,169,274                |   | $                                      | 1.82   |                      | 28,033,464 |   | $ | 2.27 |   | 45,354,992 |   | $ | 2.57 |   |
|                                                                         |   |                      |   |                                   |   |                      |       |   |   |   |   |   |   |
| Options and warrants  exercisable at year end                                |   | 25,136,567                |   |                                   |   | 27,090,203                |       |   |   | 38,662,539 |   |   |   |
| Weighted-average fair  value of options and warrants granted during the year |   |                      |   | $                                      | 0.03   |                      |       |   | $ | 0.57 |   |   |   | $ | 2.25 |   |

 

F-32

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The following table summarizes information about fixed stock optionsand warrants outstanding at December 31, 2002.

 
| **Exercise price** |   | **Options and  Warrants  Outstanding** |   | **Weighted  Average  Remaining  Life (years)** |   | **Weighted  Average  Exercise  Price** |   | **Number  Exercisable  at December  31, 2002** |       | **Weighted  Average  Exercise  Price** |   |
|--------------------|--------|----------------------------------------|--------|------------------------------------------------|--------|----------------------------------------|--------|------------------------------------------------|------------|----------------------------------------|--------|
| $0.07 to $1.00     |   | 15,335,660                             |   | 0.60                                           |   | $                                      | 0.60   |                                           | 15,310,660 |                                   | $      | 0.60 |   |
| $1.13 to $3.00     |   | 2,813,278                              |   | 6.32                                           |   | 2.61                                   |   | 2,811,613                                      |       | 2.61                                   |   |
| $3.14 to $5.87     |   | 6,402,718                              |   | 4.25                                           |   | 3.93                                   |   | 6,402,718                                      |       | 3.93                                   |   |
| $6.25 to $13.88    |   | 617,618                                |   | 7.09                                           |   | 6.55                                   |   | 611,576                                        |       | 6.55                                   |   |
|               |   | 25,169,274                             |   | 2.32                                           |   | $                                      | 1.82   |                                           | 25,136,567 |                                   | $      | 1.82 |   |

 

**2001 Stock option and appreciationrights plan**

 

In September 2001, the shareholders of the Company approved the 2001Stock Option and Appreciation Rights Plan which provides for the issuance ofincentive stock options, non-qualified stock options and stock appreciationrights (SARs) up to an aggregate of 14,000,000 shares of common stock (subjectto adjustment in the event of stock dividends, stock splits, and other similarevents).  The price at which shares ofcommon stock covered by the option can be purchased is determined by theCompany’s Board of Directors or its committee; however, in the case ofincentive stock options the exercise price shall not be less than the fairmarket value of the Company’s common stock on the date the option is granted.  There were no options granted under thisplan in 2002 or 2001.

 

**1997 Recruitment stock option plan**

 

In October 2000, the shareholders of the Company approved an amendmentof the 1997 Recruitment Stock Option Plan which provides for the issuance ofincentive stock options, non-qualified stock options and stock appreciationrights (SARs) up to an aggregate of 7,400,000 shares of common stock (subjectto adjustment in the event of stock dividends, stock splits, and other similarevents).  The price at which shares ofcommon stock covered by the option can be purchased is determined by theCompany’s Board of Directors; however, in all instances the exercise price isnever less than the fair market value of the Company’s common stock on the datethe option is granted.

 

As of December 31, 2002, there were options to purchase 2,118,024shares of the Company’s common stock outstanding.  The outstanding options vest over three years at exercise pricesof $0.07 to $13.88 per share.  Optionsissued under the plan must be exercised within ten years of grant and can onlybe exercised while the option holder is an employee of the Company.  The Company has not awarded any SARs underthe plan.  During 2002, 2001 and 2000,options to purchase  859,356, 2,600,430,and 439,542 shares of common stock, respectively, were forfeited orexpired.  There were no exercises during2002.

 

**Director stock option plan**

 

The Company’s Director Stock Option Plan authorizes the grant of stockoptions to directors of the Company. Options granted under the Plan are non-qualified stock optionsexercisable at a price equal to the fair market value per share of common stockon the date of any such grant.  Optionsgranted under the Plan are exercisable not less than six months or more thanten years after the date of grant.

 

As of December 31, 2002, options for the purchase of 4,668 shares ofcommon stock at prices ranging from $0.875 to $3.875 per share wereoutstanding, all of which are exercisable. In connection with the adoption of the 1995 Director Plan, the Board ofDirectors authorized the termination of future grants of options under theplan; however, outstanding options granted under the plan will continue to begoverned by the terms thereof until exercise or expiration of such options.  In 2002, no options were exercised and 2,334expired.

 

F-33

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**1995 Director stock option andappreciation rights plan**

 

The 1995 Director Stock Option and Appreciation Rights Plan (the 1995Director Plan) provides for the issuance of incentive options, non-qualifiedoptions and SARs to directors of the Company up to 250,000 shares of commonstock (subject to adjustment in the event of stock dividends, stock splits, andother similar events).

 

The 1995 Director Plan also provides for the grant of non-qualifiedoptions on a discretionary basis to each member of the Board of Directors thenserving to purchase 10,000 shares of common stock at an exercise price equal tothe fair market value per share of the common stock on that date.  Each option is immediately exercisable for aperiod of ten years from the date of grant. The Company has 190,000 shares of common stock reserved for issuanceunder the 1995 Director Plan.  As ofDecember 31, 2002, options to purchase 170,000 shares of common stock at pricesranging from $1.00 to $1.25 per share are outstanding and exercisable.  No options were granted or exercised underthis plan in 2002, 2001 or 2000.

 

**1995 Employee stock option andappreciation rights plan**

 

The 1995 Employee Stock Option and Appreciation Rights Plan (the 1995Employee Plan) provides for the issuance of incentive options, non-qualifiedoptions, and SARs.  Directors of theCompany are not eligible to participate in the 1995 Employee Plan.  The 1995 Employee Plan provides for thegrant of stock options which qualify as incentive stock options under Section422 of the Internal Revenue Code, to be issued to officers who are employeesand other employees, as well as non-qualified options to be issued to officers,employees and consultants.  In addition,SARs may be granted in conjunction with the grant of incentive options andnon-qualified options.

 

The 1995 Employee Plan provides for the grant of incentive options,non-qualified options and SARs of up to 400,000 shares of common stock (subjectto adjustment in the event of stock dividends, stock splits, and other similarevents).  To the extent that anincentive option or non-qualified option is not exercised within the period ofexercisability specified therein, it will expire as to the then unexercisableportion.  If any incentive option,non-qualified option or SAR terminates prior to exercise thereof and during theduration of the 1995 Employee Plan, the shares of common stock as to which suchoption or right was not exercised will become available under the 1995 EmployeePlan for the grant of additional options or rights to any eligibleemployee.  The shares of common stocksubject to the 1995 Employee Plan may be made available from either authorizedbut unissued shares, treasury shares or both. The Company has 400,000 shares of common stock reserved for issuanceunder the 1995 Employee Plan.  As of December 31, 2002, options to purchase135,250 shares of common stock with an exercise price of $3.90 are outstandingunder the 1995 Employee Plan.  During2002, 2001and 2000, options to purchase 10,000, 37,500 and 3,333, respectively,of common stock were forfeited or expired. No options were exercised in 2002.

 

**Other warrants and options**

 

In 1996, the Company approved the issuance of 1,750,000 options toexecutives of the Company, as part of their employment agreements, and 64,000options to a consultant.  The optionsexpire in 2006 and have an option price of $3.90.  In 2000, 250,000 options were exercised.  As of December 31, 2002, there remained1,564,000 options outstanding.

 

On July 1, 1996, the Company approved the issuance of options topurchase 2,000,000 shares of common stock to two officers as part of theiremployment agreements.  Each option hadan exercise price of $7.00 per share. The options expired in 2002.

 

During 1997, the Company issued options to purchase 1,210,000 shares ofcommon stock (210,000 of which were issued under the 1997 recruitment stockoption plan) to consultants at exercise prices ranging from $4.875 to $8.438(repriced to $3.90 on December 13, 1998), which was based on the closing priceof the stock at the grant date.  Thefair value of the options issued was recorded as deferred compensation of$4,757,134 to be amortized over the expected period the services were to beprovided.  As a result of the repricing,the Company recorded additional deferred compensation expense totaling $262,200(of which $21,103 was expensed in 2000), representing the incremental fairvalue of the repriced options over the original options.  During 2000, $279,150 of the deferredcompensation was amortized to expense. All deferred compensation expense related to these options wasrecognized as of December 31, 2000. During 2001 and 2000, options to purchase 0and 91,000, respectively, shares of common stock expired.  During 2000, 169,000 options wereexercised.  The remaining options mustbe exercised within ten years of the grant date. As of December 31, 2002 thereremained 890,000 options outstanding.

 

F-34

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During 1997, the Company issued non-qualified options to purchase2,295,000 shares of common stock to certain executive employees.  The options must be exercised within tenyears of the grant date and have an exercise price of $3.90.  There were no options forfeited in 2002,2001 or 2000.  There were 78,000 optionsexercised in 2000.  No options expired orwere exercised during 2002. As of December 31, 2002 there remained 2,118,219options outstanding.

 

During 1998, the Company issued non-qualified options to purchase935,000 shares of common stock to certain executive employees at exerciseprices ranging from $2.563 to $3.125, which price was based on the closingprice of the stock at the grant date. The options must be exercised within ten years of the grant date.  During 2002, 2001 and 2000, options topurchase 0, 0, and 43,332 shares of common stock, respectively, wereforfeited.  No options were exercisedduring 2002. As of December 31, 2002 there remained 809,446 optionsoutstanding.

 

In 1998 the Company issued warrants in connection with a financingarrangement.  As of December 31, 2002,there were 408,000 warrants outstanding with exercise prices from $4.89 to$5.87.  The warrants expire in June2003.

 

During 1999, the Company issued non-qualified options to purchase655,000 shares of common stock to certain executive employees at exerciseprices ranging from $2.50 to $3.563, which price was based on the closing priceof the stock at the grant date.  Theoptions must be exercised within ten years of the grant date.  No options were exercised during 2002.  During 2001, 50,000 of these options wereforfeited.  During 2000, options topurchase 230,000 shares of common stock were exercised.  As of December 31, 2002, there remained375,000 options outstanding.

 

During 1999, the Company issued non-qualified options to purchase200,000 shares of common stock to a consultant at an exercise price of $3.00,which was based on the closing price of the stock at the grant date.  The fair value of the options issued wasrecorded as deferred compensation of $300,000 to be amortized over the expectedperiod the services were to be provided.  During 2000 and 1999 deferred compensation of $137,500 and $162,500,respectively, was amortized to expense. As of December 31, 2002 there remained200,000 options outstanding.

 

During 2000, the Company issued non-qualified options to purchase2,585,000 shares of common stock to certain executive employees at exerciseprices ranging from $2.75 to $6.375, which price was based on the closing priceof the stock at the grant date.  Theoptions must be exercised within ten years of the grant date.   During 2001, 1,208,335 of these optionswere forfeited. As of December 31, 2002, there remained 1,376,665 optionsoutstanding.

 

In June 2001, the Company issued to Counsel Communications (theCompany’s largest shareholder) 15,000,000 warrants to purchase common stock at$0.60 per share.  The grant of thewarrants was associated with the acquisition of WorldxChange.  These warrants were outstanding as ofDecember 31, 2002.

 

During 2000 the Company obtained approval from its shareholders toestablish the 2000 Employee Stock Purchase Plan.  This plan allows all eligible employees of the Company to havepayroll withholding of 1 to 15 percent of their wages.  The amounts withheld during a calendarquarter are then used to purchase common stock at a 15 percent discount off thelower of the closing sale price of the Company’s stock on the first or last dayof each quarter.  This plan was approvedby the Board of Directors, subject to shareholder approval, and was effectivebeginning the third quarter of 2000. The Company issued 34,518 and 23,494 shares to employees based uponpayroll withholdings during 2001 and 2000, respectively.  There were no issuances in 2002.

 

F-35

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**Note 19 – Segment of BusinessReporting**

 

The Company’s reportable segments are as follows:

 

•                  Acceris Solutions – is comprised of the enterprisebusiness of RSL which was acquired in December 2002.  This segment offers voice and data solutions to enterprisecustomers through an in-house sales force.

 

•                  Acceris Partners – includes operations of WorldxChange (began operations in June 2001 andwas formerly reported as the dial-around segment) and the agent and residentialbusiness of RSL which was acquired in December 2002.  This segment offers a dial around telecommunications product anda 1+ product through two channels, namely, multi-level marketing (MLM) andcommercial agents.

 

•                  Acceris Technologies – is the former technologylicensing and development segment, which segment offers a fully developednetwork convergence solution for voice and data.  The Company licenses certain developed technology to third partyusers.

 

•                  Marketing services – includes training andpromotional materials to IRs in the network marketing sales channel andWebCentre set-up and monthly recurring fees. Additionally, revenues were generated from registration fees paid by IRsto attend regional and national sales conferences.  This segment and revenue source was terminated in February 2000.

 

There are no material inter-segment revenues.  The Company’s business is conductedprincipally in the U.S.; foreign operations are not significant.   The table below presents information aboutnet loss and segment assets used by the Company as of and for the three yearsended December 31, 2002.  Information asto year ending December 31, 2002 is as restated.

 
|                                  |   | **For  the Year Ending December 31, 2002** |      |
|---------------------------------------|--------|--------------------------------------------|-----------|
|                                  |   | **Acceris  Solutions**                     |      | **Acceris  Partners** |   | **Acceris  Technologies** |   | **Total  Reportable  Segments** |   |
|                                  |   |                                       |      |   |   |   |   |   |   |
| Revenues from external  customers     |   | $                                          | 1,547,000 |   | $ | 83,706,000 |   | $ | 2,837,000 |   | $ | 88,090,000 |   |
| Interest and other income             |   | 1,000                                      |      | 356,000 |   | — |   | 357,000 |   |
| Interest expense                      |   | 19,000                                     |      | 3,279,000 |   | — |   | 3,298,000 |   |
| Depreciation and amortization expense |   | 158,000                                    |      | 4,056,000 |   | 11,000 |   | 4,225,000 |   |
| Segment income (loss)                 |   | (629,000                                   | )         | (6,715,000 | ) | 976,000 |   | (6,368,000 | ) |
|                                  |   |                                       |      |   |   |   |   |   |   |
| Other significant non-cash items:     |   |                                       |      |   |   |   |   |   |   |
| Provision for doubtful accounts       |   | 33,000                                     |      | 5,966,000 |   | — |   | 5,999,000 |   |
|                                  |   |                                       |      |   |   |   |   |   |   |
| Expenditures for long-lived assets    |   | 3,102,000                                  |      | 3,747,000 |   | — |   | 6,849,000 |   |
|                                  |   |                                       |      |   |   |   |   |   |   |
| Segment assets                        |   | 9,573,000                                  |      | 27,877,000 |   | 173,000 |   | 37,623,000 |   |
|                                  |   |                                       |      |   |   |   |   |   |   |
|                                       |        |                                            |           |  |  |  |  |  |  |  |  |  |  |

 

F-36

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|                                   |   | **For  the Year Ending December 31, 2001** |       |
|----------------------------------------|--------|--------------------------------------------|------------|
|                                   |   | **Acceris  Partners**                      |       | **Acceris  Technologies** |   | **Total  Reportable  Segments** |   |
|                                   |   |                                       |       |   |   |   |   |
| Revenues from external  customers      |   | $                                          | 50,289,000 |   | $ | 5,697,000 |   | $ | 55,986,000 |   |
| Interest revenue                       |   | —                                     |       | — |   | — |   |
| Interest expense                       |   | 2,499,000                                  |       | — |   | 2,499,000 |   |
| Depreciation and amortization  expense |   | 2,286,000                                  |       | 126,000 |   | 2,412,000 |   |
| Segment income (loss)                  |   | (13,927,000                                | )          | 1,611,000 |   | (12,316,000 | ) |
|                                   |   |                                       |       |   |   |   |   |
| Other significant non-cash items:      |   |                                       |       |   |   |   |   |
| Provision for doubtful accounts        |   | 2,861,000                                  |       | — |   | 2,861,000 |   |
|                                   |   |                                       |       |   |   |   |   |
| Expenditures for long-lived assets     |   | 14,797,000                                 |       | 8,000 |   | 14,805,000 |   |
| Segment assets                         |   | 32,206,000                                 |       | 137,000 |   | 32,343,000 |   |
|                                   |   |                                       |       |   |   |   |   |
|                                        |        |                                            |            |  |  |  |  |  |  |  |

 
|                                  |   | **For  the Year Ending December 31, 2000** |    |
|---------------------------------------|--------|--------------------------------------------|---------|
|                                  |   | **Marketing  Services**                    |    | **Acceris  Technologies** |   | **Total  Reportable  Segments** |   |
|                                  |   |                                       |    |   |   |   |   |
| Revenues from external  customers     |   | $                                          | 464,000 |   | $ | 9,373,000 |   | $ | 9,837,000 |   |
| Interest revenue                      |   | —                                     |    | — |   | — |   |
| Interest expense                      |   | —                                     |    | — |   | — |   |
| Depreciation and amortization expense |   | 15,000                                     |    | 98,000 |   | 113,000 |   |
| Segment income (loss)                 |   | (204,000                                   | )       | 3,218,000 |   | 3,014,000 |   |
|                                  |   |                                       |    |   |   |   |   |
| Other significant non-cash items:     |   |                                       |    |   |   |   |   |
| Provision for doubtful accounts       |   | —                                     |    | — |   | — |   |
|                                  |   |                                       |    |   |   |   |   |
| Expenditures for long-lived assets    |   | —                                     |    | 8,000 |   | 8,000 |   |
|                                  |   |                                       |    |   |   |   |   |
| Segment assets                        |   | —                                     |    | 201,000 |   | 201,000 |   |
|                                       |        |                                            |         |  |  |  |  |  |  |  |

 

F-37

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The following table reconciles reportable segment information to theconsolidated financial statements of the Company:

 
|                                                                                                |   | **2002**   |        | **2001**    |   | **2000**    |    |
|-----------------------------------------------------------------------------------------------------|--------|------------|-------------|-------------|--------|-------------|---------|
|                                                                                                |   |       |        |        |   |        |    |
| Total interest and other income  for reportable segments                                            |   | $          | 357,000     |        | $      | —      |    | $ | — |   |
| Unallocated interest revenue from corporate accounts                                                |   | 38,000     |        | 81,000      |   | 487,000     |    |
|                                                                                                |   | $          | 395,000     |        | $      | 81,000      |    | $ | 487,000 |   |
|                                                                                                |   |       |        |        |   |        |    |
| Total interest expense for reportable segments                                                      |   | $          | 3,298,000   |        | $      | 2,499,000   |    | $ | — |   |
| Unallocated amortization of discount on notes payable                                               |   | —     |        | —      |   | —      |    |
| Unallocated interest expense from related party debt                                                |   | 4,211,000  |        | 1,556,000   |   | 1,054,000   |    |
| Other unallocated interest expense from corporate debt                                              |   | 385,000    |        | 638,000     |   | 433,000     |    |
|                                                                                                |   | $          | 7,894,000   |        | $      | 4,693,000   |    | $ | 1,487,000 |   |
|                                                                                                |   |       |        |        |   |        |    |
| Total depreciation and amortization for reportable  segments                                        |   | $          | 4,225,000   |        | $      | 2,412,000   |    | $ | 113,000 |   |
| Unallocated amortization expense from intangible assets                                             |   | —     |        | 2,608,000   |   | 2,612,000   |    |
| Other unallocated depreciation from corporate assets                                                |   | 45,000     |        | 1,389,000   |   | 1,266,000   |    |
|                                                                                                |   | $          | 4,270,000   |        | $      | 6,409,000   |    | $ | 3,991,000 |   |
|                                                                                                |   |       |        |        |   |        |    |
| Total segment loss                                                                                  |   | $          | (6,368,000  | )           | $      | (12,316,000 | )       | $ | 3,014,000 |   |
| Unallocated non-cash amounts in consolidated net loss:                                              |   |       |        |        |   |        |    |
| Amortization of discount on notes payable                                                           |   | (560,000   | )           | (253,000    | )      | —      |    |
| Litigation settlement expense                                                                       |   | —     |        | —      |   | (640,000    | )       |
| Gain on sale of subsidiary                                                                          |   | —     |        | 589,000     |   | —      |    |
| Amortization of deferred compensation on stock options  issued for services                         |   | —     |        | —      |   | (542,000    | )       |
| Amortization of intangible assets                                                                   |   | —     |        | (2,608,000  | )      | (2,612,000  | )       |
| Other corporate expenses (primarily corporate level  interest,general and administrative  expenses) |   | (8,101,000 | )           | (11,387,000 | )      | (14,373,000 | )       |
|                                                                                                |   | $          | (15,029,000 | )           | $      | (25,975,000 | )       | $ | (15,153,000 | ) |
|                                                                                                |   |       |        |        |   |        |    |
| Total amortization of deferred  compensation for reportable segments                                |   | —     |        | —      |   | —      |    |
| Unallocated amortization of  deferred compensation                                                  |   | —     |        | —      |   | $           | 542,000 |   |
|                                                                                                |   | —     |        | —      |   | $           | 542,000 |   |
|                                                                                                |   |       |        |        |   |        |    |
| Expenditures for segment  long-lived assets                                                         |   | $          | 6,849,000   |        | $      | 14,805,000  |    | $ | 8,000 |   |
| Other unallocated expenditures  for corporate assets                                                |   | 309,000    |        | 1,274,000   |   | 5,621,000   |    |
|                                                                                                |   | $          | 7,158,000   |        | $      | 16,079,000  |    | $ | 5,629,000 |   |
|                                                                                                |   |       |        |        |   |        |    |
| Segment assets                                                                                      |   | $          | 37,623,000  |        | $      | 32,343,000  |    | $ | 201,000 |   |
| Intangible assets not allocated  to segments                                                        |   | —     |        | 1,331,000   |   | 3,939,000   |    |
| Other assets not allocated to  segments*                                                            |   | 3,823,000  |        | 13,106,000  |   | 17,517,000  |    |
|                                                                                                |   | $          | 41,446,000  |        | $      | 46,780,000  |    | $ | 21,657,000 |   |

 

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* Other assets not allocated to segments includes assets associatedwith segments reported in previous periods which are no longer classified asreportable segments, primarily assets of and related to the discontinuedoperations of ILC (former telecommunications services segment).

 

F-38

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**Note 20 – Summarized Quarterly Data(unaudited)**

 

Following is a summary of the quarterly results of operations for theyears ended December 31, 2002 and 2001. The amounts for all quarters of 2001and the first three quarters of 2002 have been restated to reclassify amountsas discontinued operations related to the sale of ILC in December 2002 (seenote 6) which had previously been reported in continuing operations.

 
| **(in thousands of dollars, except  per share amounts)**                                                  |   |   |   | **March 31** |   | **June 30** |   | **September  30** |   | **December  31** |   |
|-----------------------------------------------------------------------------------------------------------|--------|--------|--------|--------------|--------|-------------|--------|-------------------|--------|------------------|--------|
| Net sales:                                                                                                |   | 2002   |   | $            | 24,392 |        | $      | 21,872            |   | $                | 20,156 |   | $ | 21,669 |   |
|                                                                                                      |   | 2001   |   | 1,437        |   | 7,352       |   | 22,907            |   | 24,289           |   |
|                                                                                                      |   |   |   |         |   |        |   |              |   |             |   |
| Operating loss:                                                                                           |   | 2002   |   | $            | (340   | )           | $      | (246              | )      | $                | (851   | ) | $ | (6,093 | ) |
|                                                                                                      |   | 2001   |   | (3,515       | )      | (2,931      | )      | (5,457            | )      | (10,050          | )      |
|                                                                                                      |   |   |   |         |   |        |   |              |   |             |   |
| Net loss from  continuing operations before discontinued operations and extraordinary item:               |   | 2002   |   | $            | (2,504 | )           | $      | (2,297            | )      | $                | (2,476 | ) | $ | (7,752 | ) |
|                                                                                                      |   | 2001   |   | (3,813       | )      | (3,554      | )      | (7,228            | )      | (11,380          | )      |
|                                                                                                      |   |   |   |         |   |        |   |              |   |             |   |
| Loss from  discontinued operations (2)                                                                    |   | 2002   |   | $            | (3,099 | )           | $      | (4,581            | )      | $                | (1,463 | ) | $ | (3,366 | ) |
|                                                                                                      |   | 2001   |   | (2,856       | )      | 714         |   | (13,275           | )      | (4,198           | )      |
|                                                                                                      |   |   |   |         |   |        |   |              |   |             |   |
| Net loss: (1)                                                                                             |   | 2002   |   | $            | (5,603 | )           | $      | (6,878            | )      | $                | (3,939 | ) | $ | (11,117 | ) |
|                                                                                                      |   | 2001   |   | (6,669       | )      | (2,839      | )      | (20,503           | )      | (14,486          | )      |
|                                                                                                      |   |   |   |         |   |        |   |              |   |             |   |
| Basic and  diluted income (loss) before discontinued operations and extraordinary item  per common share: |   | 2002   |   | $            | (0.02  | )           | $      | (0.02             | )      | $                | (0.02  | ) | $ | (0.07 | ) |
|                                                                                                      |   | 2001   |   | 0.22         |   | (0.03       | )      | (0.06             | )      | (0.11            | )      |
|                                                                                                      |   |   |   |         |   |        |   |              |   |             |   |
| Basic and  diluted income (loss) per common share:                                                        |   | 2002   |   | $            | (0.05  | )           | $      | (0.06             | )      | $                | (0.03  | ) | $ | (0.10 | ) |
|                                                                                                      |   | 2001   |   | 0.16         |   | (0.03       | )      | (0.18             | )      | (0.15            | )      |

 

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(1)          In the fourth quarter of2001, the Company recorded an extraordinary gain on extinguishment of debt of$1,092,818.

 

(2)          In the third quarter of2001, the Company recorded an impairment of goodwill of $8,040,054, which hasbeen included in discontinued operations in the above presentation.  In the fourth quarter of 2002, the Companyrecorded an impairment charge in the amount of $1,586,531 related to the saleof its ILC assets.

 

The summary financialinformation above for the quarter ended September 30, 2002 reflects the impactof correction of errors as reflected in the Company’s amended Form 10-Q for theperiod ended September 30, 2002.  Theamendment was necessary to correct errors primarily related to (i) the reversalof certain liabilities and (ii) eliminate the Company’s recognition of otherincome from the establishment of long term deposit assets and the recognitionof an impairment loss on certain long-lived assets, both related to the June2001 purchase of certain assets of WorldxChange Communications, Inc  which were reflected in the Form 10-Q asoriginally filed for the period ended September 30, 2002 (see note 8).  The restatement increased the net loss forthe three and nine months ended September 30, 2002 by $576,944.

 

The summary financial information above for the quarter ended December31, 2002 reflects the impact of a restatement on the statement of operationsfrom the originally filed annual report on Form 10-K.  The restatement was necessary to reflect corrections (all ofwhich were adjustment to the fourth quarter of 2002) as described in Note 3 tothese consolidated financial statements.

 

F-39

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**I-LINK INCORPORATED AND SUBSIDIARIES**

**SCHEDULE OFVALUATION AND QUALIFYING****ACCOUNTS**

 
| **Description**                 |   | **Balance at  Beginning  of Period** |   | **Charged to  Costs and  Expenses** |   | **Deductions  (a)** |   | **Other** |   | **Balance at  End of  Period** |   |
|---------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|---------------------|--------|-----------|--------|--------------------------------|--------|
|                            |   |                                 |   |                                |   |                |   |      |   |                           |   |
| Allowance for doubtfulaccounts: |   |                                 |   |                                |   |                |   |      |   |                           |   |
| December 31, 2000               |   | 1,789,000                            |   | 113,168                             |   | (1,801,503          | )      | —    |   | 100,665                        |   |
| December 31, 2001               |   | 100,665                              |   | 4,066,690                           |   | (2,304,367          | )      | —    |   | 1,862,988                      |   |
| December 31, 2002               |   | 1,862,988                            |   | 5,999,422                           | (b)    | (5,031,556          | )      | (47,283   | )(c)   | 2,783,571                      |   |

 

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(a)          Deductions represents allowance amounts written off as uncollectible andrecoveries of previously reserved amounts.

(b)         Amounts include charges and deductions related to continuing operationsonly.

(c)          Other includes an increase of $1,018,007 for the beginning allowanceacquired in the acquisition of RSL in December 2002 and a decrease of  $1,065,290 for the net change indiscontinued operations during the year which are not included in charged tocosts and expenses or deductions.

 

S-1

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