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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2001
OR

For the transition period from                                      to                                     

Commission file number 0-21421

VCAMPUS CORPORATION

(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: 703-893-7800

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

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

Common Stock ($0.01 par value per share)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

        The aggregate market value of the common stock held by non-affiliates of the registrant based upon the closing price of the Common Stock on March 26, 2002, on the NASDAQ SmallCap Market System was approximately $4,018,229 as of such date. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status may not be conclusive for other purposes.

        As of March 26, 2002, the registrant had outstanding 14,699,250 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Company's Proxy Statement for the 2002 Annual Meeting of Stockholders are incorporated herein by reference into Part III.

        Statements in this Annual Report on Form 10-K that are not descriptions of historical facts are forward-looking statements that are subject to risks and uncertainties. Actual events or results could differ materially from those currently anticipated due to a number of factors, including those set forth herein and in the Company's other SEC filings, and including, in particular: limited operating history in targeted markets; losses and negative operating cash flows; future capital needs and uncertainty of additional funding; difficulties in managing rapid growth; risks associated with acquisitions and integration of acquired operations; competition; developing market, rapid technological changes and new products; dependence on online distribution; substantial dependence on courseware and third party courseware providers; substantial dependence on third party technology; and limited marketing experience and substantial dependence on third party distribution. All references to the "Company" or "VCampus" herein shall mean VCampus Corporation and its subsidiaries: Cognitive Training Associates, Inc., a Texas corporation ("CTA"); Cooper & Associates, Inc., an Illinois corporation, d/b/a Teletutor ("Teletutor"); HTR, Inc., a Delaware corporation ("HTR"); and UOL Leasing, Inc., a Delaware corporation.

PART I

Item 1. Business.

        VCampus Corporation is a leading e-learning Application Services Provider, or ASP, that manages and hosts turnkey, Internet-based learning environments for corporations, government agencies, institutions of higher education, and associations. The Company has developed proprietary software for the creation and hosting of a virtual campus, or "vcampus," that enables its clients to offer Internet-based training to their clients, sales channel partners, employees and students. The Company's services cover programs from beginning to end, from enrollment and payment to course development and delivery, as well as tracking of students' progress and reporting of results.

        The VCampus® e-Learning platform enables the Company's clients to develop and execute learning strategies designed to make:

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employees and sales channels more productive;



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clients more satisfied and loyal; and



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supply chains more efficient.

        The Company believes that its ASP approach to Web-based hosting of e-Learning software provides significant business advantages. The Company charges clients a relatively low fee to establish a customized VCampus, and the Company then charges on either a subscription or usage basis for the service. The Company believes this model creates a consistent revenue stream, as well as a "backlog" of revenue for the Company. The Company believes that these factors, particularly when combined with the relatively high switching costs clients incur to change e-Learning service providers, provide a solid revenue base for the Company. The Company believes the advantages of the ASP model to clients, particularly in the Company's target markets, are significant. VCampus offers:

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a rapid, non-time-consuming implementation;



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low up-front costs and a predictable recurring expense for the service;



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access to world-class e-Learning and infrastructure talent;



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anywhere, anytime learning, including over 5,000 off-the-shelf courses;



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consistent delivery of high-quality courseware;



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delivery of content from virtually any source; and



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communities of learning created through the broad client base.

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        VCampus believes that it holds several key advantages in the e-Learning marketplace:

        Large and growing client list.    VCampus has a diverse and growing list of over 60 clients, including client relationships that have extended for as many as five years, along with a number of new clients. VCampus's client base is noteworthy for incorporating a wide range of sectors, including corporations, government agencies, institutes of higher education, professional associations and retail-oriented training sites.

        Service of multiple market segments.    Because VCampus serves clients from a variety of market sectors—including corporations, associations, government agencies, and institutes of higher education, the Company is able to provide its clients with a unique ability to participate in communities of learning. The VCampus platform design enables VCampus clients to share content with one another, thereby creating cross-sale opportunities from client to client. Several VCampus clients successfully sell their content to other VCampus clients simply by offering their content on our advanced platform.

        Established presence serving the government sector.    VCampus has established solid relationships with several government agencies, including the US General Services Administration and the Social Security Administration. In 2001, VCampus was awarded the contract for the US General Services Administration's online university, with a 3-year potential revenue value of $4 million. The Company announced during 2001 that the VCampus e-learning platform complies with Section 508 of the Federal Rehabilitation Act and the globally recognized W3C Guidelines for Web Accessibility. Compliance enables VCampus' government clients to meet Federal mandates and also helps the Company's corporate and higher education clients achieve their goals to provide e-learning to all of their users regardless of disabilities. The government sector diversifies the industries that the Company serves and represents a revenue source that is relatively recession resistant.

        Open technology.    The VCampus technology affords clients a number of advantages in terms of its ability to rapidly and cost-effectively implement a complete and secure e-learning and training environment. A vcampus is a completely outsourced, remotely hosted and scalable distance education and training delivery solution. The Company's content-neutral, open architecture platform allows for access to a wide range of aggregated content, the ability to quickly add new functionality and leverage new technology and to support a vast number of users.

        Broad service offering.    VCampus offers clients an end-to-end online learning solution. The company has greatly increased its focus on blended learning services, marketed under PowerBlend™. Through the VCampus platform, clients can access and offer self-paced courses, asynchronous, instructor-guided courses, and synchronous, instructor-led courses. Additionally, we have designed and jointly offer with George Mason University an online course in blended learning, "Online Instruction: Migrating Traditional Training to Online."

        Expansive library of content aggregated from leading sources.    Using VCampus's course development technology, known as its Course Construction Set, a client's own training materials may be combined with the Company's off-the-shelf, third-party content library consisting of thousands of courses, on subjects including management skills, information technology, telecommunications and personal development, to design a comprehensive training curriculum. The Company's existing content library, marketed as ContentMatters, includes over 5,000 online courses from approximately 25 leading providers, including SmartForce, NETg, American Media, Dearborn Financial Publishing, NIIT and Crisp Learning. The Company also has agreements to distribute some courseware that has been developed by its clients, such as the New York Institute of Finance, to other VCampus clients. VCampus' wholly-owned library of telecommunications and desktop publishing courses are marketed under the Teletutor and VCampus brand names.

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        Extensive experience.    To date, the Company has delivered over 2.25 million courses with over 630,000 enrollments. The Company delivers an average of over 3,000 courses daily. The Company has operated in the e-Learning space for more than seven years. VCampus maintains solid, long-term relationships with established clients and benefits from a highly experienced and knowledgeable management team.

        Flexibility.    The Company's technology and implementation process is flexible to respond to diverse client needs. The Company offers rapid implementation on a content-neutral platform that allows access to both off-the-shelf and proprietary courseware. The Company offers customization of its products and services on a per-client basis, as well as rapid incorporation of new technologies. The Company's technology and services are designed to be scaleable on demand to meet client needs. The Company's platform is designed to provide clients with carrier-grade scalability.

        Complete Solution.    VCampus offers a completely hosted solution, accessible by virtually any web browser. The VCampus solution includes a leading edge Learning Management System, Courseware Construction Set™ and Courseware Delivery Engine. The technology and service has been proven and tested through successful implementations at client sites including Graybar Electric, University of Texas System and the U.S. General Services Administration, where thousands of students have experienced VCampus-based e-Learning for up to five years.

Industry Background

        Corporate training is a rapidly growing segment of the training and education market. As the United States and other developed countries continue to shift from a focus on manufacturing to economies focused on information and knowledge, employers seeking to compete successfully in the marketplace find it necessary to invest more in the training and education of their employees. Accordingly, the corporate training industry, which encompasses traditional classroom training, seminars, custom and off-the-shelf training materials as well as e-learning, has grown to over $54 billion according to a December 2000 Heller Report in Training Magazine. According to a report published by IDC, the e-learning market is expected to grow from approximately $1 billion in 2000 to over $23 billion by 2004.

        Historically, corporations, training organizations and post-secondary education institutions provided education through traditional classroom training. Companies choosing to provide this type of training in-house devote managerial and financial resources towards training facilities, instructors, materials and curriculum management. Companies often choose to use third parties to provide training services to avoid some of the management and facility issues but still pay tuition and material fees. Both in-house and outsourced traditional classroom approaches result in lost productivity and travel-related costs while the employees attend and travel to and from the training.

        Web-based delivery offers the ability to rapidly and cost-effectively update course materials and can provide students with "anywhere, any time" learning. Online delivery technology significantly reduces training costs, including those associated with students' time away from work, and permits resources to be applied directly to the educational process. E-Learning supports globalization of the workforce. E-learning solutions enhance relationships with clients, suppliers and distribution channels.

Company Strategy

        The Company's objective is to be the leading e-Learning application services provider, or ASP, for the corporate training, higher education, and government training and education markets. The Company's strategies to achieve this objective include continuing to: expand its client base, deliver high-demand courseware, expand service offerings, provide superior client service, develop new and upgrade existing technologies, and develop brand recognition for its products and services. The Company's strategy also includes enhancing the "stickiness" of its clients by converting more and more

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of each client's proprietary content to online distribution through the VCampus platform. The intended result is increased penetration into the enterprise and enhanced client loyalty.

Expand Client Base

        The Company is intensely focused on expanding its client base. The Company uses its direct sales force as well as its sales agents and telemarketing team to form relationships with potential new clients as well as to expand relationships with existing clients. VCampus signed a total of 28 new online clients in 2001, including the contract with the U.S. General Services Administration, the largest contract in terms of potential revenue ever signed by the company for e-Learning services.

        VCampus' primary target markets include government agencies, healthcare, and financial services industries, as well as institutions of higher education, all of which the Company believes have relatively large training and education budgets, significant training needs and receptiveness to new technology. VCampus focuses on the "middle market" -companies with annual sales of between $100 million and $1 billion—as well as divisions of Global 2000 companies. Although VCampus serves clients outside of this range, the Company believes that this market is the most attracted to VCampus's ASP business model. These middle market clients have relatively small information technology staffs, are relatively cash constrained, and benefit from VCampus' ability to get them up and running quickly with relatively low up-front costs.

        VCampus has been successful in its strategy to expand relationships with new and existing clients by expanding its focus beyond traditional educational training into solving diverse business problems with an e-Learning solution. For example, VCampus has helped clients, such as Graybar, train sales and distribution channel partners and clients on how to sell and use their products. The Company believes significant opportunities exist for it to expand its business with existing clients as well as to attract new clients with this approach to solving diverse business problems quickly and easily.

Deliver a Broad Offering of High-Demand Courseware

        VCampus believes it is competitively differentiated by its content-neutral platform. The Company acts as a "content aggregator" for its clients, offering an off-the-shelf library of content from leading providers including SmartForce, NETg, NIIT, Dearborn Financial Publishing, and many others. The Company intends to continue to expand its content library primarily through relationships with third-party content providers. The Company's existing courseware library includes more than 5,000 online courses (of which approximately 900 are available in multiple languages). When an organization's internal courses are combined with the VCampus off-the-shelf library, the combined delivery and tracking of courses creates a turnkey solution for entities requiring an enterprise-wide learning environment.

Expand Offerings

        VCampus, as a "complete" e-learning solution offered as an ongoing service, offers a number of value-added services to its clients. These services are an integral part of VCampus's complete solutions. VCampus plans to continue adding new service offerings to enhance each client's experience and to help fuel each client's utilization of e-Learning and other VCampus Services. During 2001, VCampus introduced a number of new services, including:

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VCampus PowerBlend™ Services. VCampus offers customized services to support a client's move to blended learning environments. Through detailed analysis of the goals, audiences, organizational readiness, technological infrastructure and interactivity of training provided, VCampus helps clients identify training that should be performed online (including self-paced, asynchronous instructor guided and synchronous instructor led) or face-to-face.

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Online Train the Trainer Workshops. VCampus introduced an online course to train participants in becoming successful Web-based instructors. The "VCampus Introduction to Online Training Workshop" is a 40-hour workshop created to provide the practical experience necessary to successfully apply online communications techniques to education and training. Subsequent to its introduction, VCampus executed an agreement whereby George Mason University of Fairfax, Virginia licensed the course to offer through its Continuing Education Curriculum, offering continuing education credits.



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Synchronous Learning Technology Services. During 2001, VCampus formed a relationship with WebEx Communications, Inc. to integrate WebEx's leading synchronous online meeting technology with the VCampus platform. This integration enables VCampus to offer VMeeting™: a service for VCampus clients enabling the creation, scheduling, management and execution of real-time, live online meetings through their vcampus.



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VContent™ Certified Developers Program. This program expands VCampus' ability to provide courseware development services to clients. Through the program, VCampus clients are able to choose from a range of content development companies that are certified on the VCampus platform, enabling clients to deliver dynamic, high-quality online courses rapidly. The VContent™ program ensures that VCampus clients receive world-class instructional design and online development capabilities that meet their unique and specific needs. While VCampus also provides courseware development services internally, the program means clients gain a broader base of instructional design and development talent when implementing their e-Learning solutions.



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VCampus Gateway. During 2001, VCampus introduced the VCampus Gateway product, which enables users to be automatically authenticated using LDAP technology.



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Other partner services. Through relationships with other leading providers, VCampus provides its clients with a rich array of services to augment the core e-learning services. For instance, VCampus is collaborating with SMARTHINKING to provide online tutoring and Englishtown to provide online teaching of English.

Provide superior client service

        VCampus' core client service principle is to deliver to its clients uniquely superior service through creative, committed and well-trained employees who work as a team. The company utilizes TeamCare^SM, a service methodology grounded upon developing relationships between key players from both VCampus and each client. The partnership includes an executive member, a project manager, an account manager and the customer care center. Each member of the team has a defined series of roles and responsibilities for monitoring and supporting the health and growth of the client relationship. Furthermore, the team is responsible for continuous review of the client's content needs (both self-paced and instructor-led), introduction of existing and new VCampus services, recommendation of suitable additional content, identification of the potential need for custom courseware development and the recommendation of platform configurations for client-specific business processes.

Develop and Upgrade Proprietary Technology

        The Company intends to maintain its position as a leader in online courseware delivery technology by continuing to develop and enhance the features and functionality of its proprietary technology. VCampus's system is designed to accommodate users on both low and high bandwidth connections, enabling the Company to serve a wide range of end users without requiring a large investment on their part. Additionally, the VCampus system is a completely outsourced system; no downloading is necessary.

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        During 2001, VCampus announced several significant upgrades to its e-Learning technology:

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AICC Compliance. The VCampus Learning Management System is now compliant with AICC, the leading set of standards for interoperability of Learning Management Systems and courseware. This upgrade enables VCampus to quickly integrate any AICC compliant courseware with full tracking capabilities.



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Section 508 Compliance. The Company announced that the VCampus e-learning platform complies with Section 508 of the Federal Rehabilitation Act and the globally recognized W3C Guidelines for Web Accessibility. Compliance enables VCampus' government clients to meet Federal mandates and also helps the Company's corporate and higher education clients achieve their goals to provide e-learning to all of their users regardless of disabilities.

        VCampus expects to release major upgrades of its technology during 2002 as well. The Company believes these upgrades will lower the cost of course delivery, increase the scalability and reliability of the system as well as improve the ease of use for both learners and content courseware authors. VCampus also anticipates introducing technology in an effort to enable its platform to be easily integrated with other web applications real-time via the Internet.

Develop Enhanced Brand Recognition for Products and Services

        The Company plans to build and maintain brand recognition through the following marketing and public relations activities: press releases, editorials, media tours, analyst tours, media events, live seminars, webinars and press events at trade shows and conferences. The Company also gains public exposure through trade publications and industry related media venues. In addition, the Company cross-markets through clients' VCampuses to promote its products and services and to attract students.

Products and Services

        The Company offers its online content primarily through its proprietary virtual campus product, or "vcampus." The vcampus is an online content delivery system and environment that facilitates the development, management and administration of training and education over the Internet and Intranets.

        The Company's technology allows clients to use a variety of content on an open architecture, remotely-hosted, Internet distribution platform displaying each client's graphical "look and feel." Management believes this open architecture makes VCampus's ASP technology more flexible than that of its competitors. A client can choose to use VCampus content, convert its existing courses to online or use third-party vendor content within the VCampus infrastructure.

VCampus®

        The Company's VCampus is a centrally-served delivery and tracking system accessible by virtually any Internet-ready PC. Generally, students enroll in the Company's courses online through a VCampus, but also have the option to enroll in person, by telephone or through the mail. Enrolled students can then access the courseware online, typically through a PC connected to the Internet or a corporate intranet or extranet. Once a student has completed the course, he or she will receive credit or certification, if appropriate. The VCampus technology is a proven system, having served approximately 2.5 million courses since introduction.

        The VCampus environment is customizable and designed for ease of administration and access to students, instructors and training administrators. In addition, by using any combination of courses from

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the Company's courseware library and the client's own internal training libraries, clients can offer a variety of distance learning options. The VCampus includes the following components:

        Registrar:    In the "Registrar" function, students can sign up for courses and modify their student profiles. Administrators can add new course offerings, admit students, enroll students into course offerings, modify the course offerings, search student records and administer much of the VCampus functionality.

        Classrooms:    In the "Classrooms" function, students can enter their registered courses or check their grades for any course for which they are registered. Administrators and instructors can also access courses and view student grades.

        Faculty:    Students can use the "Faculty" function to contact instructors.

        Information:    Using the "Information" function, administrators can post news, announcements and answers to frequently asked questions to keep students informed about their training options.

        Commons:    In the optional "Commons" function, students can access games and socialize with other students.

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

VCampus Courseware Delivery Engine

        The Courseware Delivery Engine is a proven system for presenting the total e-learning experience. This product was designed and built to serve as an integrated, Web-based courseware construction and delivery tool. First delivered in August 1997, the product has been used to build and deliver the Company's courseware library of more than 5,000 online courses as of December 31, 2001 (including approximately 900 courses in multiple languages). The VCampus Courseware Delivery Engine provides a simple, easy-to-use environment for instructors and students that is capable of assessing, recommending, tracking and testing students as they complete a course. The product also enables courseware developers to easily construct, deliver and track a highly interactive and media-rich online course.

        The VCampus Courseware Delivery Engine is designed to be simple to use yet rich in possibilities and performance. The courseware developer has access to a complete suite of Web-based tools necessary to construct and deliver a highly interactive, online course. The "PointPage" functionality of the product provides a choice of methods for displaying content. To make PointPage even more powerful, the "Activity Studio" enables non-programmers to construct and include multimedia-rich (animation, sound and student interactivity) activities by answering a few simple questions. Courseware developers can also take advantage of the testing system, which includes many advanced features such as question randomization and pooling. Additionally, courseware developers can choose to link selected test questions and PointPages to learning objectives, which allows a courseware developer to group content and assess a student's progress based on performance. For the instructor, the VCampus Courseware Delivery Engine provides real-time editing of the course introduction, the syllabus, help items and reference items. Students can visit the "Gradebook" functionality of the product to get a real-time view of how they are doing in a course.

VCampus Curriculum/Group Manager

        This product allows training managers to create an enterprise-wide individualized training program by facilitating the grouping of students with similar education needs and abilities to appropriate groups

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of courses within a VCampus. This product can improve overall system efficiency and facilitate interaction among students. The result is a specific student "Training Plan" designed to guide students to courses that match the student's ability. Additionally, the Training Plan can evaluate a student's performance in each course against minimum standards established by the VCampus administrator for test scores and attendance.

VCampus Batch/Mass Enrollment Tools

        This series of tools facilitates the enrollment of large groups into the VCampus and/or courses without student involvement. Companies with a large population of students can use this tool to import demographic data from legacy enterprise resource planning or human resources systems, thus streamlining the implementation process.

        To enable custom course development, VCampus offers clients its user-friendly, turn-key Courseware Construction Set. Additionally, VCampus provides custom content conversion services in-house and through certified VContent Partners.

Existing Courseware Library

        The Company currently offers approximately 7,100 courses real-time on its e-learning system and has the rights to offer an additional 2,600 which can be promptly added in response to client requests. The Company's courses are marketed under the name ContentMatters™. The Company's courseware strategy involves two separate but equally important components: (1) COTS, or commercial off-the-shelf, courses from a variety of leading third-party course vendors; and (2) custom courseware development for the proprietary training needs of the Company's clients.

COTS Library

        The Company currently offers approximately 2,400 COTS real-time on its e-learning system and has the rights to offer an additional 2,600 which can be promptly added in response to client requests. The current library was built from a combination of acquisitions, the Company's own development efforts and relationships with leading content providers such as SmartForce, NETg, NIIT, Infosource, Vital Learning, Crisp Publications Inc., Marcom, Aztec Software and American Media Inc. Although the Company does not provide accreditation or certification itself, a number of its current courses provide either accreditation or certification through its content providers. The Company intends to continue pursuing distribution agreements with major content developers and to extend its position as a content-neutral, yet content-centric e-learning service provider.

Custom Library

        The Company's existing custom courseware library includes approximately 4,700 online courses built by VCampus corporate, higher education and government clients for their own proprietary use. The Company believes these courses provide more long-term revenue potential than COTS courses, which may become commoditized over time. The Company believes the growth of this custom library is evidence of client satisfaction with the Company's authoring and delivery products.

Clients

        The Company's primary target market is the corporate training and education market. The Company focuses its sales and marketing efforts on "middle market" companies and is primarily targeting clients in government agencies, healthcare, and financial services industries, as well as institutions of higher education. In 2001, two clients, Park University and Graybar Electric, accounted for approximately 18.5% and 10.9% of the Company's revenues respectively. The Company currently anticipates that future revenues may be derived from sales to a limited number of clients. Accordingly, the cancellation or deferral of a small number of contracts could have a material adverse effect on the Company.

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Sales and Marketing

        The Company's primary marketing goals are to create a strong brand identity as a leading training and educational courseware service provider for corporations, government agencies and academic institutions and to establish its core technology, the VCampus e-Learning platform, as the global standard for corporate training and education needs.

        In addition to direct sales efforts, the Company markets its products and services through a variety of means, including the Web, public relations, trade shows, direct mail, trade publications, clients, resellers and strategic partners. The Company cross-markets through clients' VCampuses to promote its products and services and to attract students. The Company believes that forming strategic marketing alliances with parties who will sell, promote and market the Company's products and services will be important for rapid market penetration.

Competition

        The market for online educational and training products and services is highly competitive and will likely intensify. Although VCampus believes it was the first company to offer Web-based, interactive, on-demand content, there are no substantial barriers to entry in the online education and training market. Competition in the developing market for online training and education is based upon various factors, including quality, breadth and depth of content, marketing and third party relationships, quality, flexibility and reliability of delivery system and to a lesser degree, pricing.

        A number of companies, including SmartForce, SkillSoft, Click21earn, DigitalThink, Inc., Centra Software, Inc. and Docent compete in this market, as well as many others. In addition to traditional classroom and distance learning providers, other institutions such as Apollo Group, Inc. (through University of Phoenix) offer their own accredited courses online or in an e-mail-based format. They, and many other education providers, use some of the Company's methods, including e-mail, bulletin boards, and electronic conferencing, as well as other delivery methods such as satellite communications and audio and video tapes.

        With such rapid growth in the e-learning industry, it is important to understand the trends and movements within the industry. Management believes that it is becoming increasingly apparent that e-learning providers must not only remain technologically advanced but also, more importantly, offer "complete" solutions. This "complete solution" approach represents access to a large library of high quality, off-the-shelf courses; the ability to produce customizable courses quickly and effectively; and value-added features that allow flexibility and scalability, thereby maintaining the learner as the number one proponent to be considered. Additionally, successful e-learning solutions must be affordable, convenient and easy to use and administer.

        Although there is a broad range of approaches to the e-learning marketplace, most can be generally categorized as follows, though several companies are active in more than one segment:

        ASP Hosted Services: Provide consolidated access to learning and training from multiple sources by aggregating, hosting and distributing content.

        Examples: VCampus, Docent, Saba, Click21earn, KnowledgePlanet.

        Technology, Software, Learning Management System (LMS): Provide specific software tools and infrastructure to companies that typically implement technology and applications behind a corporate firewall. Usually sold under a one-time, non-annuity license/maintenance model.

        Examples: Saba, Docent, WBT Systems, InterWise, Pathlore, and Placeware.

        Content: Create the e-learning courses used to train corporate employees. Content typically falls into one of the three generic categories: information technology, soft skills and customized

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content. Leading content providers often provide support services in conjunction with their content.

        Examples: SmartForce, DigitalThink, Cognitive Arts, ElementK, ExecuTrain, Learning Tree International, New Horizons, Prosoft Training, SkillSoft, and UNext.com.

        Professional Services and Consulting: Provide consulting, implementation and support services, contract content development and distribution.

        Examples: Most of the "Big 5" accounting/consulting firms, DigitalThink.

        Most of the Company's competitors have significantly greater financial, technical and marketing resources than the Company. The Company will require financing to compete effectively in this rapidly evolving market. In addition, any of these competitors may be able to respond more quickly than the Company to new or emerging technologies and to devote greater resources to the development, promotion and sale of their services. A number of the Company's current clients and partners have also established relationships with certain of the Company's competitors, and future clients and partners may establish similar relationships. In addition, the Company's partners could use information obtained from the Company to gain an additional competitive advantage over the Company. The Company's competitors may develop products and services that are superior to those of the Company or that achieve greater market acceptance than the Company's products and services.

Government Regulation and Legal Uncertainties

        The Company is not currently subject to direct regulation by any government agency, other than regulations applicable to businesses generally, and there are currently few laws or regulations directly applicable to access to or commerce on online networks. Due to the increasing popularity and use of online networks, it is possible that a number of laws and regulations may be adopted with respect to online networks, covering issues such as user privacy, pricing, taxation and/or the characteristics and quality of products and services. The adoption of any such laws or regulations may decrease the growth of online networks, which could in turn decrease the demand for the Company's products and increase the Company's cost of doing business or otherwise have an adverse effect on the Company. Moreover, the applicability to online networks of existing laws governing issues such as property ownership, sales taxes, libel and personal privacy is uncertain. Furthermore, as a publisher of educational materials, the Company could be subject to accreditation or other governmental regulations. Any new legislation or regulation applicable to online networks, the Company or its products or services could have a material adverse effect on the Company.

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

Trademarks and Proprietary Rights

        The Company regards its copyrights, trademarks, trade dress, trade secrets and similar intellectual property as critical to its success, and the Company relies upon federal statutory as well as common law copyright and trademark law, trade secret protection and confidentiality and/or license agreements with its employees, clients, partners and others to protect its proprietary rights. The Company owns registered trademarks in the United States for Teletutor, The Chalkboard, VCampus, the VCampus

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logo, VCampus.com, Take It Online, Point Page, and Courseware Construction Set. Additionally, the Company has applied for registration in the United States for certain of its other trademarks, including the E-Learning Solution Provider and ContentMatters. The Company intends to file applications to register the TeamCare^SM mark.

Employees

        As of December 31, 2001, the Company had 53 employees, consisting of 19 full-time employees in general business operations, 17 full-time employees in sales and marketing, nine full-time employees in product development, and eight full-time employees in general and administrative. None of the Company's employees is represented by a union and there have been no work stoppages. The Company believes that its employee relations are good.

Risks and Uncertainties

        This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in this report. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this report and in any documents incorporated in this report by reference.

        We have incurred losses and anticipate future losses.    We have incurred significant losses since our inception in 1984, including net losses of $8.5 million, $12.4 million and $5.9 million for the years ended December 31, 1999, 2000 and 2001. As of December 31, 2001, we had an accumulated deficit of $77.1 million, stockholder's equity of $2.8 million and a working capital deficit of $0.9 million. We expect losses from operations to continue until our online revenue stream matures. For these and other reasons, we cannot assure you that we will ever operate profitably.

        We may not be able to meet our business objective.    Our key objective is to be the leading provider of online courseware for the corporate training and education market. Pursuing this objective may significantly strain our administrative, operational and financial resources. We cannot assure you that we will have the operational, financial and other resources to the extent required to meet our online business objective.

        We may need to raise additional capital.    If we are not able to generate sufficient cash for ongoing operations, we will need to raise additional funds through public or private sale of our equity or debt securities or from other sources for the following purposes:

•

to build our core online business; and



•

to maintain compliance with Nasdaq listing requirements.

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

        Our need to raise additional funds could also directly and adversely affect your investment in our common stock in another way. When a company raises funds by issuing shares of stock, the percentage ownership of the existing stockholders of that company is reduced or diluted. If we raise funds in the future by issuing additional shares of stock, you may experience significant dilution in the value of your shares. Additionally, certain types of equity securities that we have issued in the past and may issue in

11

the future do have and could have rights, preferences or privileges senior to your rights as a holder of our common stock.

        We face uncertainties and risks relating to our Nasdaq SmallCap Market listing.    Our common stock is currently listed on the Nasdaq SmallCap Market. Nasdaq has certain requirements that a company must meet in order to remain listed on the Nasdaq SmallCap Market. In February 2002, Nasdaq notified us that we are not in compliance with the minimum bid price requirement for continued listing on the Nasdaq SmallCap Market. Consequently, if we cannot regain compliance with the $1.00 minimum bid price requirement for at least 10 consecutive trading days within 180 days from Nasdaq's notification of noncompliance, then Nasdaq can pursue delisting proceedings against us. On March 26, 2002, the closing bid price of our common stock was $0.42. In addition, if we continue to experience losses from our operations or if we are unable to raise additional funds if needed, we may not be able to maintain the minimum net tangible asset requirements for continued quotation on the Nasdaq SmallCap Market.

        Nasdaq has notified us that it believes that Nasdaq marketplace rules require us to get shareholder ratification for the sale of 316,509 shares of common stock at a price of $1.06 per share, plus warrants to purchase 79,127 shares of common stock at $1.79 per share, that we made to a total of four then directors and officers in May 2001. These shares were sold in connection with a larger financing in which we sold an aggregate of 3,038,919 shares of common stock at $1.06 per share and warrants to purchase an additional 759,729 shares of common stock at $1.79 per share. Because the sale of stock to directors and officers was deemed compensatory for being below market price of our common stock at the time, which was $1.79, Nasdaq is requiring us to get shareholder approval. The disinterested members of our Board unanimously approved this transaction in an effort to, among other things, improve our cash position and keep VCampus in compliance with Nasdaq net tangible assets requirements. We are asking our stockholders to ratify this sale of stock at our 2002 Annual Meeting. If we are unable to obtain such approval, Nasdaq could force us to "undo" the sales to the officers and directors, including repurchasing their securities at the original purchase price, or ultimately pursue delisting us from the Nasdaq SmallCap Market.

        The Nasdaq SmallCap Market and the Nasdaq Over-the-Counter Bulletin Board are significantly less active markets than the Nasdaq National Market. You could find it more difficult to dispose of your shares of our common stock than if our common stock were listed on the Nasdaq National Market.

        If our common stock were delisted from the Nasdaq SmallCap Market, it could be more difficult for us to obtain other sources of financing in the future. Moreover, if our common stock were delisted from the Nasdaq SmallCap Market, our stock could be subject to what are known as the "penny stock" rules. The "penny stock" rules place additional requirements on broker-dealers who sell or make a market in such securities. Consequently, if we were removed from the Nasdaq SmallCap Market, the ability or willingness of broker-dealers to sell or make a market in our common stock could decline. As a result, your ability to resell your shares of our common stock could be adversely affected.

        The large number of our shares eligible for future sale could have an adverse impact on the market price of our common stock.    A large number of shares of common stock already outstanding, or issuable upon exercise of options or warrants, is eligible for resale, which may adversely affect the market price of our common stock. As of December 31, 2001, we had 14,698,675 shares of common stock outstanding, an additional 4,957,269 shares were issuable upon conversion of outstanding preferred stock and another 9,609,945 shares upon exercise of outstanding warrants and options. Substantially all of the shares subject to outstanding warrants and options will, when issued upon exercise, be available for immediate resale in the public market pursuant to currently effective registration statements under the Securities Act of 1933, as amended, or pursuant to Rule 701 or Rule 144 promulgated thereunder. Some of the shares that are or will be eligible for future sale have been or will be issued at discounts to the market

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price of our common stock on the date of issuance. Resales or the prospect of resales of these shares may have an adverse effect on the market price of our common stock.

        We substantially depend on third-party relationships.    We rely on maintaining and developing relationships with academic institutions and businesses that provide content for our products and services and with companies that provide the Internet and related telecommunications services used to distribute our products and services to clients.

        We have relationships with a number of academic institutions and businesses that provide us with course content for our online products and services. Some of the agreements we have entered into with these content providers limit our use of their course content, some do not cover use of any future course content and most may be terminated by either party upon breach or bankruptcy. Given our plans to introduce additional online courses in the future, we will need to license new course content from existing and prospective content providers. However we might not be able to maintain and modify, if necessary, our existing agreements with content providers, or successfully negotiate agreements with prospective content providers. If the fees we pay to acquire content increase, our results of operations could be adversely affected. We might not be able to license course content at commercially reasonable rates or at all.

        We depend heavily on third-party providers of Internet and related telecommunications services. In order to reach clients, our products and services have to be compatible with the web browsers they typically use. Our clients have access to us through their arrangements with Internet service providers.

        For the academic institutions and businesses that provide content for our products and services, the companies that provide the Internet and related telecommunications services used to distribute our products and services to clients, and the web-site operators that provide links to our company web-sites, we cannot assure you that:

•

they regard their relationships with us as important to their own businesses and operations;



•

they will not reassess their commitment to our products or services at any time in the future;



•

they will not develop their own competitive products or services;



•

the products or services by which they provide access or links to our products or services will achieve market acceptance or commercial success; or



•

our relationships with them will result in successful product or service offerings or generate significant revenues.

        If one or more of these entities fail to achieve or maintain market acceptance or commercial success, or if one or more of the entities that do succeed decide to end their relationship with us, it could have a material adverse effect on our company. Likewise, if our position on a web browser is terminated, or if one of our competitors secures an exclusive arrangement with respect to positioning on a web browser, traffic on our web-sites would be significantly reduced, which could have a material adverse effect on our results of operations.

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

        A number of our existing competitors, as well as a number of potential new competitors (including some of our strategic partners), have longer operating histories, greater name recognition, larger client bases, more diversified lines of products and services and significantly greater resources than we do. Such competitors may be able to undertake more extensive marketing campaigns, adopt more

13

aggressive pricing policies and make more attractive offers to potential clients. In competing against us, our strategic partners could use information obtained from us to gain an additional competitive advantage over us. Our current and potential competitors might develop products and services that are superior to ours or that achieve greater market acceptance than ours. We might not compete effectively and competitive pressures might have a material adverse effect on our business, financial condition and results of operations.

        We depend on key personnel.    Our future success depends on the continued contributions of our key senior management personnel, some of whom have worked together for only a short period of time. Daniel J. Neal, Chief Executive Officer, has an employment agreement and we maintain "key man" life insurance in the amount of $1 million on him. Neither the insurance nor the employment agreement will necessarily fully compensate us for, or preclude, the loss of services of this executive officer. The loss of services of any of our key management personnel, whether through resignation or other causes, or the inability to attract qualified personnel as needed, could have a material adverse effect on our financial condition and results of operation.

        We anticipate significant fluctuations in our quarterly results.    Our expense levels are based in part on our expectations as to future revenues. Quarterly sales and operating results generally depend on the online revenues and development and other revenues, which are difficult to forecast. We may not be able to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant revenue shortfall would have an immediate adverse impact on our business and financial condition.

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

•

demand for online education;



•

the budgeting cycles of clients;



•

seasonality of revenues corresponding to academic calendars;



•

capital expenditures and other costs relating to the expansion of operations;



•

the introduction of new products or services by us or our competitors;



•

the mix of the products and services sold and the channels through which those products and services are sold;



•

pricing changes; and



•

general economic conditions.

        As a strategic response to a changing competitive environment, we may elect from time to time to make certain pricing, service or marketing decisions that could have a material adverse effect on us. We believe that period-to-period comparisons of our operating results should not be relied upon as an indication of future performance. Due to all of the foregoing factors, it is possible that in some future quarter, our operating results will be below the expectations of public market analysts and investors. In such event, the price of our common stock would likely be materially and adversely affected.

        We rely on significant clients.    A significant portion of our revenues is generated by a limited number of clients. We expect that we will continue to depend on large contracts with a limited number of significant clients through the near future. This situation can cause our revenue and earnings to fluctuate between quarters based on the timing of contracts. Most of our clients have no obligation to purchase additional products or services from us. Consequently, if we fail to develop relationships with significant new clients, our business, financial condition and results of operations will be materially and adversely affected.

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        We face the risk of system failures and capacity constraints.    A key element of our strategy is to generate a high volume of online traffic to our products and services. Accordingly, the performance of our products and services is critical to our reputation, our ability to attract clients and market acceptance of our products and services. Any system failure that causes interruptions in the availability or increases response time of our products and services would result in less usage of our products and services and, especially if sustained or repeated, would reduce the attractiveness of our products and services. An increase in the volume of use of our products and services could strain the capacity of the software or hardware we use or the capacity of our network infrastructure, which could lead to slower response time. We experienced capacity constraints in early 1999, and might again. Any failure to expand the capacity of our hardware or network infrastructure on a timely basis or on commercially reasonably terms would have a material adverse effect on our business. We also depend on web browsers and Internet service providers for access to their products and services, and users may experience difficulties due to system failures unrelated to our systems, products and services.

        We face security risks.    We include in our products certain security protocols that operate in conjunction with encryption and authentication technology. Despite these technologies, our products may be vulnerable to break-ins and similar disruptive problems caused by online users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and the computer systems of end-users, which may result in significant liability for us and may also deter potential clients. For example, computer "hackers" could remove or alter portions of our online courseware. Persistent security problems continue to plague the Internet, the Web and other public and private data networks. Alleviating problems caused by third parties may require us to make significant expenditures of capital and other resources and may cause interruptions, delays or cessation of service to our clients and to us. Moreover, our security and privacy concerns and those of existing and potential clients, as well as concerns related to computer viruses, may inhibit the growth of the online marketplace generally, and our client base and revenues in particular. We attempt to limit our liability to clients, including liability arising from a failure of the security features contained in our products, through contractual provisions limiting warranties and disallowing damages in excess of the price paid for the products and services purchased. However, these limitations might not be enforceable. We currently do not have product liability insurance to protect against these risks and insurance might not be available to us on commercially reasonable terms or at all.

        We face an undeveloped and rapidly changing market for our products and services.    The market for our products and services is rapidly evolving in response to recent developments relating to online technology. The market is characterized by evolving industry standards and client demands and an increasing number of market entrants who have introduced or developed online products and services. It is difficult to predict the size and growth rate, if any, of this market. As is typical in the case of a rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty. Moreover, critical issues concerning the commercial use of online networks (including reliability, cost, ease of use and access, quality of service and market acceptance) remain unresolved and may impact potential future growth. Although costs have been decreasing while ease of use, market acceptance and access have been increasing, we cannot assure that these trends will continue. Our future success will depend in significant part on our ability to continue to improve the performance, features and reliability of our products and services in response to both evolving demands of the marketplace and competitive product offerings, and we cannot assure that we will be successful in developing, integrating or marketing such products or services. In addition, our new product releases may contain undetected errors that require significant design modifications, resulting in a loss of client confidence and adversely affecting our business.

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        There are risks relating to our intellectual property rights.    We regard our copyrights, trademarks, trade dress, trade secrets and similar intellectual property as critical to our success, and we rely upon trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, clients, partners and others to protect our proprietary rights.

        We have had certain trademark applications denied and may have more denied in the future. We will continue to evaluate the need for registration of additional marks as appropriate. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or services or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. Litigation may be necessary to protect our proprietary technology. Any such litigation may be time-consuming and costly, cause product release delays, require us to redesign our products or services or require us to enter into royalty or licensing agreements, any of which could have a material adverse effect upon us. These royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. Our means of protecting our proprietary rights might not be adequate and our competitors might independently develop similar technology, duplicate our products or services or design around patents or other intellectual property rights we have. In addition, distributing our products through online networks makes our software more susceptible than other software to unauthorized copying and use. For example, online delivery of our courseware makes it difficult to ensure that others comply with contractual restrictions, if any, as to the parties who may access such courseware. We allow users to download electronically certain of our courseware content, which could adversely affect our ability to collect payment from users that obtain copies from our existing or past clients. If, as a result of changing legal interpretations of liability for unauthorized use of our software or otherwise, users were to become less sensitive to avoiding copyright infringement, we could be materially adversely affected.

        We face government regulation and legal uncertainties.    There are currently few laws or regulations that directly apply to activities on the Internet. We believe that we are not currently subject to direct regulation by any government agency in the United States, other than regulations that are generally applicable to all businesses. A number of legislative and regulatory proposals are under consideration by federal and state lawmakers and regulatory bodies and may be adopted with respect to the Internet. Some of the issues that these laws and regulations may cover include user privacy, pricing and characteristics and quality of products and services. The adoption of any such laws or regulations may decrease the growth of the Internet, which could in turn decrease the projected demand for our products and services or increase our cost of doing business. The applicability to the Internet of existing U.S. and international laws governing issues such as property ownership, copyright, trade secret, libel, taxation and personal privacy is uncertain and developing. Any new legislation or regulation, or application or interpretation of existing laws, could have a material adverse effect on our business, results of operations, financial condition and prospects.

        We could issue preferred stock and take other actions that might discourage third parties from acquiring us.     Our board of directors has the authority, without further action by the stockholders, to issue up to 10,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of such shares. We currently have outstanding four classes of preferred stock. The rights of the holders of the common stock are subject to the rights of the holders of our outstanding preferred stock, and will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. Issuing preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock, thereby delaying, deferring or preventing a change in control of our company. Furthermore, the preferred stock may have other rights, including economic rights, senior to our common stock, and as a result, issuing preferred stock could have a material adverse effect on the market value of our common stock.

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        Certain provisions of our certificate of incorporation and our bylaws could make it more difficult for a third party to acquire, and could discourage a third party from attempting to acquire, control of our company. Some of them eliminate the right of stockholders to act by written consent and impose various procedural and other requirements which could make it more difficult for stockholders to undertake certain corporate actions. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock and may have the effect of delaying or preventing a change in control of our company. We may in the future adopt other measures that may have the effect of delaying, deferring or preventing a change in control of our Company. Certain of these measures may be adopted without any further vote or action by the stockholders, although we have no present plans to adopt any such measures. We are also afforded the protections of Section 203 of the Delaware General Corporation Law, which could delay or prevent a change in control of our company, impede a merger, consolidation or other business combination involving our company or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our Company.

        We might not be able to use net operating loss carryforwards.    As of December 31, 2001, we had net operating loss carryforwards for federal income tax purposes of approximately $53 million, which will expire at various dates through 2022. Our ability to use these net operating loss and credit carryforwards to offset future tax obligations, if any, may be limited by changes in ownership. Any limitation on the use of net operating loss carryforwards, to the extent it increases the amount of federal income tax that we must actually pay, may have an adverse impact on our financial condition.

        We do not presently anticipate paying cash dividends on our common stock.    We intend to retain all earnings for the foreseeable future for funding our business operations. In addition, our outstanding preferred stock contains restrictions on our ability to declare and pay dividends on our common stock. Consequently, we do not anticipate paying any cash dividends on our common stock for the foreseeable future.

Item 2. Properties.

        A current summary showing the operating properties of the Company, all of which are leased, is shown below:

(1)

Subject to 3% annual increases

(2)

As part of the Company's transition to focus exclusively on its online businesses, the Company is negotiating to terminate these leases. The Washington DC property has been subleased.

        The Company believes that its existing office space is sufficient to accommodate its current needs and that suitable additional space will be available on commercially reasonable terms to accommodate any expansion needs in 2002 should the need arise.

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Item 3. Legal Proceedings.

        In 2000, Techsearch L.L.C. (Techsearch) filed a claim against a number of defendants, including the Company, alleging that the Company's method that allows customers to take online courses infringes Techsearch's patented method. Techsearch is seeking unspecified damages and an injunction prohibiting further alleged infringement. This matter is scheduled to go to trial in early 2003. The Company believes this claim is without merit and intends to defend itself vigorously. The Company cannot estimate at this time the amount of the liability to be incurred, if any. Accordingly no amounts have accrued in the financial statements. The Company does not believe that this matter will have a material adverse effect upon the Company's financial position or results of operations.

        On March 27, 2002, the Company was contacted by a former employee (separated September 1998) claiming rights to a bonus of approximately $56,000 and seeking damages of approximately $360,000 for the Company's alleged failure to allow him to exercise stock options. The Company has not yet had an opportunity to fully evaluate these claims, but the Company has rejected this former employee's claims in the past for lacking merit and plans to defend itself against these claims vigorously. The Company cannot estimate at this time the amount of the liability to be incurred, if any. Accordingly no amounts have accrued in the financial statements.

        Although the Company is not currently involved in any other material pending legal proceedings, the Company could be subject to legal proceedings and claims in the ordinary course of its business or otherwise, including claims relating to license agreements, royalties or claims of alleged infringement of the trademarks and other intellectual property rights of third parties by the Company and its licensees.

Item 4. Submission of Matters to a Vote of Security Holders.

        No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 2001.

Executive Officers

        As of March 25, 2002, the executive officers of the Company were as follows:

        * Resigned effective March 31, 2002

        Daniel J. Neal has served as a director and Chief Executive Officer of the Company since joining the Company in September 2000. From July 1998 until joining the Company, Mr. Neal served in various positions with USinternetworking, Inc., including Vice President/General Manager, Senior Director, E-Commerce Partnering and Senior Director, Acquisition Integration. From April 1996 until July 1998, he was the Director of National Partnering for Global One Communications, LLC, a subsidiary of Sprint. Prior to that, Mr. Neal served as a Senior Staff Member with the Office of the Vice President of the United States. Mr. Neal received his B.A. from the University of California, Berkeley, and holds an M.B.A. from the Wharton School at the University of Pennsylvania.

        Deborah A. Colella joined the Company in March 2001 as Vice President of Corporate Development, and has been serving as Chief Financial Officer since October 2001. Prior to joining VCampus, Ms. Colella spent 11 years building Kaiser Associates, a leading provider of management advice for companies striving for sustained, profitable growth. Additionally, Ms. Colella served as Vice

18

President of Business Development for Kignet, a web hosting company where she was responsible for all business planning, mergers and acquisitions. Ms. Colella holds an M.B.A., with the highest distinction, and Palmer Scholar designation, from the Wharton School of the University of Pennsylvania and a B.S., summa cum laude, in Management Science and Statistics and Economics from the University of Maryland, where she graduated as valedictorian.

        Vini N. Handler joined VCampus in December 2000 as Chief Information Officer. Ms. Handler brings both domestic and international expertise in technology operations, IP/Data services strategies, product development and ASP solutions. She is responsible for all aspects of VCampus' application services and support. Ms. Handler's executive experience in the Internet/IP and data industry includes management roles with Loral CyberStar, Cable & Wireless, Global One, and Sprint & GTE Telenet. Ms. Handler holds a bachelor's degree in electrical engineering from the Indian Institute of Technology in Kanpur, India, and an M.B.A. in Operations Research from American University.

        Randy J. Saari joined the Company in October 2000 as Senior Vice President of Worldwide Sales and is responsible for leading the VCampus direct and indirect sales efforts both domestically and abroad, and for the execution of VCampus' overall sales strategy. Before joining VCampus, Mr. Saari led the Central Region Sales efforts at The Hunter Group, a Baltimore-based consulting firm specializing in enterprise applications and information management, from 1996 to February 2000. Since 1994, Mr. Saari focused on developing "Greenfield" regions. Mr. Saari has over twenty years' experience managing people, including at Tadpole Technology from 1995 to 1996, at Sapient Corporation from February 2000 to May 2000 and at Extraprise from May 2000 to October 2000. Mr. Saari holds a B.S. in Accounting from Plymouth State College.

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PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

(a)

Price Range of Common Stock

        Our common stock is currently listed on the Nasdaq SmallCap Market under the symbol "VCMP." For each full fiscal quarter since the beginning of 2000, the high and low bid quotations for our common stock, as reported by Nasdaq, were as follows:

        The foregoing bid quotations reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions, and may not represent actual transactions.

        Since the Company's IPO in late 1996, the public market for the Company's Common Stock has been characterized by low and/or erratic trading volume, often resulting in price volatility. There can be no assurance that there will be an active public market for the Company's Common Stock in the future. The market price of the Common Stock could be subject to significant fluctuations in response to future announcements concerning the Company or its partners or competitors, the introduction of new products or changes in product pricing policies by the Company or its competitors, proprietary rights or other litigation, changes in analysts' earning estimates, general conditions in the online distribution market, developments in the financial markets and other factors. In addition, the stock market has, from time to time, experienced extreme price and volume fluctuations that have particularly affected the market prices for technology companies and which have often been unrelated to the operating performance of the affected companies. Broad market fluctuations of this type may adversely affect the future market price of the Common Stock. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."

        From October 1, 2001 to December 31, 2001, the Company issued the following unregistered securities:

        (1)  394,340 shares of common stock, valued at $0.36 per share, were issued as a dividend to the holders of the Company's Series D Preferred Stock on December 31, 2001.

        (2)  2,642,836 shares of Series F Preferred Stock were issued to four accredited investors, at $0.35 per share, on December 28, 2001. Subject to Nasdaq shareholder approval requirements, the Series F Preferred Stock converts on a one-for-one basis into common stock at any time at the election of the holder. Five-year fully vested warrants to purchase 1,982,187 shares of common stock with an exercise price of $0.40 per share and $925,000 in principal amount of convertible promissory notes convertible into a total of 2,642,857 shares of common stock at $0.35 per share were issued to the same four investors on December 28, 2001.

        The sales of the above securities were deemed to be exempt from registration under Section 4(2) of the Securities Act of 1933, as amended (the "Act") in reliance upon the Act, or Regulation D

20

promulgated thereunder as transactions by an issuer not involving a public offering. Recipients of the securities in each such transaction represented their intentions to acquire such securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the instruments issued in such transactions. All recipients had adequate access to information about the Company.

(b)

Approximate Number of Equity Security Holders

        As of March 15, 2002, the number of record holders of the Company's Common Stock was 127 and the Company believes that the number of beneficial owners was approximately 1,500.

(c)

Dividends

        The Company has never paid a cash dividend on its Common Stock and anticipates that for the foreseeable future any earnings will be retained for use in its business and, accordingly, does not anticipate the payment of cash dividends. Future dividends, if any, will depend on, among other things, our results of operations, capital requirements and on such other factors as our Board of Directors, in its discretion, may consider relevant.

Item 6. Selected Financial Data.

        The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere herein. The consolidated statement of operations data set forth below with respect to the years ended December 31, 1999, 2000 and 2001 and the consolidated balance sheet data as of December 31, 2000 and 2001 are derived from, and are referenced to, the audited consolidated financial statements of the Company included elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations data set forth below with respect to the years ended December 31, 1997 and 1998 and the consolidated balance sheet data as of December 31, 1997, 1998 and 1999 are derived from financial statements not included in this Annual Report on Form 10-K.

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22

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.

        From time to time, as used herein, the term "Company" or "VCampus" shall mean VCampus Corporation and its subsidiaries: Cognitive Training Associates, Inc., a Texas corporation; Cooper & Associates, Inc., an Illinois corporation, d/b/a Teletutor; HTR, Inc., a Delaware corporation; and UOL Leasing, Inc., a Delaware corporation.

        The following presentation of management's discussion and analysis of the Company's consolidated financial condition and results of operation should be read in conjunction with the Company's consolidated financial statements, accompanying notes thereto and other financial information appearing elsewhere in this report.

Overview

        In 2001, the Company's revenues were derived from five primary sources:

•

online tuition revenues;



•

development revenues;



•

product sales revenues;



•

other service revenues; and



•

instructor-led training revenues.

        In 2001, the Company completed its shift to focus completely on online training. In 2001, 2000, and 1999, the Company's online related businesses accounted for 96.1%, 66.0%, and 43.6%, respectively, of the Company's total revenues.

        Online tuition revenues are generated primarily from online tuition derived from corporate, government, and higher education clients. Product sales revenues are derived from the sale of telecommunications related computer-based training ("CBT") courses that are delivered through traditional CBT format (e.g. CD-ROM). Development revenues consist primarily of fees paid to the Company for creating and developing new online courseware and web-enabling existing courseware. Other service revenues consist primarily of monthly fees generated by the licensing and maintenance of the CYBIS courseware under contract with the U.S. Army. Instructor-led training revenues are generated from on-site and classroom training fees. Because the Company has completed its transition to focus completely on its core online businesses, it does not expect to generate any significant instructor-led training revenues in the foreseeable future.

        During 1998, the Company changed its pricing model from a platform license fee for hosting services to an ASP service fees and subscription model based on course usage commitments. This pricing structure provides a lower cost of entry and generates a recurring revenue stream for VCampus. While prior to 1997 licensing and support revenues have represented a substantial majority of the Company's revenues, online related revenues currently comprise the vast majority of the Company's total revenues and the Company believes that online related revenues will continue to be the primary source of its revenues in the future.

Acquisitions and Divestitures

        Since 1996, the Company has completed four acquisitions—HTR Inc., Cooper & Associates, Inc. (d/b/a Teletutor), Ivy Software, Inc. and Cognitive Training Associates, Inc. Each of these acquisitions was accounted for as a purchase, and accordingly, the operating results of each acquired company are included in the Company's financial statements from the effective date of each respective acquisition. These acquisitions provided the Company with clients and courseware content in non-online format. The Company does not currently have an agreement, commitment or understanding with any other

23

potential acquisition candidates. In 1999, the Company began implementing its plan to divest its non-online businesses, with the exception of Teletutor. This plan was completed in December 2000 through the closure of HTR's remaining instructor-led training sites in Washington D.C. and Rockville, MD. The Company continues to follow a strategy of moving content and clients to an online training platform from the traditional classroom and CBT based training formerly sold through its former non-online business.

Critical Accounting Policies

        The preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. The Company's accounting policies which are significantly affected by management's estimates and assumptions are as follows:

Revenue Recognition

        The Company derives its revenues from the following sources—online tuition revenues, instructor-led training revenues, product sales revenues, other service revenues, virtual campus software revenues, and development and other revenues.

        Revenue is recognized in accordance with either SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), as amended, or Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"), as amended. Both SAB 101 and SOP 97-2 generally require that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable: and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the fee charged for services rendered and the collectibility of those fees. Should changes in conditions cause management to determine these criteria are not met for certain sales, revenue recognized for any reporting period could be adversely affected.

        Development and other revenues earned under courseware conversion contracts are recognized based on the ratio that total costs incurred to date bear to the total estimated costs of the contract. Management's estimates of total costs to complete contracts may be revised in future periods resulting in adjustments to revenue and profit recognized in the period the revisions are made.

Allowance for Doubtful Accounts

        The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of those customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required in future periods.

Goodwill and Other Identifiable Intangibles

        Management assesses the recoverability of goodwill and other identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When management determines that the carrying value of goodwill or other identifiable intangibles is not recoverable, an impairment loss is recognized to the extent the carrying value of the asset exceeds its fair value. Fair value can be estimated using a number of techniques including quoted market prices, valuations by third parties and discounted cash flow analysis. The fair value of the asset could be different using different estimates and assumptions in these valuation techniques.

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        In accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangibles," the Company will cease amortization of goodwill and other indefinite-lived intangibles on January 1, 2002. In lieu of amortization, these assets will be subject to an annual impairment review. The Company may determine through the impairment review process that goodwill or other indefinite-lived intangibles have been impaired, resulting in an impairment charge in the period the review is completed.

        As discussed in Notes 11 and 17, we are involved in certain legal proceedings. Because of the uncertainties related to the amount of potential loss, management is unable to make a reasonable estimate of the liability, if any, that could result from an unfavorable outcome of these proceedings. Accordingly, no amount has been accrued as of December 31, 2001 for these matters in the consolidated financial statements. We do not believe these proceeding will have a material adverse effect on our consolidated financial position. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions, or the effectiveness of our settlement or litigation strategies, related to these proceedings.

Results of Operations

        The following table sets forth certain statement of operations data as a percentage of total net revenues for the periods indicated:

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2001 Compared to 2000

Summary

        The Company incurred a net loss attributable to common stockholders of $6,582,040 (or $0.52 per share) in 2001 as compared to a net loss attributable to common stockholders of $14,037,564 (or $1.76 per share) in 2000. Excluding certain non-recurring items in both years, the Company incurred a net loss attributable to common stockholders of $6,394,278 (or $0.51 per share) in 2001 as compared to a net loss attributable to common stockholders of $11,315,229 (or $1.42 per share) in 2000. Non-recurring items for 2001 amounted to $187,762 (or $0.01 per share) incurred in connection with the termination of the employment agreement between the Company and its founder. Non-recurring items for 2000 amounted to $2,722,335 (or $0.34 per share) and included $1,226,335 of adjustment to goodwill related to the Company's restructuring of HTR, $700,000 of adjustment to the Company's note receivable related to the sale of Knowledgeworks, $335,000 of costs related to the Company's restructuring of operations in December 2000, and $461,000 recorded in connection with the cumulative effect of change in accounting principle.

        Total revenues in 2001 were $6,973,231 as compared to $9,456,083 for 2000. The decrease in revenues was primarily due to the exit from the classroom-based training business, culminating in the closing of the two remaining HTR training facilities in December 2000. The decrease was partially offset by increases in online tuition revenues. Online tuition revenues increased from $5,064,889 in 2000 to $5,944,764 in 2001, primarily due to increased course usage by some of the Company's older clients and the addition of new clients. Excluding the non-recurring items described above, total costs and expenses were $12,282,027 in 2001 as compared to costs of $18,768,608 for 2000. The decrease was due primarily to decreases in product development and operations and sales and marketing expenses, and cost of revenues as the Company's lower margin instructor-led training revenues decreased.

Net Revenues

        Total net revenues decreased 26.3% from $9,456,083 in 2000 to $6,973,231 in 2001. Online tuition revenues increased from $5,064,889 (53.6% of net revenues) in 2000 to $5,944,764 (85.3% of net revenues) in 2001. The increase in online tuition revenues was primarily due to increased course usage by some of the Company's older clients (approximately $503,000) and the addition of new clients (approximately $376,000). Online development and other revenues decreased from $1,021,811 (10.8% of net revenues) in 2000 to $687,232 (9.9% of net revenues) in 2001. Development revenues were primarily related to developing online courseware for clients in both years. The decrease was primarily due to a decline in the number of courses developed for one of the Company's larger clients. Product sales revenues decreased from $413,999 (4.4% of net revenues) in 2000 to $45,038 (0.6% of net revenues) in 2001. The decrease in product sales revenues was primarily due to the transition of some Teletutor clients from CD-ROM to online usage. Other service revenues decreased from $175,399 (1.9% of net revenues) in 2000 to $121,750 (1.7% of net revenues) in 2001. Both virtual campus software revenues and other service revenues decreased due to the change in business focus of the Company. The Company anticipates that these revenues will continue to represent only a small portion of Company total revenues in the foreseeable future. Instructor-led training revenues decreased from $2,664,892 (28.2% of net revenues) in 2000 to $102,584 (1.5% of net revenues) in 2001. This decrease was due primarily to the closing of the remaining two HTR training facilities in December 2000.

Cost of Revenues

        Total cost of revenues decreased 66.8% from $3,296,284 (34.9% of net revenues) in 2000 to $1,093,285 (15.7% of net revenues) in 2001. The decrease was due primarily to the closing of the remaining two lower margin instructor-led training facilities in December 2000 (representing a decrease of approximately $2,075,000) and the decrease in online development and other revenues (representing

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a decrease of approximately $241,000) partially offset by the increase in cost of online revenues (approximately $240,000) as a result of the increase in online tuition revenues.

Operating Expenses

        Sales and Marketing.    Sales and marketing expenses decreased 24.4% from $6,241,397 (66.1% of net revenues) in 2000 to $4,716,729 (67.6% of net revenues) in 2001. Sales and marketing expenses consist primarily of costs related to personnel, sales commissions, travel, market research, advertising and marketing materials. The decrease was due primarily to the Company's cost control measures implemented in the fourth quarter of 2000 as a result of management reorganization plans.

        Product Development and Operations.    Product development and operations expenses decreased 36.1% to from $3,555,093 (37.6% of net revenues) in 2000 to $2,273,145 (32.6% of net revenues) in 2001. Product development and operations expenses consist primarily of certain costs associated with the design, programming, testing, documenting and support of the Company's new and existing courseware and software. The decrease was primarily due to cost control measures implemented beginning in the fourth quarter of 2000 as a result of management reorganization plans.

        General and Administrative.    General and administrative expenses decreased 25.9% from $2,759,682 (29.2% of net revenues) in 2000 to $2,044,716 (29.3% of net revenues) in 2001. General and administrative expenses consist primarily of personnel costs, facilities and related costs, as well as legal, accounting and other costs. The decrease was primarily due to cost control measures.

        Depreciation and Amortization.    Depreciation and amortization expense decreased 26.1% from $2,916,152 (30.8% of net revenues) in 2000 to $2,154,152 (30.9% of net revenues) in 2001. The decrease was due primarily to the write-off of $1.2 million in goodwill in December 2000 related to the acquisition of HTR.

        Compensation expense in connection with the acquisition of HTR, Inc.    During 2000, the Company recognized the final portion of compensation expense of $654,294 related to compensation paid to the HTR executives pursuant to their employment agreements.

        Reorganization and Other Non-Recurring Charges.    In December 2001, the employment agreement between the Company and Nat Kannan was terminated, resulting in $187,762 of severance related expense. In December 2000, the Company implemented a reorganization plan to reduce its workforce and close certain office facilities. The plan called for and resulted in (i) the termination of approximately 37 employees primarily from the product development and instructor-led training areas and (ii) the closure of the Company's training facilities located in Washington, DC and Rockville, MD. As a result, the Company recorded a restructuring charge of approximately $1,561,000. The restructuring charge included approximately $1,226,000 for the write off of goodwill related to HTR and $335,000 primarily for expenses related to facilities lease cancellations. The operating activities of the closed facilities were not tracked separately by the Company. Reorganization and other non-recurring charges in 2000 also included an increase of $700,000 to the Company's reserve for its notes receivable issued in connection with the sale of Knowledgeworks, which note was restructured in 2000.

        Stock Based Compensation.    Stock based compensation was $440,898 in 2001 and included the final vesting of warrants issued to Qwest Investment Company (approximately $166,000) related to their equity investment in VCampus in the second quarter of 2000 and compensatory stock options and stock warrants issued in connection with the issuance of debt to two VCampus directors and the subsequent extinguishment of that debt. The fair value of the warrants and options was estimated at $212,750 and $47,150, respectively, using the Black-Scholes option pricing model and has been included in stock-based compensation in the consolidated statements of operations. Stock-based compensation was

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$361,391 in 2000 and consisted of expense related to the issuance of compensatory stock and stock options to the Company's newly appointed President and Chief Executive Officer, and compensatory stock and stock warrants issued to several service providers.

        Interest and Other Income (Expense).    Interest income in 2001 and 2000 was primarily derived from income earned on divestiture-related notes receivable and cash raised in the Company's private placements. The decline in interest income during 2001 was primarily related to the smaller amount of financing raised in 2001, as compared to 2000.

2000 Compared to 1999

Summary

        The Company incurred a net loss attributable to common stockholders of $14,037,564 (or $1.76 per share) in 2000 as compared to a net loss attributable to common stockholders of $8,934,909 (or $1.91 per share) in 1999. Excluding certain non-recurring items in both years, the Company incurred a net loss attributable to common stockholders of $11,315,229 (or $1.42 per share) in 2000 as compared to a net loss attributable to common stockholders of $8,576,355 (or $1.83 per share) in 1999. Non-recurring items for 2000 amounted to $2,722,335 (or $0.34 per share) and included $1,226,335 of adjustment to goodwill related to the Company's restructuring of HTR, $700,000 of adjustment to the Company's note receivable related to the sale of Knowledgeworks, $335,000 of costs related to the Company's restructuring of operations in December 2000, and $461,000 recorded in connection with the cumulative effect of change in accounting principle. Non-recurring items for 1999 amounted to $358,554 (or $0.08 per share) and included $360,000 of costs related to a settlement with a former partner, and $1,446 of gain related to the sale of Knowledgeworks.

        Total revenues in 2000 were $9,456,083 as compared to $11,547,439 for 1999. The decrease in revenues was primarily due to the closing of two HTR training facilities in 1999 (approximately $2,327,000) the sale of Knowledgeworks in June 1999 (approximately $268,000) and the decrease in Teletutor revenues (approximately $593,000) as the Company focused on its core online business. The decrease was partially offset by increases in online tuition revenues and development and other revenue. Online tuition revenues increased from $3,834,617 in 1999 to $5,064,889 in 2000, primarily due to increased course usage by some of the Company's older clients, the addition of new clients, and the transition of some Teletutor clients to online delivery. Excluding the non-recurring items described above, total costs and expenses were $18,768,608 in 2000 as compared to costs of $17,864,951 for 1999. The increase was due primarily to increases in product development and operations expenses and sales and marketing expenses, partially offset by a decrease in cost of revenues as the Company's lower margin instructor-led training revenues decreased.

Net Revenues

        Total net revenues decreased 18.1% from $11,547,439 in 1999 to $9,456,083 in 2000. Online tuition revenues increased from 3,834,617 (33.2% of net revenues) in 1999 to $5,064,889 (53.5% of net revenues) in 2000. The increase in online tuition revenues was primarily due to increased course usage by some of the Company's older clients (approximately $900,000) and the addition of new clients (approximately $330,000). Virtual campus software revenues decreased from $216,341 (1.9% of net revenues) for 1999 to $115,093 (1.2% of net revenues) for 1999. The decrease in virtual campus software revenues is primarily due to the decrease of clients with virtual campus software license agreements. Online development and other revenues increased slightly from $977,295 (8.5% of net revenues) in 1999 to $1,021,811 (10.8% of net revenues) in 2000. Development revenues were primarily related to developing online courseware for clients in both years. Product sales revenues decreased from $1,222,389 (10.6% of net revenues) in 1999 to $413,999 (4.4% of net revenues) in 2000. The decrease in product sales revenues was primarily due to the sale of Knowledgeworks in June 1999, and

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the transition of some Teletutor clients from CD-ROM to online usage. Other service revenues decreased from $305,046 (2.6% of net revenues) in 1999 to $175,399 (1.9% of net revenues) in 2000. The decrease in other service revenues was due primarily to decreased sales to the Company's legacy clients using its CYBIS courseware. Instructor-led training revenues decreased from $4,991,751 (43.2% of net revenues) in 1999 to $2,664,892 (28.2% of net revenues) in 2000. This decrease was due primarily to the closing of two HTR training facilities in 1999 as a result of management reorganization plans.

Cost of Revenues

        Total cost of revenues decreased 42.7% from $5,748,745 (49.8% of net revenues) in 1999 to $3,296,284 (34.9% of net revenues) in 2000. The decrease was due primarily to the closing of two lower margin instructor-led training facilities in 1999 (representing a decrease of approximately $2,300,000) and the decrease in product sales revenues (representing a decrease of approximately $300,000) partially offset by the increase in cost of online revenues (approximately $150,000) as a result of the increase in online tuition revenues.

Operating Expenses

        Sales and Marketing.    Sales and marketing expenses increased 45.6% from $4,285,989 (37.1% of net revenues) in 1999 to $6,241,397 (66.1% of net revenues) in 2000. Sales and marketing expenses consist primarily of costs related to personnel, sales commissions, travel, market research, advertising and marketing materials. The increase was due primarily to the Company's expansion of its sales force and increased marketing investments in 2000.

        Product Development and Operations.    Product development and operations expenses increased 58.6% to from $2,241,283 (19.4% of net revenues) in 1999 to $3,555,093 (37.6% of net revenues) in 2000. Product development and operations expenses consist primarily of certain costs associated with the design, programming, testing, documenting and support of the Company's new and existing courseware and software. The increase was primarily due to additional costs incurred transitioning to a new hosting facility, re-configuring the architecture of the courseware delivery platform, and leasing certain hardware designed to improve capacity and performance of delivering courseware, as well up-front costs related to establishing an application hosting platform under the Company's application hosting agreement with a large reseller.

        General and Administrative.    General and administrative expenses increased 4.8% from $2,632,937 (22.8% of net revenues) in 1999 to $2,759,682 (29.2% of net revenues) in 1999. General and administrative expenses consist primarily of personnel costs, facilities and related costs, as well as legal, accounting and other costs.

        Depreciation and Amortization.    Depreciation and amortization expense decreased 1.3% from $2,955,997 (25.6% of net revenues) in 2000 to $2,916,152 (30.8% of net revenues) in 1999.

        Compensation expense in connection with the acquisition of HTR, Inc.    During 2000, the Company recognized the final portion of compensation expense of $654,294 related to compensation paid to the HTR executives pursuant to their employment agreements.

        Reorganization and Other Non-Recurring Charges.    In December 2000, the Company implemented a plan to reduce its workforce and close certain office facilities. The plan called for and resulted in (i) the termination of approximately 37 employees primarily from the product development and instructor-led training areas and (ii) the closure of the Company's training facilities located in Washington, DC and Rockville, MD. As a result, the Company recorded a restructuring charge of approximately $1,561,000. The restructuring charge included approximately $1,226,000 for the write off of goodwill related to HTR and $335,000 primarily for expenses related to facilities lease cancellations.

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The Company believes that the restructuring plan will be completed by the second quarter of 2001 and does not anticipate adjustments to its restructuring accrual. No amounts related to the restructuring had been paid as of December 31, 2000. The operating activities of the closed facilities were not tracked separately by the Company. Reorganization and other non-recurring charges in 2000 also included an increase of $700,000 to the Company's reserve for its notes receivable issued in connection with the sale of Knowledgeworks, which note was restructured in 2000.

        Stock Based Compensation.    Stock based compensation was $361,391 in 2000 and consisted of expense related to the issuance of compensatory stock and stock options to the Company's newly appointed President and Chief Executive Officer, and compensatory stock and stock warrants issued to several service providers.

        Interest and Other Income (Expense).    Interest income in 2000 was primarily derived from income earned on divestiture-related notes receivable and cash raised in the Company's private placements. Interest expense in 1999 was primarily attributable to the Company's borrowings under its then convertible debentures and credit facilities.

        Cumulative Effect of Accounting Change.    During the fourth quarter of 2000, the Company implemented Emerging Issues Task Force Issue No. 00-27, Application of EITF Issue No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios," to Certain Convertible Instruments (EITF 00-27). Issue 1 of EITF 00-27 modified the calculation of beneficial conversion features for convertible securities issued with detachable instruments for all transactions subject to EITF Issue No. 98-5. As a result of implementation of EITF 00-27, the beneficial conversion feature associated with the Company's Secured Subordinated Convertible Debentures increased by $461,000. This non-cash item has been recorded by the Company as a cumulative effect of a change in accounting principle in accordance with EITF 00-27.

Liquidity and Capital Resources

        At December 31, 2001, the Company had $2,027,771 in cash and cash equivalents. Since its inception, the Company has financed its operating cash flow needs primarily through offerings of equity and debt securities and, to a lesser extent, borrowings. Cash utilized in operating activities was $3,253,893 for the year ended December 31, 2001 and $9,465,895 for the year ended December 31, 2000. Use of cash was primarily attributable to the net loss recorded.

        Cash utilized in investing activities was $441,053 for the year ended December 31, 2001as compared to $1,832,420 for the year ended December 31, 2000. The use of cash for investing activities in 2000 and 2001 was primarily attributable to purchases of equipment and investments in software and courseware development.

        Cash provided by financing activities was $5,479,513 for the year ended December 31, 2001 as compared to $11,337,064 provided by financing activities for the year ended December 31, 2000. Under the terms of the Company's equity line agreement with H&QGF, the Company drew down $213,150 during January and February 2001 and issued to H&QGF 187,500 shares of Series E Preferred Stock at an average price of $1.14 per share. In February 2001, the Company secured $1,150,000 of debt financing through the issuance of short-term notes bearing interest at 10% to Barry Fingerhut, a director and shareholder of the Company, and John Sears, a director of the Company. These notes were cancelled in March 2001 in exchange for an aggregate of 1,183,782 shares of common stock at a purchase price of $0.978 per share and warrants to purchase an aggregate of 287,500 shares of common stock at an exercise price of $1.076 per share. In May and June 2001, the Company raised approximately $3,200,000 through a private placement of 3,038,919 shares of common stock at a purchase price of $1.06 per share. Under the terms of this financing, the Company also issued five-year warrants to purchase 938,479 shares of common stock at $1.79 per share. In December 2001, the

30

Company raised $1,850,000 through a private placement of 2,642,836 shares of Series F Preferred Stock at a price of $0.35 per share and $925,000 in principal amount (including $100,000 funded in early January 2002) of 8% debentures due December 31, 2003. Subject to Nasdaq rules limiting the number of shares of common stock that may be issued without shareholder approval, these notes are fully convertible into common stock at a conversion price of $0.35 per share. The debentures are due the earlier of (i) December 31, 2003 or (ii) in the event shareholder approval is not obtained at the Company's next annual stockholder meeting, ninety days after such meeting, currently scheduled for late May 2002. Under the terms of this financing, the Company issued five-year warrants to purchase 1,982,127 shares of common stock at $0.40 per share.

        The Company expects negative cash flow from operations to continue for at least the next six months until the online revenue stream matures. In March 2002, the Company reduced monthly operating costs by approximately $50,000 through the termination of five employees. After these cost cutting measures, the Company believes it has adequate resources to fund operations until operations reach cash flow positive. However, in the event revenues do not meet anticipated levels, the Company may need to further reduce operating expenses or raise additional funding to meet working capital requirements and to remain in compliance with Nasdaq Small Cap market listing requirements. The Company believes it has available sources for debt or equity capital in amounts necessary to, in addition to operating sources, meet its cash needs through 2002. However, such capital may not have terms favorable to the Company or its current stockholders.

        If the Company does not address its funding needs, it will be materially adversely affected. The Company's future capital requirements will depend on many factors, including, but not limited to, acceptance of and demand for its products and services, the types of arrangements that the Company may enter into with clients and resellers, and the extent to which the Company invests in new technology and research and development projects.

        As of December 31, 2001, the Company had net operating loss carryforwards of approximately $53 million for federal income tax purposes, which will expire at various dates through 2022. The Company's ability to utilize all of its net operating loss and credit carryforwards may be limited by changes in ownership. The Company has recognized a full valuation allowance against these deferred tax assets because it is more likely than not that sufficient taxable income will not be generated during the carryforward period available under the tax law to utilize the deferred tax assets.

Contractual Obligations

        The Company's future liquidity and capital resources will be affected by its contractual obligations. The Company's significant contractual obligations as of December 31, 2001 are for debt, operating and capital leases and purchase obligations. These obligations are summarized as follows:

(1)

In December 2001, the Company raised $825,000 through the issuance of 8% debentures together with five-year, fully vested warrants to purchase 1,982,127 shares of common stock at $0.40 per

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share. The Company allocated the proceeds of the offering to the debentures and the warrants based on their relative fair values. The amount allocated to the warrants was recorded as a debt discount and is being amortized to interest expense over the period the debentures are expected to be outstanding. The unamortized debt discount at December 31, 2001 was $332,649. Principal and accrued interest under the debentures are due and payable on the earlier of (i) December 31, 2003 or (ii) 90 days after the Company's next annual shareholders meeting, unless the Company receives shareholder approval at such meeting for the conversion of the debentures into common stock. The Company has classified the debentures as due within one year in the event shareholder approval for conversion is not obtained and the debentures become due 90 days after the Company's next annual shareholders meeting, currently scheduled for late May 2002. In addition, the Company raised an additional $100,000 in January 2002 through the issuance of its 8% debentures under the same terms as the debentures issued in 2001.

(2)

On December 15, 2000, the Company entered into a three-year reseller agreement with a vendor to resell certain software. The agreement, as amended, requires the Company to generate sales of $650,000 over the three-year period. As of December 31, 2001, the Company was required to generate sales of $507,000 prior to December 15, 2003.

        The Company has not engaged in off-balance sheet financing, commodity contract trading or significant related party transactions.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

        Not applicable.

Item 8. Financial Statements and Supplementary Data.

        The information required by this item is included in this Report at pages F-1 through F-20 See Index to Consolidated Financial Statements on page F-1.

        Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

        Not applicable.

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PART III

        Certain information required by Part III is omitted from this report because the Registrant intends to file a definitive proxy statement for its 2002 Annual Meeting of Stockholders (the "Proxy Statement") within 120 days after the end of its fiscal year pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, and the information included therein is incorporated herein by reference to the extent provided below.

Item 10. Directors and Executive Officers of the Registrant.

        The information required by Item 10 of Form 10-K concerning the Registrant's executive officers is set forth under the heading "Executive Officers" located at the end of Part I of this Report.

        The other information required by Item 10 of Form 10-K concerning the Registrant's directors is incorporated by reference to the information under the heading "Proposal No. 1—Election of Directors" and "Other Information—Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement.

Item 11. Executive Compensation.

        The information required by Item 11 of Form 10-K is incorporated by reference to the information under the heading "Proposal No. 1—Election of Directors—Information Concerning the Board of Directors and Its Committees", "Other Information—Executive Compensation", "—Compensation of Directors", "—Report of the Compensation Committee on Executive Compensation", "—Compensation Committee Interlocks and Insider Participation" and "—Performance Graph" in the Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

        The information required by Item 12 of Form 10-K is incorporated by reference to the information under the heading "Other Information—Principal Stockholders" in the Proxy Statement.

Item 13. Certain Relationships and Related Transactions.

        The information required by Item 13 of Form 10-K is incorporated by reference to the information under the heading "Other Information—Certain Transactions" in the Proxy Statement.

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PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

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

        (1) Financial Statements.

        See Index to Consolidated Financial Statements on page F-1.

        (2) Financial Statement Schedules.

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

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

        (3) Exhibits.

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        * Confidential treatment granted.

(a)

Incorporated by reference to the similarly numbered Exhibit to the Registrant's Registration Statement on Form S-1 (File No. 333-12135).

(b)

Incorporated by reference to the similarly numbered Exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997.

(c)

Incorporated by reference to the identically numbered Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.

(d)

Incorporated by reference to the identically numbered Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.

(e)

Incorporated by reference to the corresponding appendix filed with the Registrant's preliminary proxy materials on Schedule 14A dated July 16, 1999 for its 1999 annual meeting of stockholders.

(f)

Incorporated by reference to the similarly numbered Exhibit to the Registrant's Registration Statement on Form S-1 (No. 333-83885) filed with the SEC on July 27, 1999, as amended.

(g)

Incorporated by reference to the similarly numbered Exhibit to the Registrant's current Report on Form 8-K filed January 13, 2000.

(h)

Incorporated by reference to the similarly numbered Exhibit to the Registrant's current Report on Form 8-K filed May 1, 2000.

(i)

Incorporated by reference to the similarly numbered Exhibit to the Registrant's Quarterly Report on Form 10-Q filed May 15, 2000.

(j)

Incorporated by reference to the similarly numbered Exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000.

35

(k)

Incorporated by reference to the similarly numbered Exhibit to the Registrant's Quarterly Report on Form 10-Q filed May 15, 2001.

(l)

Incorporated by reference to the similarly numbered Exhibit to the Registrant's current Report on Form 8-K filed June 1, 2001.

(m)

Incorporated by reference to the similarly numbered Exhibit to the Registrant's current Report on Form 8-K filed January 8, 2002.

        (b) The Registrant filed no reports on Form 8-K during the fourth quarter of the fiscal year ended December 31, 2001.

36

SIGNATURES

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

Date: March 26, 2002

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

37

VCAMPUS CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors
VCampus Corporation

        We have audited the accompanying consolidated balance sheets of VCampus Corporation as of December 31, 2000 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of VCampus Corporation at December 31, 2000 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        As discussed in Note 2 of Notes to Consolidated Financial Statements, in 2000 the Company changed its method of accounting for convertible securities with beneficial conversion features in accordance with the consensus reached by the Emerging Issues Task Force on Issue No. 00-27, Application of EITF Issue No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios," to Certain Convertible Instruments.

/s/ ERNST & YOUNG LLP

McLean, Virginia
March 15, 2002, except for Note 17, as to
        which the date is March 27, 2002

F-2

VCAMPUS CORPORATION

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the financial statements.

F-3

VCAMPUS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of the financial statements.

F-4

VCAMPUS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY