Indicated by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x]

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of March 8, 2002 was approximately $37,398,478.

As of March 8, 2002 16,329,671 shares of our common stock were outstanding.

[None]

eCollege.com ("eCollege" or the "Company") is a leading provider of technology and services that enable colleges, universities, primary schools and high schools ("K-12 schools"), and corporations to offer an online environment for distance and on-campus learning. Our technology enables our customers to reach a large number of students who wish to take online courses at convenient times and locations. Our customers can also use our technology to supplement their on-campus courses with an online environment. Additionally, we offer services to assist in the development of online programs, including online course and campus design, development, management and hosting, as well as ongoing administration, faculty, instructor and student support.

Our objectives are to be the leading provider of asynchronous, instructor-led teaching technology used in education, and for our services to be the highest standard in the industry. Our strategy to achieve these objectives includes providing the leading eTeaching platform for teaching and learning in distance and on-campus education; providing key front-office transactions between educators and their students; and providing additional new self-service tools that allow customers to deploy our product without substantial involvement from our staff. Our primary market is colleges and universities in the United States and Canada. Our secondary markets include K-12 schools, corporations focused on continuing education and corporate training, and international customers.

Our products and services are designed to be flexible to meet the online learning needs of our primary market. As an application service provider, we provide our customers access to our software products, consisting of online campuses, courses, and course supplements, through hosting services in our reliable data center. We also provide services complementing our software including design, development, management and hosting of online campuses and courses, as well as ongoing administration, faculty and student support. Our suite of products and services enables customers to either completely outsource the development of their online campus and courses or to select individual products and services to meet their unique needs.

The eCollege online learning platform is designed to meet the teaching, campus community, administrative, evaluation and hosting needs of our customers and includes:

eCollege eCourseEvaluation is a comprehensive Internet-based product that automates the entire course and instructor evaluation process. This is analogous to the traditional paper-based process where students complete "fill-in-the-bubble" forms at the end of their course. However, eCourseEvaluation provides institutions with a more flexible, efficient, and timely feedback system compared to the paper-based process. eCollege eCampusSurvey helps to create and manage all types of surveys that an institution may want to deploy (e.g. instructors, facilities, sports, politics, etc.) outside of a classroom.

eCollege Content Solutions. We partner with leading textbook and new media publishers to provide educators and students academically focused content resources. Incorporating material from our content partners enables educators to quickly create new courses or add engaging elements to existing courses, saving considerable development time.

We believe that our service offering is a key competitive advantage and will be an important factor in achieving market acceptance and maintaining long-term relationships with our customers. In addition, we offer self-authoring tools that allow our customers to change and update their online campuses and courses. In the alternative, we will implement changes and updates, as a service purchased by our customers, under hourly billing relationships or fixed price contracts.

We first began delivering our products and services in 1996 to the University of Colorado. As of December 31, 2001, the Company has contracts with 249 customers. Our customers include: Boston University, University of Colorado, Corinthian Colleges, Inc., University of Dallas, DeVry University, Inc., Eastern Michigan University, Illinois Virtual High School, Kentucky Virtual High School, University of Massachusetts - Amherst, National University, New England College of Finance, Rutgers University, University of South Alabama, Strayer University, and University of Wyoming. In addition, we have contracts with several providers of continuing education and corporate training. Sales to National University represented approximately 10% of the Company's revenue for 2001.

Our objectives are to continue to expand our presence within our primary market and to further develop our secondary markets. The key elements of our growth strategy are to:

Add Additional Colleges and Universities from our Primary Market. Using a focused regional approach, we are actively targeting more than 800 colleges and universities, all of which have a significant existing distance education program or show the potential to develop one. To generate qualified leads, we concentrate on selling to this market through our regional directors within the Sales Department and through direct marketing to key decision-makers, generally senior administrators, faculty and IT administrators. The regional directors will communicate our value proposition through sales tools and presentation material that demonstrate our superior technology and service offerings, the total cost of ownership for higher education institutions, and formulas for a successful online program.

Increase Course Offerings and Enrollments with Existing Customers. In order to increase the course offerings and student enrollments of our existing customers, we have assigned our account executives within the Sales Department to be responsible for all aspects of account management for our largest potential distance programs. Account executives are responsible for sales to existing customers by facilitating the addition of online programs for new schools or departments within an existing customer, and by promoting and selling additional online undergraduate and graduate degree programs and certificate programs to existing customers. Account executives are located regionally, allowing them to share formulas for success and valuable customer usage reports with existing customers on an on-going basis. This strategy will be further supported by our client service representatives and various marketing initiatives focused on establishing enterprise-wide relationships with our custome rs.

Increase On-Campus Adoptions to Solidify and Grow Distance Education Relationships. In order to protect and further penetrate the distance education market, we feel it is important to develop a greater presence in the lower-margin on-campus market for key customers. To accomplish this, we have begun offering our on-campus product and service offerings at significantly reduced prices for customers who demonstrate a commitment to building or maintaining a large distance education program. This pricing strategy is designed to make our offerings attractive for both on-campus and distance education programs. It will also encourage further familiarity of our Teaching Solutions software with faculty that may wish to teach online. We will also continue to expand our product offerings, including increasing the flexibility of how our products may be deployed. We feel that this flexibility will be attractive to customers who choose to host portions of their eLearning solutions locally.

Add Additional Customers in our Secondary Markets. We have sales representatives solely focused on virtual high schools and K-12 school districts that have a desire to provide access to students through an online environment. In addition, we are working with our college and university customers to deploy their corporate training course content directly to corporations. We also have personnel responsible for developing business in select international markets.

Sales. We target prospective customers in our primary market in the United States and Canada. As of March 8, 2002 we have a sales force of 27 individuals, most with a background in education and/or technology. Our sales force is compensated with a combination of salary and commissions. We divide the United States and Canada into two geographic areas, each managed by a regional vice president who is responsible for several smaller geographic territories. These territories are covered by regional directors and account executives who are located within the territories they serve.

Our regional directors focus exclusively on prospecting, selling and closing deals for large distance programs within a clearly defined target account list for each geographic region. Account executives are responsible for leveraging the satisfaction of our contacts within existing programs to encourage the addition of online programs for new schools or departments within customers' institutions. Account executives also promote and sell additional products and service offerings to our customers' existing programs.

We have recently discontinued our inside sales team within the Sales Department. Going forward, our regional directors will have the responsibility to qualify leads and introduce eCollege to prospective customers. We feel that this approach will allow the regional directors to establish strong relationships with key decision makers of the potential customers at an earlier stage in the sales process.

Marketing. Historically, we have marketed our technology and services through a combination of print and online media advertising, trade shows and direct marketing. Our website has been designed as one of our primary marketing communications tools, incorporating a free trial of the eCollege System, information on industry news and trends, and other important events in online learning. We have also advertised in industry periodicals such as The Chronicle of Higher Education to address key decision-makers in our target market. We also use advertising media to promote online learning and our customers' programs to further increase online student enrollments. We are currently focusing our marketing activities to include more direct marketing to decision-makers in our target markets and continuing to strengthen our brand identity by participating in trade shows, conferences and executive speaking engagements. Finally, we hold online learning symposiums to build market awarenes s and identify qualified prospects.

Our technology strategy is to employ the best available software on stable and scalable platforms. All of our software products contain our proprietary software, which we have created using a combination of our custom software and widely-available software products we license from third parties. To create the custom components of our software, we employ Microsoft's most current and commonly used Internet programming technologies, allowing applications to communicate and share data over the Internet. We rely on copyrights, trademarks, trade secret laws, and employee and third-party non-disclosure agreements to protect our proprietary software.

Because our current business depends on our ability to host web-based software applications for our customers, one of our primary technical goals is to provide a highly reliable, fault tolerant system. To do so, we have made substantial investments in systems monitoring, fault handling, technology redundancy and other system uptime enhancements. For example, we continuously monitor our customers' websites and our own core systems. All of our primary servers contain fault-tolerant disk storage technology, backup network cards and power supplies which eliminate the possibility of a single point of failure in our servers and reduce downtime. Our database servers contain the latest clustering technology that uses a combination of scalable hardware and Microsoft software technologies. Finally, we maintain sophisticated "firewall" technology to prevent access by unauthorized users and to minimize known vulnerabilities to system security.

Our products are delivered to our customers from a network of centralized web servers. Our web servers are located in three commercial data centers, commonly known as web "server farms," which provide us with scalable, high bandwidth Internet connections. Our primary facility is co-located at ViaWest Internet Services, Inc. and our back-up facilities are located at eCollege's headquarters. Having multiple data centers provides us with the capability to survive a catastrophic failure of a data center. Our investment in our technology allowed us to deliver 99.97% internal system availability to our customers during 2001. We also believe that our target market is interested in highly reliable and scalable solutions for implementation of our software that can be locally-hosted and we expect that certain aspects of our software will be installed in our customers' data centers in the future.

The online learning market is quickly evolving and is subject to rapid technological change. The market is highly fragmented with no single competitor accounting for a dominant market share. We believe that the principal competitive factors in our market include:

• the ability to provide high quality online learning, meeting the needs of colleges, universities, K-12 schools and corporations, as well as students;
• adaptability, scalability and ability to integrate other technology-based products;
• reliability, with up-time being the significant measure of performance;
• the ability to offer a full complement of products, services, and hosting capabilities as a single-source provider;
• quality of implementation and support teams;
• pricing; and
• company reputation.

Our competitors vary in size and in the scope and breadth of the products and services they offer. Some colleges and universities construct online learning systems utilizing in-house personnel and create their own software or purchase software components from a vendor. Therefore, we face significant competition from a variety of companies including software companies with specific products for the college and university market and service companies who specialize in consulting, system integration and support in the eLearning industry. Other competitors in this market include a wide range of education and training providers. These companies use video, cable, correspondence, CD-ROM, computer-based training, and online training.

Due to seasonality inherent in the academic calendar, which typically consists of three academic terms, as well as our customers' plans for online campus and course development, we experience fluctuations in our sequential quarterly results. We typically have lower student fee revenue in the summer academic term which spans the second and third calendar quarters. Our operating expenses are relatively fixed in nature and seasonal fluctuations in revenue will result in seasonal fluctuation in our operating results. As a result, sequential quarter-to-quarter financial results are not directly comparable.

As of March 8, 2002 we employed 223 people: 100 employees engaged in customer service, academic services and implementation; 37 employees engaged in sales and marketing; 49 employees engaged in product development; and 37 employees engaged in general administrative and management, including staff to maintain our corporate network and business development. None of our employees are subject to any collective bargaining agreements, and we consider our relations with our employees to be good.

Our corporate headquarters are located in Denver, Colorado. The headquarters facility encompasses approximately 69,000 square feet and is leased under two separate leases which expire on June 30, 2002 and April 30, 2003, respectively. In February 2002, we signed a Letter of Intent to lease approximately 47,000 square feet of space at a new headquarters facility in Denver beginning in July 2002. This new facility will replace our existing facilities as our current office leases expire. We believe our planned facilities are adequate for our current requirements and that additional space can be obtained on commercially reasonable terms to meet future requirements.

The Company is exposed to asserted and unasserted legal claims encountered in the normal course of business. We believe that the ultimate resolution of any such matters will not have a material adverse effect on the operating results or the financial position of the Company.

During the fourth quarter of 2001, the Company did not submit any matters for a vote by the Company's stockholders.

eCollege's common stock has been traded on the NASDAQ Stock Market under the symbol "ECLG" since December 15, 1999. The following table sets forth the high and low sales prices of the Company's common stock for the periods indicated and are as reported on the NASDAQ Stock Market.

The closing price on March 8, 2002 was $2.90.

As of March 8, 2002, there were approximately 126 stockholders of record of our common stock.

The Company has never paid cash dividends on its stock, and is currently precluded from doing so under its borrowing agreements. The Company currently intends to retain all future earning for use in the operation of its business. Accordingly, the Company does not anticipate paying cash dividends on its common stock in the foreseeable future. The payment of any future dividends will depend upon, among other things, the terms of its borrowing agreements, future earnings, operations, capital requirements, the general financial condition of the Company, contractual restrictions and general business conditions.

On December 15, 1999, the Company consummated its initial public offering of its common stock. The registration statement relating to the offering (File No. 333-78365) was declared effective on December 14, 1999. The Company registered and sold a total, including the underwriter's overallotment in January 2000, of 5,500,000 shares with an aggregate registered price of $60,500,000. At the time of the initial public offering, 4,150,402 shares of the Company's Series A, B, and C preferred stock were converted to 4,150,402 shares of common stock.

The net offering proceeds to the Company were $56,265,000, of which $5,115,000 related to the exercise of 500,000 shares of the underwriters' over-allotment option on January 13, 2000. As of December 31, 2001, we have used approximately: $2,050,000 to repay bank debt; $35,683,000 to fund operations and provide working capital; and $5,940,000 to purchase computer equipment, software, furniture and fixtures. None of the net proceeds of the offering were paid directly or indirectly to any of our directors, officers, general partners or their associates, or persons owning 10% or more of any class of our equity securities. We expect to use the remainder of the proceeds for working capital and general corporate purposes.

The following table sets forth our summary financial data. You should read this information together with the Financial Statements and the Notes to those statements beginning on page 46 of this Annual Report on Form 10-K and the information under "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Please see Note 3 in the Notes to Financial Statements for further discussion of the change in accounting principle implemented by the Company effective January 1, 2000.

Note on Discontinued Operations: On March 24, 1997, the Board of Directors approved the disposition of ColoradoNet, an Internet Service Provider acquired in 1996, as the Company determined that such business did not complement its primary business focus of Internet education. Pursuant to an Asset Purchase Agreement dated May 30, 1997, the Company sold substantially all of the net assets of ColoradoNet to a third party for $200,000 in cash. The gain on the sale of this discontinued operation was $34,632. Total revenue for ColoradoNet was $137,055 in 1997.

Note on Change in Accounting Principle: Effective January 1, 2000, the Company adopted the Securities and Exchange Commission's Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements," which provides guidance on revenue recognition for public companies. As a result, the Company reviewed the terms of its current contracts and determined that the provisions of SAB 101 materially impact the Company's revenue recognition for our campus and course development revenue, effectively deferring the recognition of such revenue. Under SAB 101, campus development fees are recognized from the campus launch date through the end of the contract period or the expected life of the customer relationship, whichever is greater. The average recognition period is slightly less than three years. Annual fees for campus licenses, hosting and maintenance services are recognized on a straight-line basis over 12 months. Course development fees are recognized on a straigh t-line basis, generally over 12 months from the date the course is ordered by the customer, which approximates the period over which our services are provided. The 12-month period may change in the future based upon our experience of providing such services. The Company is in the process of re-evaluating this period, and expects that it may decrease in the future. Changes in our contract terms and expected contract life may also effect the period over which development fees are recognized.

The Company has accounted for the implementation of the guidelines of SAB 101 as a change in accounting principle effective January 1, 2000, and therefore has not restated the 1999 or prior years' financial statements. Effective January 1, 2000, the Company recorded a cumulative adjustment of $1,205,038 or $.07 per share, basic and diluted, for the change in accounting principle. The impact in 2000 of adopting SAB 101 was to increase net loss, before the cumulative effect of accounting change, by $1,120,296. Excluding the impact of the change, basic and diluted net loss per share for 2000, before the cumulative effect of accounting change, would have been $1.69.

The following table is a summary of our balance sheet data:

eCollege is a leading provider of technology and services that enable colleges, universities, K-12 schools, and corporations to offer an online environment for distance and on-campus learning. Our technology enables our customers to reach a large number of students who wish to take online courses at convenient times and locations. Our customers can also use our technology to supplement their on-campus courses with an online learning environment. Additionally, we offer services to assist in the development of online programs, including online course and campus design, development, management and hosting, as well as ongoing administration, faculty, instructor and student support, and evaluation and consulting services.

We were founded and began delivering our products and services in 1996. As of December 31, 2001, we have 249 customer contracts covering approximately 1,500 individual campuses. Since our inception our customers have had approximately 298,000 student enrollments in online courses or course supplements and have purchased or ordered more than 14,800 online courses and course supplements, of which approximately 4,100 included course development services. We have invested, and continue to invest, in our service capabilities by expanding our infrastructure. Our expenditures have exceeded our revenues since our inception and our accumulated losses have increased as a result of our growth strategy.

For the Spring, Summer and Fall 2001 academic terms, our customers had approximately 59,000, 30,000 and 58,000 student enrollments in online courses, respectively. Our customers also had approximately 6,000, 1,000 and 38,000 student enrollments in our lower priced course supplements during these respective academic terms. The number of customers for which we provide development, licensing and hosting services of their virtual campuses increased by approximately 15% during 2001. However, the number of orders for new online courses to be developed by our professionals decreased by approximately 54% in 2001. As we look at these important trends in our business, we expect to see continued growth in revenue in 2002, but at a slower rate than the growth we experienced in 2001 as a result of the following factors:

• We expect our customers' student enrollments for the Spring 2002 term to be significantly greater than in the Fall 2001 term. We have historically seen an increase in Fall enrollments over Spring, although due to issues associated with the terrorist attacks in September 2001 and other factors we did not experience that traditional growth pattern in 2001. We are uncertain if 2002 will return to our historical trend, however we do believe our customers' student enrollments will grow substantially in the long term;
• We expect strong overall growth in our customers' student enrollments in 2002. However, our pricing provides discounts to our customers as their programs grow. Therefore, while we expect our student fee revenue to show a strong increase, the increase will likely not be directly proportional to the anticipated increases in student enrollments;
• We expect to see our course development revenue decrease as more customers elect to self-develop courses. While we are planning to introduce new course development services, we do not expect these to have a significant impact until 2003; and
• Our grant from the National Institute of Standards and Technology, or NIST, concludes in April 2002. This will negatively impact our revenue, but will improve our gross margins, as we were only reimbursed for approximately 85% of our costs of research and development under the grant.

Any increases in our cost of revenue should be significantly less than our increases in revenue. We expect to see gross margins improve as student fees increase and we utilize existing capacity in our data center. We expect our operating expenses to decrease as a percentage of revenue in the future, as we utilize our current resources to support anticipated revenue growth.

Since inception, we have primarily generated revenue from three sources:

• enrollment fees for students enrolled in online courses;
• design and development, licensing and hosting services fees for online campuses; and
• design and development services fees to build online courses.

Our other revenue sources have primarily been professional consulting and research grant activities.

We enter into contracts with our customers to provide our online learning products and services. Our contracts typically have one to five year initial terms. Each contract specifies the type and price of the online campus purchased and the number and price of online courses purchased, as well as the fees for student enrollments and any other services purchased.

Our business model is based upon a number of factors, including increasing the acceptance of online learning among colleges, universities, K-12 schools and corporations, adding new customers, adding new schools and programs within existing customers, developing additional courses for our existing customers, increasing student enrollment in online courses, and selling new products and services to our clients. From our inception through December 31, 1998, the majority of our revenue was generated by development and design services fees for building campuses and courses, and, to a lesser extent, student fees. Campus and course development revenue continued to grow in 1999, 2000 and 2001, however student fees have become a larger percentage of total revenue as the number of online courses offered by our customers and the number of students enrolled in those courses continue to increase at an even greater pace. We expect this trend in our revenue mix to continue. As our pricing and product mix change, and as our customers' online programs grow and mature, we anticipate that student enrollments will increase, with resulting increases in student fee revenue. However, due to volume discounts that we offer and competitive pricing in our industry, the increases in student fee revenue will likely not be directly proportional to the anticipated increases in student enrollments.

We continue to improve our core online products: Teaching Solutions and Campus Solutions. Teaching Solutions includes eCourse, an online version of a traditional classroom course delivered to students who might not otherwise have access, and eCompanion, an online teaching supplement to enhance classroom-based courses. Campus Solutions complements most aspects of an institution's physical presence with an online dimension, incorporating the customer's unique look and feel into our campus portals. These online campuses allow a customer to access and manage online courses, and provide access to the online community and organizations. We also generate a smaller portion of our total revenue from additional sources under our Service Solutions, Content Solutions and Evaluation and Survey products. These additional sources include:

• Technical consulting, instructional design and faculty training and support services;
• eCourseEvaluation, a fully hosted application that supports evaluation administration, reporting and dissemination processes in a secure environment; and
• eCampusSurvey, for large-scale institutional research surveys.

In October 2001, we announced that our CampusPortal product completed a successful six-month beta trial. CampusPortal, the most comprehensive of our Campus Solutions tools, enables an institution to complement and connect most aspects of the physical campus online, including academic, administrative, social, and personal resources. We expect this product to supplement our other Campus Solutions products and therefore provide an alternative for customers seeking a larger-scale solution.

In late 2000, we released a new version of our course delivery software that includes more robust self-authoring tools, designed to allow customers to easily develop their own online courses without needing HTML or other programming knowledge. In 2001, we released a new version of our campus software that allows campus administrators to make certain changes to their virtual campuses without our assistance. Accordingly, we began offering new services for fees, including the complete design and development of an online course. This service includes complete design and development of the online course by eCollege, subject to our customer's approval, and is differentiated from our standard course development services where our customers lead the course design and development efforts, and we support their efforts. We are also offering course audit services, a comprehensive review and analysis of online courses, along with recommended modifications and improvements.

With the ease of use features and improved self-authoring functionality of these products, we have seen and may continue to see customers update their own online campuses and self-design and develop online courses, resulting in lower development revenue from our campus and course development services. However, we expect our customers to continue to add additional courses, which are either self-authored or developed by us, and for students to enroll in these additional courses (which are hosted by us), thereby increasing our student fee revenue.

In 2001, we began offering a new campus pricing model for access to our campus software for new customers exclusively offering distance education and for existing customers as their contracts come up for renewal. Under this program, we generally charge: 1) a one time set-up and design fee to implement an online campus, 2) an annual license fee for access to our software, and 3) an annual hosting fee. We also charge an annual maintenance fee to manage the online campus during the term of the agreement. We also began offering a new pricing model for our eCompanion product under which we charge an annual license fee. Historically, we have charged a per-enrollment student fee for such services. We feel that this new pricing model will create additional market opportunities, however we do not expect a significant change in the amount of revenue we generate from this product. Generally, revenue from these fees is recognized ratably over the related period.

In October 1998, the Company was awarded a grant of approximately $1,859,000 by NIST, a department of the U.S. Department of Commerce. The Company is entitled to receive payments under the grant as research related to automated course content creation and organization, and tutoring delivery systems is performed. Maximum payments under the grant, which expired in January, 2002, are $1,859,000. Pursuant to the terms of the NIST grant, work must be performed at a prescribed format and pace. We were granted an extension until April 2002 to complete the necessary documentation of our research. We believe we will be able to perform under the terms of the NIST grant, however, there is no assurance we will continue to receive payments under the NIST grant or that we will receive the maximum payments under the NIST grant. This revenue is recognized as the work is performed by the Company or its subcontractors. For the years ended December 31, 2001, 2000 and 1999, the Company recognized revenue of $808,907, $500,762 and $348,962, respectively. The Company recorded direct expenses associated with the grant within Cost of Revenue of $886,054, $521,254 and $422,481 for these same periods. We do not expect that revenue from such grants will constitute a significant portion of our revenue in the future, nor will we continue to incur costs associated with the current grant after Apirl 2002. We may apply for other grants in the future, although we have no present plans to do so.

Revenue recognition is a critical accounting policy for our business. As stated in Note 3 in the Notes to Financial Statements, we adopted the Securities and Exchange Commission's Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements," which provides guidance on revenue recognition for public companies, effective January 1, 2000. As a result, the Company reviewed the terms of its current contracts and determined that the provisions of SAB 101 materially impact the Company's revenue recognition for our campus and course development revenue, effectively deferring the recognition of such revenue. Under SAB 101, campus set-up, design and development fees are recognized from the campus launch date through the end of the contract period or the expected life of the customer relationship, whichever is greater. The average recognition period is slightly less than three years. Annual fees for campus licenses, hosting and maintenance services are recogniz ed on a straight-line basis over 12 months. Course development fees are recognized on a straight-line basis over 12 months from the date the course is ordered by the customer, which approximates the period over which our services are provided. The 12-month period may change in the future based upon changes in our experience of providing such services. We are in the process of re-evaluating this period, and expect that the recognition period may decrease in the future, resulting in revenue being recognized over a shorter period of time. Changes in our contract terms and expected contract life may also affect the period over which development fees are recognized.

Student fees are recognized on a straight-line basis over each course's specific academic term or over the length of the student technology license purchased by the customer, depending upon contract terms. All other revenue sources are recognized over the length of the service period (e.g., annual maintenance fees) or are recognized over the period of the performance of the service (e.g., consulting).

We accounted for the implementation of the revenue recognition guidelines of SAB 101 as a change in accounting principle effective January 1, 2000, and therefore have not restated the 1999 or prior years' financial statements. Modifications to generally accepted accounting principles for revenue recognition could result in unanticipated changes in our revenue recognition policies and such changes could significantly affect the timing of recognition of future revenue and results of operations.

Our cost of revenue consists primarily of employee compensation and benefits for account management, online campus development, course design, technical personnel, help desk, and sales commissions. Our cost of revenue also includes personnel expense, software and hardware costs, and other direct costs associated with maintaining our data center operations, our web servers and our network infrastructure. Non-marketing related costs of our Grant Program, as discussed below, are also included in cost of revenue. We also allocate a portion of our occupancy and infrastructure costs to cost of revenue.

For the year 2001, sales commissions were recorded as revenue was recognized, but were paid only after we had received an initial payment from the customer. Sales representatives also began receiving additional commissions for achieving significant goals such as signing large customers and increasing program offerings within current customers. Historically, we have recorded and paid sales commissions as contracts were signed and as revenue was recognized.

On April 1, 2000 we started to capitalize software development costs related to our CampusPortal product as required by AICPA's Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." As of March 31, 2001, we had capitalized $3,763,507 of costs related to development of this product. In April 2001 the CampusPortal software was determined to be ready for its intended use and we began amortizing the total cost over its expected useful life of three years. Accordingly, $940,877 of amortization expense has been recorded as of December 31, 2001 and is included in cost of revenue.

Realization of the capitalized software development costs is dependent upon generating revenue from the related software products and services during the useful life of such capitalized software. It is reasonably possible that a review of the recorded amount of capitalized software development costs in the future could indicate that they are impaired, and the amount of impairment could be significant. Additionally, the technology we use to support our customers can be subject to significant changes as new technology and software products are introduced into the marketplace by others. Because of the volatility of the technological environment, it is reasonably possible that a change in our technology strategy could result in a conclusion that all or a portion of the recorded balance is impaired.

We expect that our cost of revenue will continue to decline in the future as a percent of revenue. We anticipate experiencing this decline as we achieve operating efficiencies, since many of these costs do not increase in direct proportion to our revenue, and as our revenue mix changes to be more heavily weighted towards student and license fees which have a lower cost than revenue derived from our other service offerings.

We implemented a Grant Program in late 1999 designed to assist new and existing customers by increasing the quality and number of online courses they offer and the number of students pursuing online degrees. Seventy-two grants were awarded, at our discretion, to institutions based on demonstrated commitment to a quality online degree program, the number of current and potential students, the college or university's unique approach to online learning and other factors. We do not anticipate offering new grant awards.

Funds granted consist of both marketing funds and educational support funds. Marketing funds are reimbursed to customers based on demonstration of payment for approved marketing activities. These expenses are recorded as marketing expenses when it is estimated they are incurred by our customers to third parties. Educational support funds consist of faculty stipends and technology and travel funds, and are considered contract costs. To date, we have granted approximately $7.5 million, which consists of $1.7 million in marketing funds and $5.8 million in educational support funds. Pursuant to the terms of the grants, funds are paid to the grant recipients after they have provided evidence of payment for appropriate expenditures. Customer expenditures for our services are not considered reimbursable under terms of the grants. Reimbursements for marketing expenditures totaled $802,199 and $140,436 during the years ended December 31, 2001 and 2000, respectively. For the years ended December 31, 2001 and 2000, disbursements under the Grant Program of $2,675,306 and $889,299 were made primarily for faculty stipends to encourage the generation of digital course content and hardware technology purchases. The estimated remaining disbursements under the Grant Program for reimbursed marketing and educational support funds are $800,000 and $2.2 million, respectively, at December 31, 2001 and are expected to be paid during 2002.

If contract costs, including appropriate educational support funds, are in excess of the revenue guaranteed under the related agreement, such excess is expensed in the quarter in which the excess is first identified. For the year ending December 31, 1999, the Company recognized such a loss of $2,438,055. As we recognize course development revenue under these contracts, the grant loss accrual is reduced such that the gross margin related to this revenue is zero. This reduction is reflected in cost of revenue and was $1,207,570 and $954,886 for the years ended December 31, 2001 and 2000, respectively. The remaining estimated grant loss accrual at December 31, 2001 is $275,599 and is included in Grant Liabilities on the balance sheet. The determination of the grant loss requires management to make estimates and assumptions regarding the total amount of costs to be incurred. These estimates and assumptions may change and affect the reported amounts of the contingent liability on the date o f the financial statements and the reported amount of expenses during the reporting period. As contracts are completed, actual results could impact reported amount of expense in the current reporting period. We recorded $1,586,870, $1,461,978 and $2,438,055 of expenses related to educational support, before any reduction of the grant loss accrual, in 2001, 2000 and 1999, respectively.

As our product mix continues to change and diversify, we expect that the mix of our cost of revenue will change accordingly. Our investments in our infrastructure and personnel should be able to support future growth and with increased utilization, we have been able to achieve cost of revenue that is lower than our revenue. Since we expect our revenue to increase in the future while our cost of revenue decreases due to operating efficiencies and the expiration of Grant Program expense, we expect continued improvement in our gross margin.

Product development includes costs of maintaining, developing and improving our software products. These costs consist primarily of employee compensation and benefits, consulting fees, occupancy and depreciation expenses. We expect our development costs to remain at approximately the same level as in 2001 as we continue to develop new products to respond to competitive pressures and the needs of our customers.

The principal components of our selling and marketing expenses are employee compensation and benefits, advertising, industry conferences, and travel. Other significant components include marketing collaterals and direct mailings, consulting fees, occupancy and depreciation expenses.

Our Grant Program includes reimbursement of approved third party expenditures to our customers for marketing their online degree programs. These funds are recorded as marketing expense as we estimate that our customers incur them and we incur the obligation to reimburse them. We recorded $321,000 and $1,253,725 of marketing expenses associated with the Grant Program in 2001 and 2000, respectively.

We expect a slight decrease in total selling and marketing expenses in 2002 as we implement more focused and cost-effective selling techniques.

Our general and administrative expenses include accounting and finance; legal services; business development; corporate facilities; executive; and internal technical network administration and support. Employee compensation and benefits represent the most significant component of general and administrative expense. Other components include rent, depreciation, communications, professional and consulting fees, and stock-based compensation. We expect that our general and administrative expenses will not change significantly in absolute dollars in the year 2002.

We have incurred significant losses since our inception, resulting in an accumulated deficit of $73,485,398 as of December 31, 2001. We believe that our revenue growth will continue in the year 2002 primarily based upon growth in student fees. At the same time we intend to continue to make investments in technology which may involve the development, acquisition or licensing of technologies that complement or augment our existing services and technologies. Our selling and marketing expense should decrease slightly as a result of our focused strategy in 2002. We also intend to utilize our existing administrative resources and operating efficiencies to continue to support our business at slightly lower costs. Our operating loss decreased significantly during 2001 and we expect this trend to continue. We expect our earnings before interest, taxes, depreciation, and amortization of capitalized software costs and stock-based compensation to be slightly positive for the year 2002 and plan to realize operating profits in 2003, although there can be no guarantee thereof.

Revenue. Revenue increased 58% to $19,846,527 for the year ended December 31, 2001 from $12,539,470 for the year ended December 31, 2000. The increase in revenue is primarily due to an increase in the number of student enrollments in online courses. Student enrollments in eCourses increased 101% to approximately 147,000 from approximately 73,000 in the prior year. Student enrollments in our lower priced eCompanion course supplements increased to approximately 45,000 from approximately 1,000 in the prior year. Student fees represented $13,054,307 and $7,037,442 of total revenue for the years ended December 31, 2001 and 2000, respectively.

Campus and course development fees represented $4,416,453 and $4,325,430 of total revenue for the year ended December 31, 2001 and 2000, respectively. We recognized revenue from developing, licensing and hosting virtual campuses forof 173 different customers during 2001, up from the 150 customers that had virtual campuses in 2000. There were 2,581 new eCourses developed on our platform in 2001, 692 of which were developed by our professionals. This compares to 3,032 and 1,496, respectively in 2000. With the ease of use features and improved self-authoring functionality of our products, we have seen and may continue to see customers update their own online campuses and self-design and develop online courses, resulting in lower development revenue from our campus and course development services.

Other revenue includes professional consulting revenue of $824,818 and $483,394, and revenue from the NIST grant of $808,907 and $500,761, for the years ended December 31, 2001 and 2000, respectively.

Cost of Revenue. Cost of revenue increased to $13,839,799 for the year ended December 31, 2001 from $12,650,533 for the year ended December 31, 2000. Our cost of revenue increased primarily due to the amortization of $940,877 of software development costs related to our CampusPortal product previously capitalized and additional depreciation and occupancy costs related to cost of revenue of $880,640. We also had an increase in information technology expenses associated with hosting our customers' programs. The amount of expenses related to our Grant Program included in cost of revenue also increased by $124,892 to $1,586,870 from $1,461,978 for the years ended December 31, 2001 and 2000, respectively.

These increases were somewhat offset by decreases in personnel costs, as we were able to support our revenue growth through increased operating efficiencies. Our operations and account management personnel decreased to an average of 131 in 2001 from 157 during 2000, with most of the reductions coming in March 2001. Total cost of revenue was approximately 70% and 101% of total revenue for the years ended December 31, 2001 and 2000, respectively.

Gross Margin. We experienced a positive gross margin of $6,006,728, or 30% of revenue, for the year ended December 31, 2001 as compared to a negative gross margin of $111,063 for the year ended December 31, 2000. The favorable increase of $6,117,791 in gross margin was primarily due to the 85% increase in our student fees resulting from our increased student enrollments, which have a higher contribution margin than our other revenue sources, as well as improved utilization of our professional services staff and realization of operating leverage on our fixed expenses as our revenue increased.

Product Development. During the year ended December 31, 2001, we expanded and improved our Teaching Solutions product line, including the release of the next generation of our eLearning platform, eCollege AU. The new platform provides enhanced features with increased customization capabilities, usability and accessibility for our customers. Additionally, due to the significant investments we made in 2000 to improve our efficiency in developing online campuses and courses, we were able to reduce our overall product development costs in 2001. Product development expenses decreased $2,323,921 to $4,809,576 for the year ended December 31, 2001 from $7,133,497 for the year ended December 31, 2000. The decrease was primarily due to our decreased use of external consulting for product development during 2001. Staffing levels of our product development personnel remained consistent with the prior year, averaging 52 in 2001 and 53 in 2000. We also capitalized $622,395 of internal-use sof tware development costs related to our CampusPortal product during the year ended December 31, 2001, compared to the $3,141,112 capitalized during the year ended December 31, 2000. Therefore, we had a total of $5,431,971 and $10,274,609 in product development expenditures during 2001 and 2000, respectively.

Selling and Marketing. Selling and marketing expenses decreased to $7,147,317 for the year ended December 31, 2001 from $10,586,595 for the year ended December 31, 2000. The decrease was primarily due to decreases in advertising and marketing personnel salaries and benefits expense, as we averaged 16 and 24 marketing related employees during 2001 and 2000, respectively. Marketing costs associated with our Grant Program were $932,725 less than in the same period last year. External advertising expenses also decreased $903,186 during the year ended December 31, 2001, as we focused our marketing strategy on more efficient methods. The decrease in selling and marketing expenses also reflects decreases in amounts spent on marketing collaterals, trade show participation and other promotional activities. Our sales personnel decreased slightly to an average of 35 employees in 2001 from 39 in 2000.

General and Administrative. General and administrative expenses decreased to $6,717,781 for the year ended December 31, 2001 from $9,434,181 for the year ended December 31, 2000. The decrease was due in large part to a decrease in amortization of deferred compensation due to employee terminations, as well as decreases in executive compensation and severance, consulting services and other cost savings due to improved efficiencies in our administrative departments. Our executive and administrative personnel decreased to an average of 44 in 2001 from 54 during 2000, including the termination of our President and Chief Operating Officer.

Through December 31, 2001, we recorded aggregate deferred compensation totaling $4,444,202 in connection with the grant of stock options and restricted common stock to employees, officers, directors and former executives. The deferred charge is being amortized over the vesting period of such options or restricted stock, which ranges from 1 to 3 years. Of the total deferred compensation, $704,363 was amortized in the year ended December 31, 2001, while $1,191,142 was amortized in the year ended December 31, 2000. The majority of compensation expense related to such options is included in general and administrative expense. However, a portion of such compensation expense has been allocated to cost of revenue, selling and marketing expense and product development expense as appropriate. We expect the majority of the remaining $223,937 of deferred compensation recorded as of December 31, 2001 to be amortized during 2002.

Other General and Administrative Expense. Additional non-cash general and administrative expenses of $2,570,408 reflect the fair market value of fully vested options issued during the third quarter of 2000 to a non-employee investment partnership in exchange for the services of our Chief Executive Officer in lieu of salary, benefits and other compensation. This expense was not incurred during the year ended December 31, 2001.

Other Income (Expense). Interest and other income, which consists primarily of interest earnings on our cash and cash equivalents and short-term investments, decreased to $752,743 for the year ended December 31, 2001 from $2,472,600 for the year ended December 31, 2000. This decrease is primarily due to a decrease in cash invested as a result of the use of such cash in our operations. Interest expense decreased slightly during 2001 compared to 2000. Other expense of $151,463 is primarily due to the net realized losses on sales of our short-term investments during the year ended December 31, 2001. As a result of a change in our investment policy during the third quarter of 2001 to limit risk exposure, all of our invested cash is in money market accounts as of December 31, 2001, therefore we do not anticipate incurring such losses in the future.

Net loss. Our net loss before the cumulative effect of a change in accounting principle decreased to $12,336,598, or $0.76 per share, from $27,681,984, or $1.76 per share, for the year ended December 31, 2001, as compared with the year ended December 31, 2000. Effective January 1, 2000, the Company recorded a $1,205,038 one-time cumulative adjustment in connection with the adoption of SAB 101. Therefore, our net loss decreased to $12,336,598, or $0.76 per share, from $28,887,022, or $1.83 per share, for the years ended December 31, 2001, as compared with the year ended December 31, 2000.

Revenue. As previously discussed, in response to the Securities and Exchange Commission's Staff Accounting Bulletin No. 101 issued in December 1999, we have changed our revenue recognition of campus and course development fees. As a result, total revenue increased to $12,539,470 for the year ended December 31, 2000 from $4,650,818 in 1999, or 170%. If this accounting change had not been implemented January 1, 2000, the revenue for the year ended December 31, 2000 would have been $14,169,714 under the percent complete method, which is the same method used to recognize revenue in 1999. Therefore, on a comparable basis, 2000 revenue would have increased $9,518,896 or 205% versus 1999. Increases in revenue are due to increased student enrollment in online courses, as well as an increased number of online campuses and courses developed.

Student fees represented $7,037,442 and $2,300,111 of total revenue for the years ended December 31, 2000 and 1999, respectively. Campus and course development fees and other revenue represented $5,502,028 and $2,350,707 of total revenue, respectively, for these same periods. If the accounting change had not been implemented January 1, 2000, the campus and course development and other revenue for 2000 would have been $7,132,272 under the percent complete method. Revenue from the NIST grant was $500,762 and $348,962 for the years ended December 31, 2000 and 1999, respectively and is included in other revenue.

Cost of Revenue. Cost of revenue increased to $12,650,533 for the year ended December 31, 2000 from $10,381,390 in 1999, or 22%. As previously discussed, we have changed our revenue recognition of campus and course development fees in accordance with SAB 101. As a result, the amount of expenses related to our Grant Program included in cost of revenue decreased by $509,947. If the change in accounting principle had not been implemented as of January 1, 2000, the total cost of revenue for the year ended December 31, 2000 would have been $13,160,480 under the percent complete method. Therefore, on a comparable basis, 2000 cost of revenue would have increased $2,779,090 or 27% over 1999.

Cost of revenue increased primarily due to additional personnel costs to support revenue growth. Our operations and account management personnel increased from an average of 107 in 1999 to 157 during 2000. Costs associated with expanding and improving our web servers, database architecture, and network infrastructure increased by $1,514,513 over 1999. Depreciation and occupancy costs related to cost of revenue increased by $657,405. These increases were partially offset by a decrease of $976,077 in the amount of grant expense and a $644,988 decrease in sales commissions. Total cost of revenue was approximately 100% and 223% of total revenue for the years ended December 31, 2000 and 1999, respectively.

Gross Margin. We experienced a negative gross margin of $111,063 for the year ended December 31, 2000 as compared to a negative gross margin of $5,730,572 in 1999 for a 98% improvement. Our gross margin would have been a positive $1,009,234, or 7% of total revenue, had the accounting change for SAB 101 not been implemented January 1, 2000.

Excluding the expense of our Grant Program, we would have recognized a positive gross margin of $1,350,915 for the year ended December 31, 2000 compared to a negative gross margin of $3,292,517 for the year ended December 31, 1999. Our gross margin for 2000 would have been a positive $2,829,506, excluding the Grant Program and had the accounting change for SAB 101 not been implemented January 1, 2000. The improvement in gross margin this year was primarily due to the increase in our student fees, which have a higher contribution margin, improved utilization of our professional services staff and realizing operating leverage on our fixed expenses as our revenues increase.

Product Development. For the year ended December 31, 2000, we made substantial investments in expanding and improving our Teaching Solutions product. We also incurred significant expenses in developing tools to improve our efficiency in developing online campuses and courses. Accordingly, product development expenses increased to $7,133,497 for the year ended December 31, 2000 from $2,255,562 for the year ended December 31, 1999. The number of product development personnel increased to 81 at December 31, 2000 from 39 at December 31, 1999. We also incurred an increase of $453,241 in occupancy and depreciation charges allocated to development activities. On April 1, 2000, we started to capitalize software development costs related to our CampusPortal product. As of December 31, 2000, we have capitalized $3,141,112 in development costs, which will be amortized through cost of revenue as we begin to recognize revenue associated with this new product. Therefore, we had a total of $10 ,274,609 in product development expenditures during 2000.

Selling and Marketing. Selling and marketing expenses increased to $10,586,595 for the year ended December 31, 2000 from $7,242,939 for the year ended December 31, 1999.

The increase was primarily due to an increase in marketing costs associated with the Grant Program of $1,253,725 for 2000 from $0 in 1999. The increase in selling and marketing expenses also reflects increases in the number of selling and marketing personnel, additional trade show participation and other promotional activities, and increases in travel expense. Our selling and marketing personnel increased from an average of 49 in 1999 to 64 in 2000. We also incurred additional marketing activity costs of $224,088 in 2000 associated with enhancing our corporate website, as well as an increase of $440,477 in occupancy and depreciation charges allocated to selling and marketing activities.

General and Administrative. General and administrative expenses increased to $9,434,181 for the year ended December 31, 2000 from $5,929,810 for the year ended December 31, 1999. Expenses increased in the form of additional salaries, consulting, professional fees, and travel expenses as we built and developed our management team and operating infrastructure. We also incurred an increase of $433,546 in occupancy and depreciation charges allocated to general and administrative activities. Additional general and administrative expenses for 2000 include severance pay of approximately $250,000 for the former chief executive officer. In addition, outside consulting, professional fees, recruiting fees and travel expenses increased, reflecting our expanded business activities. The number of general and administrative personnel as of December 31, 2000 was 53, consisting of: 28 employees in the Corporate Services area which includes finance, human resources, legal, facilities and travel; 13 employees in Systems Administration; and 12 employees in Executive and Business Development. The number of employees at December 31, 1999 was 51.

Through December 31, 2000, we recorded aggregate deferred compensation totaling $4,139,631 in connection with the grant of options to employees. The deferred charge is being amortized over the vesting period of such options, which ranges from 2 to 3 years. Of the total deferred compensation, $1,191,142 was amortized in the year ended December 31, 2000 and $1,019,771 was amortized during the year ended December 31, 1999. The majority of compensation expense related to such options is included in general and administrative expense. However, a portion of such compensation expense has been allocated to cost of revenue, selling and marketing expense and product development expense as appropriate.

Other General and Administrative Expense. Additional non-cash general and administrative expenses of $2,570,408 reflect the fair market value of options issued during the third quarter of 2000 to a non-employee investment partnership in exchange for the services of our Chief Executive Officer in lieu of salary, benefits and other compensation.

Other Income (Expense). Interest and other income, which consists primarily of interest earnings on our cash, cash equivalents and short-term investments, increased to $2,472,600 in 2000 from $374,566 in 1999. This increase is primarily due to an increase in cash as a result of proceeds from our initial public offering in the fourth quarter of 1999 and the exercise of the underwriters' over-allotment option in the first quarter of 2000 of $51,150,000 and $5,115,000, respectively. Interest expense associated with our capital lease facility and interest resulting from amortization of warrants and prepaid fees associated with establishing the line of credit in 1999 was $317,439 in 2000 compared to $23,110 in 1999.

Net loss. For the year ended December 31, 2000, the Company incurred a net loss before the cumulative effect of a change in accounting principle of $27,681,984, and a total net loss after the cumulative effect of a change in accounting principle of $28,887,022, as compared to a net loss of $20,807,427 in 1999. Effective January 1, 2000, the Company recorded a $1,205,038 one-time cumulative adjustment in response to SAB 101. If this accounting change had not been implemented January 1, 2000, the net loss for the year ended December 31, 2000 would have been $26,561,688, or $1.69 per share. Our net loss applicable to common stockholders increased to $28,887,022, or $1.83 per share, from $23,225,206, or $4.12 per share, for the years ended December 31, 2000 and 1999, respectively. The net loss applicable to common stockholders in 1999 includes the impact of dividends and accretion related to our mandatorily redeemable convertible preferred stock.

Income taxes consist of federal, state and local taxes. We have incurred significant losses since our inception, resulting in net tax loss carryforwards. And while we believe that our revenue growth will continue in the year 2002, we do not expect to realize net taxable income in the foreseeable future, and therefore we expect to generate additional net operating loss carryforwards. However, utilization of such prospective net operating loss carryforwards may be subject to certain limitations. Significant changes in ownership such as our public offering in 1999 may also limit our ability to utilize our net operating losses. In addition, income taxes may be payable during this time due to operating income in certain tax jurisdictions which cannot be offset by operating loss carryforwards. If we achieve net taxable income and the net operating loss carryforwards are not available, because they have been exhausted or have expired, we may experience significant tax expense. We have rec orded no provision or benefit for federal and state income taxes because we incurred net operating losses from inception through December 31, 2001. As of December 31, 2001, we had approximately $65,000,000 of net operating loss carryforwards available to offset future taxable income which expire in varying amounts beginning in 2011. We have established a valuation allowance against the entire amount of our deferred tax asset because our management has not been able to conclude that it is more likely than not that we will be able to realize the deferred tax asset, due primarily to our history of operating losses.

Our cash and cash equivalents increased $4,333,543 to $16,625,705 at December 31, 2001 from $12,292,162 at December 31, 2000. The increase from December 31, 2000 was primarily due to cash proceeds from sales of marketable securities of $22,129,036 and cash provided by financing activities of $653,969 (including net borrowings under our line of credit of $500,000 in 2001), partially offset by cash used in operating activities of $11,254,840 and purchases of marketable securities of $5,998,788. Overall, our cash, cash equivalents and available-for-sale securities decreased $11,789,156 to $16,625,705 at December 31, 2001 from $28,414,861 at December 31, 2000.

We have financed the majority of our operations through the issuance of equity securities. We have sold common stock and preferred stock generating aggregate proceeds of $85,102,508 from inception through December 31, 2001, including our initial public offering.

In January 2000, we received net proceeds of $5,115,000 from the exercise of the underwriters' over-allotment option. The amount received was net of the underwriting offering expenses. In May 2000, we received $588,208 from the exercise of warrants for common stock.

We leased $2,244,057 of equipment under a $2,500,000 sale-leaseback agreement entered into in the second quarter of 2000. At the end of the initial 36-month lease term, we are required to purchase the equipment for 8.5% of the amount drawn. As of December 31, 2001, we have leased $455,432 of equipment under a $1,500,000 sale-leaseback agreement entered into in the second quarter of 2001, and therefore have $1,044,568 available under the new agreement. At the end of the initial 36-month lease term, we are required to purchase the equipment for 8.25% of the amount drawn. These leases are treated as capital leases for accounting purposes. As of December 31, 2001 and 2000, the Company leased $2,699,489 and $2,244,057 of equipment, respectively. Accumulated depreciation on leased equipment was $1,004,772 and $262,990 as of December 31, 2001 and 2000, respectively. Our total capital lease obligations, including interest, as of December 31, 2001 and 2000 were $2,040,235 and $2,428,819, respec tively.

We have a $2,500,000 revolving line of credit with a maturity date of March 30, 2002 which we expect to renew through March 2003. The line of credit is secured by all of our assets. The interest rate on the revolving line of credit is an adjustable rate of prime, which was 4.75% as of December 31, 2001, plus 1.25%. In December 2001, the Company drew $2,500,000 from the revolving line which remained outstanding at December 31, 2001. The entire $2,500,000 draw was subsequently repaid in January 2002. In December 2000, the Company drew $2,000,000 from the revolving line which remained outstanding at December 31, 2000. The entire $2,000,000 draw was subsequently repaid in January 2001.

The lease agreements and line of credit contain certain financial covenants. We were out of compliance with the quick ratio covenant as of June 30, 2001. However, we received a written waiver of the covenant as of June 30, 2001 and the covenant was subsequently amended during the third quarter of this year to exclude deferred revenue in the calculations. We were out of compliance with the maximum loss covenant as of December 31, 2001. We received a written waiver of the covenant in March 2002.

In connection with the bank line of credit, we issued warrants to the lender for 30,000 shares of common stock. The exercise price of the warrants is $11.00, the offering price of common shares sold in connection with our initial public offering on December 15, 1999. The value of the warrants at the date of issuance was $172,200, which was recorded as a deferred financing cost and was amortized to interest expense over the original term of the revolving line of credit.

We used the net proceeds from our equity financings for funding capital expenditures and supporting sales, marketing, product development activities, expanding our data center, investing in short-term marketable securities with maturities of one year or less, enhancing new accounting and financial information systems and for other expenses associated with our growth.

We believe that our current cash and cash equivalents, and working capital together with cash generated from operations, are sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. Because we expect to incur net losses during 2002, our cash and cash equivalents will decrease as necessary to fund such losses.

Although at this time our plans do not require us to raise additional capital, in the future, we may desire to raise additional capital. In the event that we need to raise additional capital, we cannot assure that additional funds will be available or that funds will be available on terms favorable to eCollege. Our need to raise additional funds could also directly and adversely affect our stockholders' investment in our common stock. 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, stockholders may experience dilution in the value of their shares. Stockholders may also experience dilution in the value of their shares if we issue additional shares of stock and receive funds from the exercise of outstanding stock options.

We have experienced aggregate net losses from operations of $72,072,784 since our inception in July 1996. These losses consist of $422,075 for the period from inception to December 31, 1996, and $585,800, $7,402,336, $21,158,883, $29,835,744 and $12,667,946 for the years ended December 31, 1997, 1998, 1999, 2000 and 2001, respectively. We may never achieve profitability, and if we do, we may not be able to sustain profitability. In 2000 we invested heavily to develop our services and establish our development, sales and marketing capabilities, in the belief that our success depends, among other things, on our ability to develop new relationships with colleges, universities and other potential clients and maintain existing customer relationships. Although we continue to hold this belief, we reduced our sales staff and marketing expenditures in March 2001 to achieve cost savings and greater operating efficiency. If we are unable to continue to increase our revenues with this reduced sales staff and marketing budget, our business and financial results will be materially and adversely affected.

Because of the emerging nature of the online learning market, we may be unable to accurately forecast our revenues. The sales cycle for our products and services varies widely and it is difficult for us to predict the timing of particular sales, the rate at which online campuses, courses and/or course supplements will be implemented or the number of students who will enroll in the online courses. The cancellation or delay of even a small number of campus and/or course implementations could cause our revenues to fall short of projections. Since most of our costs are fixed and are based on anticipated revenue levels, small variations in the timing of revenue recognition could cause significant variations in operating results from quarter-to-quarter. As a result, we believe that quarter-to-quarter comparisons of our sales and operating results are not necessarily meaningful, and that such comparisons may not be accurate indicators of future performance. Since we may be unable to adjus t spending in a timely manner to compensate for any unexpected revenue shortfall, any significant decrease in revenue would likely have an immediate material adverse effect on our business and financial results. Due to the change in our method of recognizing revenue from campus and course development fees as of January 1, 2000, these fluctuations in our revenues have diminished, but still occur due to the significance of our student fee revenue. In addition, if our future operating results are below the expectations of securities analysts or investors, our stock price may decline.

The online learning market is quickly evolving and is subject to rapid technological change. Although the market is highly fragmented with no single competitor accounting for a dominant market share, competition is intense. Competition is most intense from colleges' and universities' internal information technology departments. Some colleges and universities construct online learning systems utilizing in-house personnel and creating their own software or purchasing software components from a vendor. We also face significant competition from a variety of companies including other companies which seek to offer a complete solution including software and services; software companies with specific products for the college and university market; systems integrators; and hardware vendors. Other competitors in this market include a wide range of education and training providers. These companies use video, cable, correspondence, CD-ROM, computer-based training, and online training.

We believe that the level of competition will continue to intensify as current competitors increase the sophistication of their offerings and as new participants enter the market. Many of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do and may enter into strategic or commercial relationships with larger, more established and well-financed companies. Certain competitors may be able to secure alliances with customers and affiliates on more favorable terms, devote greater resources to marketing and promotional campaigns and devote substantially more resources to systems development than we can. In addition, new technologies and the expansion of existing technologies may increase the competitive pressures we face. Increased competition may result in reduced operating margins, as well as loss of market share and brand recognition. We may not b e able to compete successfully against current and future competitors, and competitive pressures we face could have a material adverse effect on our business and financial results.

Our success depends on the performance of senior management and on our ability to continue to attract, motivate and retain highly qualified technical professionals. The loss of the services of a number of senior management personnel or highly qualified technical professionals could have a material adverse effect on us. Competition for highly skilled employees is intense in our line of business, and we may not be successful in attracting and retaining these personnel.

Over the past few years we have implemented several changes in our business model to increase revenues, and we continue to develop new pricing structures to meet the needs of our customers. We cannot predict whether ongoing refinements we make to our business model will be accepted by our existing customer base or by prospective customers. Under our current model, customers pay a one-time set-up fee at the time they enter into a contract with us and a license fee, hosting fee and maintenance fee on an annual basis over the length of their contract. We cannot predict whether our current pricing model will continue to be accepted by our existing customers or whether prospective customers will be deterred from contracting with us in part because of these terms. We therefore cannot predict whether these terms will achieve or maintain revenue growth in the future. Moreover, we may continue to make changes to our business model to attempt to achieve greater efficiency or to respond to ch anges in our evolving industry. We cannot predict whether these future changes will impact our business negatively.

Revenue from a small number of customers has comprised a substantial portion of our revenue and is expected to represent a substantial portion of our revenue in the foreseeable future. In 2001, our top 20 customers accounted for approximately 49% of our revenue. In 2000, our top 20 customers accounted for approximately 51% of our revenue. Any cancellation, deferral or significant reduction in work performed for these principal clients, or failure to collect accounts receivable from these principal clients, could have a material adverse effect on our business, financial condition and results of operations.

The sales cycle between initial customer contact and signing of a contract varies widely, reflecting differences in our customers' decision-making processes and budget cycles. As a result, we may not be able to forecast the timing and amount of specific sales and resulting revenue. Our customers typically conduct extensive and lengthy evaluations before committing to our system. Delays in the sales cycle can result from, among other things, changes in a customer's budget, the need for approval from both the customer's administration and faculty, and the need to educate customers as to the potential applications of and cost savings associated with our services. We generally have little or no control over these factors, which may cause a potential customer to favor a competitor's products and services, or to delay or forego purchases altogether. The delay in or failure to complete planned transactions could have a material adverse effect on our business and financial results and coul d cause our financial results to vary significantly from period to period.

A substantial portion of our revenues is derived from enrollment fees for each enrollment in an online course that we implement. Generally, we do not market the eCollege brand directly to students and therefore have little influence on the number of students that enroll. We are therefore dependent on the institutions and organizations that purchase our products and services to market to individual students. The failure of these third parties to effectively attract, maintain, and increase student enrollments could have a material adverse effect on our business and financial results.

The market for our products and services is rapidly evolving in response to ongoing developments relating to online technology. The market is characterized by evolving industry standards and customer 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. 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 customer confidence and adversely affecting our business.

The continuing and uninterrupted performance of our network infrastructure and computer systems is critical to our success. Any system failure that causes interruptions in our ability to provide services could reduce customer satisfaction and, if sustained or repeated, would reduce the attractiveness of our technology and services to our customers and their students. An increase in the number of students online through our servers could strain the capacity of our software or hardware, which could lead to slower response times or system failures. We periodically test our user capacity by simulating load capacity based on our student enrollment. To the extent we do not successfully address any capacity constraints, such constraints would have a material adverse effect on our business and financial results.

Our operations are dependent upon our ability to protect our computer systems against damage from fire, power loss, telecommunications failures, vandalism and other malicious acts, and similar unexpected adverse events, including the consequences of terrorist attacks. In addition, the failure of our telecommunications provider or our network backbone provider, which provides us with our Internet connection, to provide the data communications capacity and network infrastructure in the time frame we require could cause service interruptions or slower response times. Despite precautions we have taken, unanticipated problems affecting our systems have from time to time in the past caused, and in the future could cause, interruptions or delays in the delivery of our products and services. Any damage or failure that interrupts or delays our operations could have a material adverse effect on our business and financial results.

Our success depends on our ability to provide superior network security protection and the confidence of our customers in that ability. Our system is designed to prevent unauthorized access from the Internet and, to date, our operations have not been affected by security breaks; nevertheless, in the future we may not be able to prevent unauthorized disruptions of our network operations, whether caused unintentionally or by computer "hackers." Due to the sensitive nature of the information contained on the websites hosted by us, such as students' grades, our websites may be targeted by hackers. As such, disruptions may result in liability to us and harm to our customers, and our failure to prevent such disruptions would have a material adverse effect on our business and financial results.

Our success depends, in part, on our ability to protect our proprietary rights and technology, such as our trade and product names, and the software included in our products. We rely on a combination of copyrights, trademarks, trade secret laws, and employee and third-party nondisclosure agreements to protect our proprietary rights. Despite our efforts to protect these rights, unauthorized parties may attempt to duplicate or copy aspects of our services or software or to obtain and use information that we regard as proprietary. Policing unauthorized use of the software underlying our services is difficult, and while we are unable to determine the extent to which piracy of our software exists, software piracy in general will likely be a persistent problem. In addition, the laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. As a consequence, effective trademark, service mark, copyright, and trade secret protection m ay not be available in every country in which our products and services are made available. Our failure to meaningfully protect our intellectual property could have a material adverse effect on our business and financial results.

We may from time to time encounter disputes over rights and obligations concerning intellectual property. These disputes could lead to litigation, which may be time-consuming and costly (even if successful), 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 on our business. Such royalty or licensing agreements, if required, may not be available on acceptable terms or at all. Although we believe that our intellectual property rights are sufficient to allow us to market our existing services without incurring liability to third parties, we might not prevail in such disputes. Failure to prevail in one or more such disputes could impair our right to market our services, which, in turn, could have a material adverse effect on our business and financial results.

Through our relationships with educational institutions and educators we understand that some academics and educators are opposed to online learning in principle. They also have expressed concerns regarding the perceived loss of control over the education process that can result from the outsourcing of online campuses and courses. Some of these critics, particularly college and university professors, have the capacity to influence the market for our services, and their opposition could have a material adverse impact on our business and financial results.

The market for online learning is relatively new and emerging. Our success depends upon colleges, universities and other educational organizations adopting online learning. Although we have entered into contracts with some colleges and universities, these colleges and universities may not continue to use the online learning products and services we provide. Further, given their relatively early entry into the market for online learning, the colleges and universities with which we have contracts are likely to be less risk-averse than most colleges and universities. Accordingly, the rate at which we have been able to enter into contracts with colleges and universities in the past may not be indicative of the rate at which we will be able to enter into contracts in the future. Any failure of online learning to gain continuing market acceptance would have a material adverse effect on our business and financial results.

The market price of our common stock is likely to be volatile and could be subject to significant fluctuations in response to factors such as the following, some of which are beyond our control: quarterly variations in our operating results; operating results that vary from the expectations of securities analysts and investors; changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; changes in market valuations of other online service companies; future sales of our common stock; stock market price and volume fluctuations; and other risk factors described in this Form 10-K. Moreover, our stock is thinly traded, and we have a relatively small public float.

Domestic and international stock markets often experience extreme price and volume fluctuations. These fluctuations, as well as general political and economic conditions, such as a recession or terrorist attacks or interest rate or currency rate fluctuations, may adversely affect the market price of our common stock. The market prices for stocks of many Internet related and technology companies have historically experienced extreme price fluctuations that appeared to bear no relationship to the operating performance of these companies. These market prices are subject to wide variations.

We May Need Additional Capital In The Future And It May Not Be Available On Acceptable Terms

Although at this time our plans do not require us to raise additional capital, we may seek to raise additional capital in the future. The circumstances that could cause us to consider raising additional capital include acquisitions. In the event that we need to raise additional capital, we cannot assure that additional funds will be available or that funds will be available on terms favorable to us. Our inability to raise additional capital on acceptable terms in a timely manner could have an adverse effect on our business and our financial position. 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 our stockholders' investment in our common stock. 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 issuin g additional shares of stock, stockholders may experience dilution in the value of their shares.

Although we have no present agreement or understanding relating to any material acquisition or investment, from time to time we have had discussions with companies regarding our acquiring, or investing in, their businesses. If we buy a company, we could have difficulty in assimilating its operations, or assimilating and retaining its key personnel. These difficulties could disrupt our ongoing business and distract our management and employees. Also, acquisitions may result in a variety of accounting charges which would increase our reported expenses, including impairment of goodwill and the write off of acquired in-process research and development. Furthermore, we may incur debt or issue dilutive equity securities to pay for any future acquisitions or investments. As a result, any future business acquisitions or investments could have a material adverse effect on our business and financial results.

We are increasing our presence in many states across the country. Due to this increased presence, we may be subject to additional tax laws and government regulations which may adversely affect our future operating results. Our violation of any state statutes, laws or other regulations, could have a material adverse effect on our business and financial results. In addition, it is possible that laws and regulations may be adopted with respect to the Internet, relating to user privacy, content, copyrights, distribution, and characteristics and quality of products and services. The adoption of any additional laws or regulations may decrease the popularity or expansion of the Internet, and may cause us to incur unanticipated compliance costs. A decline in the growth of the Internet could decrease demand for our products and services and increase our cost of doing business. We cannot predict the impact, if any, that future regulation or regulatory changes may have on our business.

Our revenues are subject to fluctuation as a result of general economic conditions. A significant portion of our revenues are derived from the sale of products and services to colleges and universities. Should current weak economic conditions continue or worsen, these organizations may not increase or may reduce their expenditures, which could have an adverse effect on our business.

Factors influencing the financial condition of security issuers may impact their ability meet their financial obligations and could impact the realizability of our security portfolio. Our short-term investment portfolio is managed on a discretionary basis by a third party, subject to our investment policy. The Company's current investment policy requires that its investment portfolio be limited to investment securities of less than one year in maturity. As of December 31, 2001 all of our invested cash is in money market accounts, however, in the event our investment policy changes, we could invest cash in securities which are less liquid and subject to more market risk.

A component of our growth strategy is to expand our presence in select foreign markets. It may be costly to establish international operations, promote our brand internationally, and develop localized products and support. Revenue from international activities may not offset the expense of establishing and maintaining these foreign operations. In addition, we may not be successful in marketing and distributing our products due to our limited experience in these markets.

Our business and operating results are subject to uncertainties arising out of the terrorist attacks on the United States of America in September 2001. These uncertainties include the potential worsening or extension of the current global economic slowdown and the economic consequences of military action or additional terrorist activities. While the recent terrorist attacks have not had a material impact on our financial position or results of operations to date, any future attacks or events arising as a result of the attacks, such as interruptions to the international telecommunications network or the Internet, could have a material impact on our business.

In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). In accordance with an amendment subsequently issued in 1999, the Company was required to adopt SFAS No. 133 effective January 1, 2001. To date, we have not entered into any arrangements that would fall under the scope of SFAS No. 133, and therefore the adoption of SFAS No. 133 has not had an impact on our financial statements.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS No. 141"). SFAS No. 141 addresses financial accounting and reporting for business combinations. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001, and for all business combinations accounted for under the purchase method initiated before but completed after June 30, 2001. In addition, in June 2000 the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and applies to all goodwill and other intangibles recognized in the financial statements at that date. The adoption of these standards is not expected to have an impact on our financial position or results of operations. However, any business combinations initiated from this point forward will be impacted by these two standards.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Asset." This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This statement applies to recognized long-lived assets of an entity to be held and used or to be disposed of. This statement does not apply to goodwill, intangible assets not being amortized, financial instruments, and deferred tax assets. This statement requires an impairment loss to be recorded for assets to be held and used when the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. An asset that is classified as held-for-sale shall be recorded at the lower of it s carrying amount or fair value less cost to sell. We are is required to adopt this statement for the first quarter of 2002. We do not believe that this statement will materially impact our results of operations.

In April and July 2001, the Emerging Issues Task Force ("EITF") reached a consensus on two issues within Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products" ("EITF 00-25"). EITF 00-25 was subsequently codified along with other related EITF issues into EITF Issue No. 01-09, "Accounting for Consideration Given by a Vendor or a Reseller of the Vendor's Products" ("EITF 01-09"). Among other issues, EITF 01-09 addresses whether consideration from a vendor to a reseller of the vendor's products is (a) an adjustment of the selling prices of the vendor's products and, therefore, should be deducted from revenue when recognized in the vendor's income statement or (b) a cost incurred by the vendor for assets or services received from the reseller and, therefore, should be included as a cost or an expense when recognized in the vendor's income statement. Under our Grant Program described in the notes to our financial statements, we have historically accounted for our grant payments to institutions as costs of revenue or operating expenses in our income statement. We are currently evaluating EITF 01-09 and are in the process of determining the impact EITF 01-09 will have on our income statement classifications, if any. If it is determined that EITF 01-09 does impact the Company's financial statements, we are required to adopt EITF 01-09 for financial statements presented for periods beginning after December 15, 2001, and financial statements for prior periods presented for comparative purposes would be reclassified to comply with the income statement classification requirements of EITF 01-09.

Due to seasonality inherent in the academic calendar, which typically consists of three academic terms, as well as our customers' plans for online campus and course development, we experience fluctuations in our sequential quarterly results. We typically have lower revenue in the summer academic term which spans the second and third calendar quarters. Our operating expenses are relatively fixed in nature and seasonal fluctuations in revenue will result in seasonal fluctuation in our operating results. As a result, sequential quarter-to-quarter financial results are not directly comparable.

In view of the rapidly evolving nature of our business and our limited operating history, we believe that our revenue and other operating results should not be relied upon as indications of future performance. The following summarizes selected quarterly information with respect to the Company's operations for the last eight fiscal quarters. Amounts are in thousands, except per share data.

Market risk represents the risk of loss that may impact our financial position, operating results or cash flows due to adverse changes in financial market prices and rates. The Company is, or may become, exposed to market risk in the areas of changes in United States interest rates and changes in foreign currency exchange rates as measured against the United States dollar. These exposures are directly related to our normal operating and funding activities. Historically and as of December 31, 2001, we have not used derivative instruments or engaged in hedging activities.

Additionally, the Company does not have significant exposure to changing interest rates on invested cash, which was $15,568,615 at December 31, 2001. Historically we have invested available cash in money market accounts, certificates of deposit and investment grade commercial paper that generally had maturities of three months or less, as well as debt securities of United States government agencies and corporate bonds. Our short-term investment portfolio is managed on a discretionary basis by a third party, subject to our investment policy. The Company's investment policy requires that its investment portfolio be limited to investment securities of less than one year in maturity. Furthermore, as a result of a change in the Company's investment strategy during the third quarter of 2001 to limit risk exposure, all of our invested cash is in money market accounts as of December 31, 2001. As a result, the interest rate market risk implicit in these investments at December 31, 2001, is low. However, factors influencing the financial condition of security issuers may impact their ability meet their financial obligations and could impact the realizability of our security portfolio. We have not undertaken any other interest rate market risk management activities.

Included in the results of operations for the year ending December 31, 2001 are net realized losses of $151,193. These losses are primarily due to the $171,627 loss sustained upon the sale of our investment in a commercial bond issued by Southern California Edison. Due to certain circumstances related to the State of California's regulatory environment, the fair value of our investment in the Southern California Edison bond had declined from its original purchased cost of $1,276,750, and we believed that the future value of these bonds would continue to be uncertain. Therefore, the Company elected to sell these bonds in September 2001 to reduce the risk in our investment portfolio.

A hypothetical ten percent change in market interest rates over the next year would not have a material effect on the fair value of the Company's debt instruments or our cash equivalents nor would it materially impact the earnings or cash flow associated with our cash investments. See Note 2 to the Financial Statements for further information on the fair value of the Company's financial instruments. Although our revolving line of credit bears interest at an adjustable rate of prime plus 1.25%, a hypothetical ten percent change in the market rates as of December 31, 2001 would not have a material effect on our earnings and cash flows in 2002, as the entire borrowings outstanding at December 31, 2001 were repaid on January 2, 2002. We anticipate drawing on our line of credit only for short-term working capital needs during 2002.

The Company's Financial Statements and Notes to Financial Statements at December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000 and 1999 together with the Report of Independent Public Accountants are included in Part IV of this Annual Report on Form 10-K as indicated on the Index to Financial Statements and Schedule on page 41.

None.

Oakleigh Thorne has served as our Chief Executive Officer since May 30, 2000 and as a member of our Board of Directors since February 1998. Mr. Thorne has been Chairman and Chief Executive Officer of TBG Information Investors, LLC and the co-President of Blumenstein/Thorne Information Partners, L.L.C. since October 1996, and is a co-founder of these private equity investment firms. TBG, a partnership with GS Capital Partners II, is a private equity fund that focuses on capital transactions in the information industry. Prior to that time, from September 1986 to August 1996, Mr. Thorne served in various management positions, including most recently as President and Chief Executive Officer of CCH Incorporated, a leading provider of tax and business law information, software, and services.

Douglas H. Kelsall was named Executive Vice President in November 2000 and has served as our Chief Financial Officer and Treasurer since September 1999 and as our Secretary since November 2000. From July 1997 to August 1999, Mr. Kelsall served as Chief Financial Officer of TAVA Technologies, Inc.; from December 1995 to June 1997, he served as Chief Financial Officer of Evolving Systems, Inc.; from June 1993 to December 1995, he served as President of Caribou Capital Corporation. Prior to that time, Mr. Kelsall served in various management and Vice President positions at Colorado National Bank. Mr. Kelsall holds a Bachelor of Arts degree from the University of Colorado and a Master of Business Administration degree from the University of Denver. Mr. Kelsall presently serves on the Board of Caribou Capital Corporation.

Robert S. Haimes was named Senior Vice President of Market and Product Management in August 2001 and has served as our Vice President of Marketing since November 1999. From 1996 to 1999, he served as the Brand Marketing Director and the Director of Market Development for Coors Brewing Company. In 1995 and 1996, Mr. Haimes was Director of New Products and New Business Development at Boston Chicken, Inc. Prior to September of 1995, Mr. Haimes held positions in brand management, new business development and operations management at Procter and Gamble. He played a key role in his eleven years at Procter and Gamble, managing marketing campaigns to consumers and professionals in a highly competitive industry. Mr. Haimes holds a Bachelor of Science degree in Mechanical Engineering from the University of Cincinnati and a Master of Business Administration degree from Xavier University.

Steven P. Lindauer has served as our Senior Vice President of Strategy and Business Development since August 2001. From June 2000 to May 2001, Mr. Lindauer served as a Director of Strategic Alliances at DigitalThink, where he launched and operated the company's alliance with one of the world's largest technology outsourcing and systems integration firms. Prior to April 2000, Mr. Lindauer worked for Accenture, Ltd. (formerly Andersen Consulting) for 17 years, most recently as associate partner and global competency leader for its learning practice. Mr. Lindauer holds a Bachelor of Arts degree in Biology from the University of Colorado.

Mark S. Brodsky has served as our Vice President of Sales since August 1, 2000. Mr. Brodsky served as our Regional Vice President of Sales in the Eastern territory from November 14, 1998 to July 31, 2000. Prior to joining eCollege, Mr. Brodsky was Vice President of Sales for Aprisa Multimedia, a company he helped found in Denver in 1995, which was later acquired by Capella Learning in November 1997. Prior to Aprisa, Mr. Brodsky held sales and sales management positions with Aimtech Corporation, Fluent Inc., Teleconferencing Systems and Hughes Aircraft Corporation. Mr. Brodsky received a Bachelor of Science degree in Finance from San Diego State University.

Dr. Edward O. Gould has served as our Vice President of Academic and Government Affairs since January 2002. Dr. Gould also serves as the Executive Director of the academic forum, Center for Internet Technology in Education (CiTE^SM), a division of eCollege. Dr. Gould comes to eCollege from San Joaquin Delta College where he served as Superintendent and President from January 2000 to January 2002. Other previous positions include Vice Chancellor of Student Services and Special Programs at the California Community Colleges Chancellor's Office in Sacramento from July 1998 to January 2000; interim Vice President of Student Services at Ohlone College from July 1997 to June 1998; President and District Superintendent at Monterey Peninsula College from July 1995 to June 1997; President and District Superintendent at Victor Valley Community College District from August 1990 to June 1995; and from July 1986 until July 1990 Dean of Student Services at the Gavilan Joint Community College District. Dr. Gould attended Hartnell College, California State University Hayward, San Diego State College and the University of Nevada, Reno, where he earned a Doctorate in Education in Counseling and Personnel Services.

Matthew T. Schnittman has served as our Vice President of Professional Services since July 2001. Mr. Schnittman served as our Director of Strategic Planning and Analysis from July 1999 to June 2001. Before joining eCollege, Mr. Schnittman worked at PricewaterhouseCoopers from June 1998 to June 1999 in the Management Consulting Strategy group, where he provided strategic consulting services to Fortune 1,000 companies. From January 1995 to June 1997, Mr. Schnittman was with CCD, LLP, a consulting boutique focused on consumer product strategy. Mr. Schnittman holds a Bachelor of Science degree in Business and Public Administration in Marketing from the University of Arizona, and a Master of Business Administration degree in Management and Strategy, Finance and Marketing from JL Kellogg Graduate School of Management.

Ward R. Huseth, C.P.A., has served as our Chief Accounting Officer and Controller since December 2001. Mr. Huseth served as our Assistant Controller from December 2000 to December 2001. Prior to joining eCollege, Mr. Huseth worked for the public accounting firm of Deloitte & Touche LLP for five years, most recently as an assurance and advisory manager for its Denver, Colorado office. Mr. Huseth holds a Bachelor of Business Administration degree in Accounting from the University of Wisconsin-Whitewater.

Lee R. Spiegler has served as our General Counsel and Assistant Secretary since September 2001. Prior to joining eCollege, Mr. Spiegler served as General Counsel for ClearVision Laser Centers from November 2000 through August 2001 and as their Assistant General Counsel from July 1999 through November 2000. From June 1998 through July 1999, Mr. Spiegler was an Associate with Brobeck, Phleger & Harrison, LLP. From September 1996 through June 1998, Mr. Spiegler was an Associate with Ballard Spahr Andrews & Ingersoll, LLP. Mr. Spiegler received a Bachelor of Science degree in Economics from The Wharton School, University of Pennsylvania and a Juris Doctor degree from the University of Colorado School of Law.

Jack W. Blumenstein has served as a member of our Board of Directors since January 1998. Mr. Blumenstein has been the President of TBG Information Investors, LLC, and the co-President of Blumenstein/Thorne Information Partners, L.L.C. since October 1996, and is a co-founder of these private equity investment firms. TBG, a partnership with GS Capital Partners II, is a private equity fund that focuses on capital transactions in the information industry. From October 1992 to September 1996, Mr. Blumenstein held various positions with The Chicago Corporation (now ABN AMRO, Inc.), serving most recently as Executive Vice President, Debt Capital Markets Group and a member of the Board of Directors. Mr. Blumenstein was President and CEO of Ardis, a joint venture of Motorola and IBM, and has held various senior management positions in product development and sales and marketing for Rolm Corporation and IBM. Mr. Blumenstein also presently serves on the Boards of Illuminet Holdings, Inc., AirCell, Inc., SCP Communications, Inc. and RCT Systems, Inc.

Christopher E. Girgenti has served as a member of our Board of Directors since June 1997. Mr. Girgenti has been Senior Managing Director of New World Equities, Inc. since November 1996 and Managing Director of New World Venture Advisors, LLC since January 1998. From April 1994 through October 1996, Mr. Girgenti served as Vice President and was co-head of the technology investment banking group of The Chicago Corporation (now ABN AMRO, Inc.). He has held various corporate finance positions with Kemper Securities, Inc. and KPMG Peat Marwick. Mr. Girgenti is a Chartered Financial Analyst. Mr. Girgenti also presently serves on the Boards of Tavve Software Company and BulkMarkets.com, Inc.

Jeri L. Korshak has served as a member of our Board of Directors since February 1999. Ms. Korshak has over twenty years of experience in marketing and business development. Ms. Korshak served as Senior Vice President of Marketing and Business Development for AuraServ Communications from June 2000 to March 2001 and Vice President of Strategy for MediaOne Group from June 1998 to June 2000. Ms. Korshak was Vice President and General Manager of US WEST Dex-Mountain Region from September 1995 to May 1998, and Vice President and General Manager of Interactive Television of US WEST Multimedia from November 1994 to September 1995. In these and other positions, Ms. Korshak has been involved in developing and introducing interactive services.

Robert H. Mundheim has served as a member of our Board of Directors since January 2001. Mr. Mundheim has been Of Counsel to Shearman & Sterling since March 1999. Mr. Mundheim formerly held the position of Senior Executive Vice President and General Counsel of Salomon Smith Barney Holdings Inc. Before that he was Executive Vice President and General Counsel of Salomon Inc., a firm which he joined in September 1992. Prior to joining Salomon Inc., Mr. Mundheim was co-Chairman of the New York law firm of Fried, Frank, Harris, Shriver & Jacobson. Until 1992 Mr. Mundheim was the University Professor of Law and Finance at the University of Pennsylvania Law School, where he had taught since 1965. He served as Dean of that institution from 1982 through 1989. Among his other professional activities, Mr. Mundheim has been General Counsel to the U.S. Treasury Department (1977-1980); Special Counsel to the Securities and Exchange Commission (1962-1963); and Vice Chairman, Governor-at - -Large and a member of the Executive Committee of the National Association of Securities Dealers (1988-1991). He is a trustee and President of the American Academy in Berlin, a trustee of the New School University and a member of the Council of the American Law Institute, board member of the Salzburg Seminar, and President of the Appleseed Foundation. He served as a member of the ABA Commission on Multidisciplinary Practice and on the Bar Association of the City of New York's Commission on the Future of CUNY.

All directors hold office until the next annual meeting of stockholders or until their successors have been duly elected and qualified.

On April 26, 2001, Mr. Mundheim was granted 95,000 options to purchase the Company's Common Stock as compensation for his service as a director. The 95,000 options are exercisable in sixty successive equal monthly installments upon Mr. Mundheim's completion of each month of Board service. These options were granted at an exercise price of $3.85. These options are subject to a special acceleration event if Oakleigh Thorne ceases service as Chairman of the Board and Chief Executive Officer of the Company, and his replacement or replacements are not acceptable to Mr. Mundheim (''Special Acceleration Event''). If the Special Acceleration Event occurs on or before January 23, 2004, then 50% of the outstanding unvested options held by Mr. Mundheim automatically accelerate so that such options shall become fully vested and exercisable. If such Special Acceleration Event happens after January 23, 2004, then 100% of the outstanding options held by Mr. Mundheim automatically accelerate so that s uch options shall become fully vested and exercisable

We have entered into an employment agreement with Mr. Kelsall. The agreement, as amended, sets an annual base salary for Mr. Kelsall of $185,000, which may be adjusted upward by the Board of Directors. In addition to a base salary, Mr. Kelsall is eligible for an annual bonus of up to $92,500, payable in cash. For the year ended December 31, 2001, we issued to Mr. Kelsall options to purchase up to 25,000 shares of our common stock at an exercise price of $2.85 per share. These options are subject to vesting requirements. In addition, on June 21, 2001, Mr. Kelsall was awarded 50,000 shares of the Company's common stock under the Company's 1999 Stock Incentive Plan, as consideration for Mr. Kelsall's services to the Company and his consent to terminate a previous option grant issued in 1999 for the option to purchase 50,000 shares of the Company's common stock at an exercise price of $9.00, the quoted market price of the Company's common stock at the date of grant. These shares of com mon stock are restricted, with the restrictions lapsing in a series of installments over three years, provided that Mr. Kelsall remains in continuous service with the Company through each date. All unvested options vest upon a change of control of eCollege. Mr. Kelsall is also entitled to standard benefits including vacation days, participation in a flexible reimbursement plan, and medical/dental insurance.

Mr. Kelsall's employment may be terminated by eCollege or by him at any time and for any reason.

We have agreed to provide Mr. Kelsall with severance pay equal to six months of his base salary, unless his employment is terminated for cause, as defined in the agreement.

The agreement contains non-competition provisions during the term of employment and for the period six months after termination of employment. Under these provisions, Mr. Kelsall may not:

• own an interest in, participate in the management of, or perform services for any competitive business or activity; or
• for a period of 12 months subsequent to termination, solicit any of our employees to terminate their employment.

The agreement also contains a confidentiality provision as well as a provision recognizing that we own all ideas and inventions conceived by Mr. Kelsall during the term of the agreement.

We have entered into an employment agreement with Mr. Haimes. The agreement, as amended, sets an annual base salary for Mr. Haimes of $180,000, which may be adjusted upward or downward by the Board of Directors. In addition to a base salary, Mr. Haimes is eligible for an annual bonus of up to $72,000, payable in cash. For the year ended December 31, 2001, we issued to Mr. Haimes options to purchase up to 16,000 shares of our common stock at an exercise price of $2.85 per share. These options are subject to vesting requirements. All unvested options vest upon a change of control of eCollege. Mr. Haimes is also entitled to standard benefits including vacation days, participation in a flexible reimbursement plan, and medical/dental insurance.

Mr. Haimes' employment may be terminated by eCollege or by him at any time and for any reason.

The agreement contains non-competition provisions during the term of employment and for the period twelve months after termination of employment. Under these provisions, Mr. Haimes may not:

• own an interest in, participate in the management of, or perform services for any competitive business or activity; or
• for a period of 12 months subsequent to termination, solicit any of our employees to terminate their employment.

The agreement also contains a confidentiality provision as well as a provision recognizing that we own all ideas and inventions conceived by Mr. Haimes during the term of the agreement.

We have entered into an employment agreement with Mr. Brodsky. The agreement, as amended, sets an annual base salary for Mr. Brodsky of $140,000, which may be adjusted upward or downward by the Board of Directors. In addition to a base salary, Mr. Brodsky is eligible for an annual bonus of up to $140,000, payable in cash. For the year ended December 31, 2001, we issued to Mr. Brodsky options to purchase up to 7,500 shares of our common stock at an exercise price of $2.85 per share. These options are subject to vesting requirements. All unvested options will vest upon a change of control of eCollege. Mr. Brodsky is also entitled to standard benefits including vacation days, participation in a flexible reimbursement plan, and medical/dental insurance.

Mr. Brodsky's employment may be terminated by eCollege or by him at any time and for any reason.

The agreement contains non-competition provisions during the term of employment and for the period of twelve months after termination of employment. Under these provisions, Mr. Brodsky may not:

• own an interest in, participate in the management of, or perform services for any competitive business or activity; or
• for a period of 12 months subsequent to termination, solicit any of our employees to terminate their employment.

The agreement also contains a confidentiality provision as well as a provision recognizing that we own all ideas and inventions conceived by Mr. Brodsky during the term of the agreement.

We have entered into an employment agreement with Mr. Lindauer. The agreement sets an annual base salary for Mr. Lindauer of $170,000, which may be adjusted upward or downward by the Board of Directors. In addition to a base salary, Mr. Lindauer was eligible for a bonus of up to $14,875, payable in cash for the year ending December 31, 2001. For the year ended December 31, 2001, we issued to Mr. Lindauer options to purchase up to 75,000 shares of our common stock at an exercise price of $4.00 per share. These options are subject to vesting requirements. All unvested options will vest upon a change of control of eCollege. Mr. Lindauer is also entitled to standard benefits including vacation days, participation in a flexible reimbursement plan, and medical/dental insurance.

Mr. Lindauer's employment may be terminated by eCollege or by him at any time and for any reason.

The agreement contains non-competition provisions during the term of employment and for the period of six months after termination of employment. Under these provisions, Mr. Lindauer may not:

• own an interest in, participate in the management of, or perform services for any competitive business or activity; or
• for a period of 6 months subsequent to termination, solicit any of our employees to terminate their employment.

The agreement also contains a confidentiality provision as well as a provision recognizing that we own all ideas and inventions conceived by Mr. Lindauer during the term of the agreement.

We have entered into an employment agreement with Dr. Gould. The agreement sets an annual base salary for Dr. Gould of $147,000, which may be adjusted upward or downward by the Board of Directors. In addition to a base salary, Dr. Gould is eligible for an annual bonus of up to $48,000, payable in cash. On January 31, 2002, we issued to Dr. Gould options to purchase up to 30,000 shares of our common stock at an exercise price of $2.75 per share. These options are subject to vesting requirements. All unvested options will vest upon a change of control of eCollege. Dr. Gould is also entitled to standard benefits including vacation days, participation in a flexible reimbursement plan, and medical/dental insurance.

Dr. Gould's employment may be terminated by eCollege or by him at any time and for any reason.

The agreement contains non-competition provisions during the term of employment and for the period of twelve months after termination of employment. Under these provisions, Dr. Gould may not:

• own an interest in, participate in the management of, or perform services for any competitive business or activity; or
• for a period of 12 months subsequent to termination, solicit any of our employees to terminate their employment.

The agreement also contains a confidentiality provision as well as a provision recognizing that we own all ideas and inventions conceived by Dr. Gould during the term of the agreement.

In July 2001, Mr. Schneider's employment with the Company terminated. The Company entered into an employment agreement with Mr. Schneider at the time of his hiring. Under the terms of his agreement, Mr. Schneider was entitled to receive severance pay in an amount equal to six months of his salary upon execution of a severance agreement. On July 2, 2001, the Compensation Committee of the Board of Directors awarded Mr. Schneider options to purchase up to 75,000 shares of the Company's common stock under the Company's 1999 Stock Incentive Plan, as consideration for Mr. Schneider's services to the Company and his consent to extend the non-competition provisions of his agreement in connection with his departure from the Company. These options have a 5 year term, were fully vested at the award date and become exercisable on July 2, 2002. The exercise price of the option grant is $5.00 per share.

The following table sets forth certain information known to us with respect to beneficial ownership of the common stock as of March 8, 2002 (unless otherwise stated in the footnotes) by (i) each stockholder that we know is the beneficial owner of more than 5% of the common stock, (ii) each director and nominee for director, (iii) each of the executive officers named in the Summary Compensation Table and (iv) all executive officers and directors as a group. Unless otherwise indicated, each of the security holders has sole voting and investment power with respect to the shares beneficially owned, subject to community property laws, where applicable.

We have entered into indemnification agreements with our non-employee directors, Messrs. Blumenstein, Girgenti and Mundheim and Ms. Korshak.

On June 23, 2000, the Company issued a $271,000 secured promissory note to Jonathan Dobrin, our former Chief Technology Officer. The note is a full recourse note and is secured by the common stock of the Company owned by the former executive officer. The note was originally due on December 31, 2000. Interest accrued on the note through December 31, 2000 was paid during the first quarter of 2001. The note was extended until April 30, 2002 and began to bear interest at 9% per annum as of April 1, 2001. The principal, together with accrued but unpaid interest due on the outstanding unpaid balance, is payable in monthly installments through April 30, 2002. In November 2001, the Company purchased 14,935 of the pledged shares of the Company's common stock from the former executive officer for $3.00 per share, or $44,805, in lieu of cash payment on the note. These shares of common stock were immediately retired and are no longer outstanding. As of December 31, 2001, $117,430 remained outs tanding on the note receivable. In January 2002, the Company purchased 15,801 of the pledged shares of the Company's common stock from the former executive officer for $3.00 per share, or $47,403, in lieu of cash payment on the note.

(a)(2) None

(a)(3) Exhibits

(b) No reports on Form 8-K have been filed during the last quarter of the period covered by this report.

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.

eCollege.com

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

We have audited the accompanying balance sheets of eCollege.com (a Delaware corporation) as of December 31, 2001 and 2000, and the related statements of operations and comprehensive loss, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our 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 financial position of eCollege.com as of December 31, 2001 and 2000, and the 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.

As explained in Note 3 to the financial statements, effective January 1, 2000 the Company changed its method of accounting for certain revenue.

Denver, Colorado,
    February 5, 2002.

The accompanying notes to financial statements are an integral part of these balance sheets.