For the transition period from _____________________ to ________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X] Yes [ ] No

The number of shares outstanding of the Registrant's Common Stock, $.01 par value, as of August 7, 2002 was 16,373,202.

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements. 

eCollege is a leading provider of technology and services that enable colleges, universities, primary and high schools ("K-12 schools") and corporations to offer an online environment for distance and on-campus learning. The Company's technology enables its customers to reach a large number of students who wish to take online courses at convenient times and locations. Customers can also use the Company's technology to supplement their on-campus courses with an online environment. Additionally, the Company offers 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, training, evaluation and consulting services.

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The Company has eliminated intercompany transactions in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such regulations. The unaudited condensed consolidated financial statements reflect all adjustments and disclosures that are, in the opinion of management, necessary for a fair presentation. All such adjustments are of a normal recurring nature. Certain amounts in the 2001 financial statements have been reclassified to conform to the 2002 presentation. Management does not believe the effects of such reclassifications are material. The results of operations for the interim periods ended June 30, 2002 are not necessarily indicative of the results of the full fiscal year. For further information, refer to the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K, for the year ended December 31, 2001.

In June 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. The Company adopted this statement as of January 1, 2002. The adoption of this standard did not have an impact on the Company's financial position or results of operations. However, goodwill and other intangibles acquired in connection with any future business combinations will be impacted by this standard.

Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." 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 its carrying amount or fair value less cost to sell. The adoption of this standard did not have an impact on the Company's financial position or 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"). During the first quarter of 2002, the Company completed its review of the provisions of EITF 01-09 and concluded that the payments made under its Grant Program are properly classified as costs and not a reduction of the selling price of its services.

Basic net loss per share is computed by dividing net loss available to common stockholders for the period by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. As a result of the Company's net losses, all potentially dilutive securities as of June 30, 2002 and 2001 would be anti-dilutive and are excluded from the computation of diluted loss per share. The table below summarizes all such securities which have been excluded from this computation.

The Company has never paid cash dividends on its stock, and is currently precluded from doing so under its borrowing agreements.

The Company accounts for its employee stock option plans and other employee stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25"), and related interpretations. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and related interpretations.

As of April 23, 2002, the Company entered into an employment agreement with Mr. Oakleigh Thorne, the Company's Chief Executive Officer. As part of the agreement, in lieu of an annual salary, on April 23, 2002, Mr. Thorne was granted an option to purchase up to 101,156 shares of common stock at an exercise price of $4.49 per share, the closing price of the Company's common stock on that grant date. This option vests monthly in twelve equal installments beginning January 1, 2002. In addition, on April 23, 2002, Mr. Thorne was granted an additional option to purchase up to 101,156 shares of common stock at an exercise price of $4.49 per share. This option vests, if at all, partially on June 30, 2002, and on December 31, 2002, based on the Company meeting the targets in its corporate bonus plan for 2002. As of June 30, 2002, this second option vested with respect to 20,231 shares as a result of the Company meeting interim targets in its corporate bonus plan. Any options which do not vest pursu ant to the corporate bonus plan for 2002 will be forfeited. All unvested options will vest fully upon a change of control of the Company.

No compensation expense was recorded upon issuance of the options due to the fact that the grant price was equal to the exercise price on the date of grant. However, the second option is subject to variable accounting due to its performance-based terms. As a result, the Company is required to re-measure compensation expense at each reporting date until each portion of the option vests. Since the closing price of the Company's common stock on June 30, 2002, the date on which the first portion of the second option vested and the reporting date for the remaining unvested options, was less than the exercise price of $4.49, no stock-based compensation expense was recorded by the Company during the three months ended June 30, 2002. However, the unvested portion of the option for 80,925 shares continues to be subject to variable accounting treatment, and therefore the Company may be subject to stock-based compensation expense during the remaining reporting periods of 2002 if the price of the Company's common sto ck is greater than the exercise price of $4.49 and the option appears likely to be earned as of each reporting date.

The Company generates revenue primarily from three sources: (i) student enrollment fees, (ii) campus development, licensing and hosting services, and (iii) course development services.

The Company's services are generally sold at fixed prices as set forth in customer contracts. The Company charges its customers student fees as students enroll in online courses hosted by the Company for its customers at an agreed upon price. The Company also sells student technology licenses which allow for up to a specified number of student enrollments in online course supplements over a specified period of time, typically one year. Customers are typically charged for annual license and hosting fees as well as initial design and development services fees for an online campus. Design and development services fees to build online courses are also specified in contracts. Frequently, customers will add online courses in addition to those purchased under the initial contract. Annual maintenance fees to manage the online campus or courses during the term of the agreement and other service fees, including online campus implementation, faculty training and support, evaluation and technical cons ulting services and instructional design services, may also be included in customer contracts.

The Company's student fee revenue is recognized on a straight-line basis over each course's specific academic term or over the length of the student technology license purchased by a customer, depending upon contract terms. Campus license and hosting fees, including the set-up, design, development and maintenance of a customer's campus, are generally received near the start of each contract term, deferred, and recognized on a straight-line basis 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 for campus fees is slightly less than three years. Historically, the Company recognized course development fees over a period of twelve months, which approximated the length of time over which the Company completed its obligations to the customer under course development arrangements. However, the Company continually evaluates the period over which these services are provided, and effective January 1, 2002, changed the recognition period to nine months, to better reflect the period over which the Company's services are provided to customers, and the Company's obligations are completed. This change is based upon the Company's experience of providing such services and will continue to be evaluated as the Company gains additional experience and to reflect changes in the business and technological environment. For course development services initiated but not yet completed as of the date of the change, the Company is recognizing the remaining deferred revenue balance as of January 1, 2002 over the remaining estimated service period, based upon the revised nine-month estimate. Had the Company continued to recognize its course development services using its original estimate of twelve months, course revenue would have been approximately $34,000 greater than that reported in the accompanying consolidated statement of operations for the three months ended June 30, 2002 and approximately $210 ,000 less than that reported in the accompanying consolidated statement of operations for the six months ended June 30, 2002. Changes in our contract terms and expected contract life may also affect the period over which development fees are recognized in the future.

Revenue that is recognized is reflected as accrued revenue receivable to the extent that the customer has not yet been billed for such services. The Company records deferred revenue for amounts received from or billed to customers in excess of the revenue that has been earned.

NIST Grant

In October 1998, the Company was awarded a grant by the National Institute of Standards and Technology, or NIST, a department of the U.S. Department of Commerce. This revenue was recognized as the work was performed by the Company or its subcontractors. The Company was entitled to receive payments under the grant as research related to automated course content creation and organization, and tutoring delivery systems was performed. Maximum payments under the grant which expired in January 2002 were approximately $1,859,000. The Company was granted an extension until April 2002 to complete the necessary documentation of its research.

Through June 30, 2002, the Company had applied for payments totaling $1,859,037 under the NIST grant and had received $1,812,850. The Company has recognized $1,753,834 of revenue relating to the NIST grant since its inception through June 30, 2002. The Company believes it performed its work in accordance with the terms of the NIST grant, and will receive all the payments it has requested to be reimbursed for under the NIST grant.

No one customer represented more than 10% of the Company's revenue for the three month and six month periods ended June 30, 2002. One customer individually accounted for approximately 10% of the Company's revenue for the three month and six month periods ended June 30, 2001.

The Company 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 the Company's 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. The Company does not anticipate offering new grant awards.

Funds granted consist of both educational support funds and marketing 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 to third parties. Customer expenditures for the Company's services are not reimbursable under terms of the grants. To date, the Company has granted approximately $7.5 million, which consists of $5.8 million in educational support funds and $1.7 million in marketing funds.

Educational support funds consist of faculty stipends to encourage the generation of re-usable digital course content, hardware technology, and travel funds, and are considered contract costs. Educational support funds are paid only after the customer has provided evidence that they have expended funds in compliance with the grant agreement. If contract costs, including direct and indirect costs to perform the Company's obligations under the contract as well as the 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. The Company recognized such a loss of $2.4 million in 1999 based upon total anticipated grant expenses of approximately $7.5 million versus guaranteed revenue of approximately $5.1 million. This contract loss was recorded as a component of cost of revenue in 1999. As the Company recognizes course development revenue under the grant recipients' contracts and recognizes the cost of educational support funds and other contract costs, the contract loss accrual is reduced such that the gross margin related to this revenue is zero. The reduction in the contract loss accrual results in a decrease in cost of revenue in the current period. The Company recorded $13,179 and $713,477 of costs related to educational support funds, before any reduction of the contract loss accrual, in the three months ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002 and 2001, recorded costs associated with the educational support funds prior to any reduction of the contract loss accrual was $208,422 and $1,508,681, respectively. The reduction of the contract loss accrual, as reflected as a reduction of the cost of revenue, was $31,489 and $387,015 for the three months ended June 30, 2002 and 2001, respectively, and $155,394 and $827,066 for the six months ended June 30, 2002 and 2001, respectively. The combined effect on cost of revenue of the accrued grant costs less the reversal of the contract loss accrual was a net reduction of expenses of $18,310 for the three months ended June 30, 2002 and a net expense of $326,462 for the same period in 2001. For the six months ended June 30, 2002 and 2001, the resulting net expense included in cost of revenue was $53,028 and $681,615, respectively.

The remaining estimated contract loss accrual at June 30, 2002 is $120,205 and is included in Grant Liabilities on the consolidated balance sheet. The determination of the contract 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 of 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.

Marketing funds are reimbursed to customers based on demonstration of payment to third parties for approved marketing activities which promote their online programs. These expenses are recorded as marketing expenses in the consolidated statement of operations when it is estimated they are incurred by customers. The Company recorded $55,581 and $121,000 of marketing expenses related to the Grant Program in the three months ended June 30, 2002 and 2001, respectively. Marketing expenses related to the Grant Program for the six months ended June 30, 2002 and 2001 were $121,181 and $242,000, respectively.

Since the Grant Program's inception, grant payments have totaled $4.5 million for reimbursements of educational support funds and $1.2 million for reimbursements of marketing funds. The estimated remaining disbursements under the Grant Program for reimbursed educational support and marketing funds are $1.2 million and $500,000, respectively, at June 30, 2002 and are expected to be paid during 2002. Management evaluates these grants for compliance. It is possible that there may be individual grants that do not require the Company to reimburse the full grant award, and thus a portion of the accrued expenses may be reversed and the related liability reduced in future reporting periods.

The Company incurs costs for the development of internal-use software as well as software to be sold or marketed to third parties. In general, the Company has expensed such costs as incurred due to the nature of the costs and the fact that costs qualifying for capitalization have been immaterial and the related lives are short. However, the Company did capitalize $3,763,507 of costs related to development of its CampusPortal product, including $622,395 during the six months ended June 30, 2001. Capitalized software development costs are amortized using the straight-line method over their estimated useful lives, generally three years. Amortization begins when the products are ready for their intended use. In April 2001, the software was determined to be ready for its intended use and accordingly, $1,568,128 of accumulated amortization has been recorded as of June 30, 2002, including $313,626 of expense for both the three months ended June 30, 2002 and 2001. Amortization expense for the six months ended June 30, 2002 and 2001 was $627,251 and $313,626, respectively.

Realization of the Company's 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, technology used by the Company and its customers can be subject to significant changes as new technology and software products are introduced into the marketplace by others. It is reasonably possible that a change in technology strategy by the Company could result in a conclusion that all or a portion of the recorded balance is impaired.

As of June 30, 2002, the Company had leased $3,281,373 of equipment in connection with two sale-leaseback arrangements with a bank. The Company may lease an additional $462,684 of equipment under the second arrangement. At the end of the 36-month lease terms of each arrangement, which end at various dates between July 2003 and April 2005, the Company will purchase the equipment leased under these arrangements for a total of approximately $276,000. The leases have been treated as capital leases for accounting purposes. The weighted average interest rate of borrowings under the capital lease agreements was 12% as of June 30, 2002. The net book value of leased equipment as of June 30, 2002, was $1,861,901.

The following is a schedule by year of future minimum capital lease payments, together with the present value of the net minimum lease payments as of June 30, 2002:

The Company is exposed to asserted and unasserted legal claims encountered in the normal course of business. Management believes 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.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements in this Section and elsewhere in this report are forward-looking in nature and relate to trends and events that may affect the Company's future financial position and operating results. Such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements when you see us using words such as "expect," "anticipate," "estimate," "plan," "believe" and other similar expressions. These statements speak only as of the date of this report. These statements are based on current expectations about our Company and our industry and involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including changes in economic conditions in the markets served by the Company, increasing competition, and other unanticipated events and conditions, as well as the factors described in the Company's other SEC filings. These forward-looking statements should also be read in conjunction with certain risk factors in our Form 10-K for the year ended December 31, 2001 and other filings we have made with the SEC. We undertake no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

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, training, evaluation and consulting services.

We were founded and began delivering our products and services in 1996. As of June 30, 2002, we have 267 customer contracts covering approximately 1,500 individual campuses. Since our inception, our customers have had approximately 467,000 student enrollments in online courses or course supplements and have purchased or ordered more than 16,000 unique online courses and course supplements, of which approximately 4,400 included course development services. For the Spring 2002 academic term, which lasted from January 1, 2002 until May 15, 2002, our customers had more than 89,000 student enrollments in online courses and approximately 38,000 student enrollments in our lower priced course supplements. For the Summer 2002 academic term, which lasts from May 16, 2002 through August 15, 2002, we estimate that our customers will have more than 51,000 student enrollments in online courses and approximately 15,000 student enrollments in our lower priced course supplements.

We have invested in our service capabilities by expanding our infrastructure to accommodate our current and future customer volumes. Our expenditures have exceeded our revenues since our inception and our accumulated losses have increased as a result of our growth strategy. Any future increases in our cost of revenue should be significantly less than any increases in our revenue. We expect to see gross profits improve as revenue from 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.

On June 5, 2002 eCollege International, Inc. agreed to provide services in the value of $25,000 as an initial 25% capital contribution in the formation of Knowledge Access FZ-LLC (the "Joint Venture"), a free zone limited liability company incorporated in Dubai Internet City, Dubai, United Arab Emirates. An unrelated company agreed to contribute $75,000 of cash as its initial capital contribution to the Joint Venture, representing a 75% equity interest. eCollege International, Inc. is represented on the Joint Venture's Board of Directors by two of five appointed Directors. Not later than December 31, 2002, the Joint Venture's Board shall agree upon any increased capitalization of the Joint Venture. Any increase in the Joint Venture's capital shall be implemented through additional contributions in the ratio of 25% to 75%, with eCollege International, Inc.'s 25% contribution being in the form of a license agreement of eCollege's software, and accordingly, eCollege International, Inc. wi ll not be required to make any future cash contributions. In addition to eCollege International, Inc.'s equity interest in the Joint Venture, eCollege International, Inc. may earn revenue as a third-party service provider to the Joint Venture. Any revenue earned from the Joint Venture is not expected to be material during the remainder of 2002.

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.

The success of 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. Further, during 2002 we have seen our campus and course development fees decline as our customers develop more courses on their own using our proprietary tools. While this has negatively impacted course development revenue, it has positively impacted the higher margin student fee revenue due to the availability of more online courses on the eCollege system. 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: eCollege Teaching Solutions and eCollege Campus Solutions. Teaching Solutions includes eCollege eCourse^SM, an online version of a traditional classroom course delivered to students who might not otherwise have access to the course, and eCollege eCompanion^SM, an online teaching supplement designed to enhance classroom-based courses. Campus Solutions, consisting of eCollege CampusPortal^SM and eCollege Gateway Campus^SM, offer community, academic and administrative functions similar to a physical college campus while incorporating the customer's unique look and feel. These online campuses allow a customer to access and manage online courses and supplements, and provide access to the online community and organizations.

We also offer a suite of services and products designed to assist our customers in creating and delivering high quality online programs. eCollege Service Solutions include program consulting, delivery and operational support services. eCollege eCourseEvaluation^SM is a comprehensive Internet-based product that automates the entire course and instructor evaluation process. eCollege eCampusSurvey helps to create and manage all types of surveys that an institution may want to deploy outside of a classroom. Finally, through eCollege Content Solutions, we partner with leading textbook and new media publishers to provide educators and students academically focused content resources.

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.

The majority of our revenue is earned by charging a per-enrollment student service fee to our customers for access to their eCourses and eCompanions, and also to our 24x7 technical support. We also offer a pricing model for our eCompanion product under which we charge an annual license fee. For our Campus Solutions, 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. Historically, we have sold our course development services on a per-course basis while our other professional consulting services were based on our standard hourly rates. In 2002, we began offering our customers the option to purchase blocks of course development service hours, based on our standard hourly rates.

During 2001 we expanded and improved our Teaching Solutions product line, including the release of the next generation of our eLearning platform, eCollege AU^SM. eCollege AU provides enhanced features with increased customization capabilities, usability and accessibility for our customers. We also added more robust self-authoring tools to our course delivery software in the past two years which are designed to allow customers to easily develop their own online courses without needing HTML or other programming knowledge. We also released a new version of our campus software during 2001 that allows campus administrators to make certain changes to their virtual campuses without our assistance. 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 s ervices. 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 on our platform), thereby increasing our student fee revenue.

In October 1998, the Company was awarded a grant of approximately $1,859,000 by the National Institute of Standards and Technology, or NIST, a department of the U.S. Department of Commerce. This revenue was recognized as the work was performed by the Company or its subcontractors. The Company was entitled to receive payments under the grant as research related to automated course content creation and organization, and tutoring delivery systems were performed. Maximum payments under the grant which expired in January 2002 were approximately $1,859,000. The Company was granted an extension until April 2002 to complete the necessary documentation of its research.

Through June 30, 2002, we had applied for payments totaling $1,859,037 under the NIST grant and had received $1,812,850. We have recognized $1,753,834 of revenue relating to the NIST grant since its inception. We believe we performed our work in accordance with the terms of the NIST grantand will receive all the payments we have requested to be reimbursed for under the NIST grant.

Revenue recognition is a critical accounting policy for our business. 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. Campus license and hosting fees, including the set-up, design, development and maintenance of a customer's campus, are recognized on a straight-line basis 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 for these license and hosting fees is slightly less than three years. Course development fees are recognized on a straight-line basis over the approximate period over which our services are provided and our obligation to the customer fulfilled. During 2001 and prior periods, this performance period was estimated to be twelve months from the date the course is ordered by the customer. Effective J anuary 1, 2002, we began to recognize such fees over a nine-month recognition period, based upon changes to our experience in providing such services. We believe that this change more accurately reflects the period over which the services are delivered. As a result of this change, our course development revenue for the three months ended June 30, 2002, was approximately $34,000 lower than it would have been had we continued to recognize such fees over a twelve-month period. For the six months ended June 30, 2002 our course development revenue was approximately $210,000 higher than it would have been had we continued to recognize such fees over a twelve-month period. For course development services initiated but not yet completed as of the date of the change, the Company is recognizing the remaining deferred revenue balance as of January 1, 2002 over the remaining estimated service period, based upon the revised nine-month estimate. The period over which we perform the services and therefore recognize the rev enue may change in the future as our actual experience in completing development obligations continues to evolve. Changes in our contract terms and expected contract life may also affect the period over which development fees are recognized in the future.

All other revenue sources are recognized over the length of the service period (e.g., annual eCourseEvaluation license fees) or are recognized over the period of the performance of the service (e.g., program consulting).

Due to the seasonality inherent in the academic calendar that typically consists of three academic terms, 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. We also experience quarter-to-quarter fluctuations due to our customers' plans for online campus and course development. Our operating expenses are relatively fixed in nature and seasonal fluctuations in revenue will result in fluctuations in our operating results. As a result, sequential quarter-to-quarter financial results are not directly comparable.

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 software, hardware, 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.

Sales commissions are recorded as revenue is recognized, but are paid only after we have received an initial payment from the customer. Sales representatives also receive additional commissions for achieving significant goals such as signing large customers and increasing program offerings within current customers.

Software development costs is also a critical accounting policy for our business. 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 software was determined to be ready for its intended use and accordingly, $1,568,128 of accumulated amortization has been recorded as of June 30, 2002, including $313,626 of expense for both the three months ended June 30, 2002 and 2001. Amortization expense for the six months ended June 30, 2002 and 2001 were $627,251 and $313,626, respectively.

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. 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 percentage of revenue. We anticipate experiencing this decline as we achieve operating efficiencies, because many of our costs do not increase in direct proportion to our revenue. Specifically we will experience this decline 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 educational support funds and marketing funds. To date, we have granted approximately $7.5 million, which consists of $5.8 million in educational support funds and $1.7 million in marketing 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 to third parties. Customer expenditures for our services are not reimbursable under terms of the grants.

Educational support funds consist of faculty stipends to encourage the generation of re-usable digital course content, hardware technology, and travel funds, and are considered contract costs. If contract costs, including direct and indirect costs to perform the Company's obligations under the contract as well as the 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. We recognized such a loss of $2.4 million in 1999 based upon total anticipated grant expenses of approximately $7.5 million versus guaranteed revenue of approximately $5.1 million. This contract loss was recorded as a component of cost of revenue in 1999. As we recognize course development revenue under the grant recipients' contracts and recognize the cost of educational support funds and other contract costs, the contract loss accrual is reduced such that the gross margin related to this re venue is zero. We recorded $13,179 and $713,477 of costs related to educational support funds, before any reduction of the contract loss accrual, in the three months ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002 and 2001, recorded costs associated with the educational support funds prior to any reduction of the contract loss accrual was $208,422 and $1,508,681, respectively. The reduction of the contract loss accrual, as reflected as a reduction of the cost of revenue, was $31,489 and $387,015 for the three months ended June 30, 2002 and 2001, respectively, and $155,394 and $827,066 for the six months ended June 30, 2002 and 2001, respectively. The combined effect on cost of revenue of the accrued grant costs less the reversal of the contract loss accrual was a net reduction of expenses of $18,310 for the three months ended June 30, 2002 and a net expense of $326,462 for the same period in 2001. For the six months ended June 30, 2002 and 2001, the resulting net expense in cluded in cost of revenue was $53,028 and $681,615, respectively.

Marketing funds are reimbursed to customers based on demonstration of payment to third parties for approved marketing activities which promote their online programs. These expenses are recorded as marketing expenses in the consolidated statement of operations when it is estimated they are incurred by customers.

Since the Grant Program's inception, grant payments have totaled $4.5 million for reimbursements of educational support funds and $1.2 million for reimbursements of marketing funds. The estimated remaining disbursements under the Grant Program for reimbursed educational support and marketing funds are $1.2 million and $500,000, respectively, at June 30, 2002 and are expected to be paid during 2002. Management evaluates these grants for compliance. It is possible that there may be individual grants that do not require the Company to reimburse the full grant award, and thus a portion of the accrued expenses may be reversed and the related liability reduced in future reporting periods.

We account for our employee stock option plans and other employee stock-based compensation arrangements in accordance with the provisions APB Opinion No. 25 and related interpretations. We account for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and related interpretations. This is a critical accounting policy. The FASB is currently reconsidering the generally accepted accounting principles for stock-based compensation arrangements and may adopt new standards that may have a material impact on our financial statements.

As of April 23, 2002, the Company entered into an employment agreement with Mr. Oakleigh Thorne, our Chief Executive Officer. As part of the agreement, in lieu of an annual salary, on April 23, 2002, Mr. Thorne was granted an option to purchase up to 101,156 shares of common stock at an exercise price of $4.49 per share, the closing price of the Company's common stock on that grant date. This option vests monthly in twelve equal installments beginning January 1, 2002. In addition, on April 23, 2002, Mr. Thorne was granted an additional option to purchase up to 101,156 shares of common stock at an exercise price of $4.49 per share. This option vests, if at all, partially on June 30, 2002, and on December 31, 2002, based on the Company meeting the targets in our corporate bonus plan for 2002. As of June 30, 2002, this second option vested with respect to 20,231 shares as a result of the Company meeting interim targets in our corporate bonus plan. Any options which do not vest pursuant to the corporate bonus plan for 2002 will be forfeited. All unvested options will vest fully upon a change of control of the Company.

No compensation expense was recorded upon the issuance of the options due to the fact that the grant price was equal to the exercise price on the date of the grant. However, the second option is subject to variable accounting due to its performance-based terms. As a result, we are required to re-measure compensation expense at each reporting date until each portion of the option vests. Since the closing price of the Company's common stock on June 30, 2002, the date on which the first portion of the options vested and the reporting date for the remaining unvested options, was less than the exercise price of $4.49, we did not record any stock-based compensation expense during the three months ended June 30, 2002. However, the unvested portion of the option for 80,925 shares continues to be subject to variable accounting treatment, and therefore the Company may be subject to stock-based compensation expense during the remaining reporting periods of 2002 if the price of the Company's common st ock is greater than the exercise price of $4.49 and the option appears likely to be earned as of each reporting date.

We have incurred significant losses since our inception, resulting in an accumulated deficit of $76,868,691 as of June 30, 2002. We believe that our revenue growth will continue in the remainder of 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 in the remainder of 2002 as a result of our focused strategy and the timing of the higher education selling season. We also intend to utilize our existing administrative resources and operating efficiencies to continue to support our business at slightly lower costs. We expect our earnings before interest, taxes, depreciation, and amortization of capitalized software costs and stock-based compensation to be positive for the remainder of the year ended December 31 , 2002 and plan to realize operating profits in 2003, although there can be no guarantee thereof.

Overview. Results in the three months ended June 30, 2002 compared to the three months ended June 30, 2001, demonstrated a 24% increase in revenue, and a 15% reduction in total expense, with reductions in cost of goods sold, sales and marketing and general and administrative expenses. The increase in revenue was primarily driven by an increase in student enrollments in online courses. Expense reductions were achieved primarily by better utilization of the Company's fixed assets and its personnel and cost reductions in other areas. The increase in revenue and reductions in expenses resulted in a $2,256,409 decrease in our net loss. We expect that revenue will continue to grow faster than expenses, resulting in further improvements in our results of continuing operations.

Revenue. Revenue increased 24% to $5,756,439 for the three months ended June 30, 2002 from $4,625,071 for the three months ended June 30, 2001. The increase in revenue is primarily due to an approximate 51% increase in the number of student enrollments in online courses begun in the Spring academic term, which ran from January 1, 2002 through May 15, 2002 and an approximate 70% increase in the number of student enrollments in online courses begun in the Summer academic term, which runs from May 16, 2002 through August 15, 2002 compared to the same academic terms in 2001. Student fees from eCourse and eCompanion enrollments increased 39% and represented $4,483,370 and $3,219,703 of total revenue for the three months ended June 30, 2002 and 2001, respectively. Campus and course fees represented $784,157 and $1,164,514 of total revenue, respectively, for these same periods, reflecting the fact that more customers are self-developing their online courses. NIST grant revenue decreased to $4,574 from $167,073 for the three months ended June 30, 2002 and 2001, respectively, due to the expiration of our grant in 2002. Other revenue includes professional consulting revenue of $351,089 and $65,157, respectively, for these same periods.

Cost of Revenue. Cost of revenue decreased to $2,883,013 for the three months ended June 30, 2002 from $3,413,398 for the three months ended June 30, 2001. Our cost of revenue decreased primarily due to a reduction of expenses related to our Grant Program, reduced personnel costs for our operations and account management groups and lower employee recruitment costs. Based on results of the Grant Program, there was a net reduction of expenses of $18,310 included in cost of revenue for the three months ended June 30, 2002 compared to net expenses of $326,462 for the same period in 2001. Our personnel in the operations and account management areas decreased to 94 in June 2002 from 116 in June 2001 as we were able to improve on our operating efficiencies of our course development services while also concluding our NIST research program.

Gross Profit. We experienced a gross profit of $2,873,426 for the three months ended June 30, 2002 as compared to a gross profit of $1,211,673 for the three months ended June 30, 2001. The favorable increase of $1,661,753 in gross profit was primarily due to the increase in our student fees, which have a higher contribution margin than most of our other revenue sources, improved utilization of our professional services staff as we continue to improve the technology and business processes used to develop campuses and courses for our customers, and realization of operating leverage on our fixed expenses as our revenue increased.

Product Development. Product development expenses of $1,386,214 for the three months ended June 30, 2002 were consistent with the $1,362,740 expensed during the three months ended June 30, 2001. As we continue to internally design and develop enhanced features for our eCollege AU platform and other product offerings, our personnel cost in the development group have increased. The increase was partially offset by a decrease of $118,718 in external consulting costs incurred during the quarter ended June 30, 2002 as compared with the same period in 2001. Staffing levels of our product development personnel remained consistent at 53 and 52 as of June 30, 2002 and 2001, respectively.

Selling and Marketing. Selling and marketing expenses decreased to $1,436,588 for the three months ended June 30, 2002 from $1,906,663 for the three months ended June 30, 2001. The decrease was due to decreases in direct mail and trade conference expenses of $177,032, which were somewhat offset by increased promotions and advertising cost of $114,275, as we focus on more activities directed at key decision makers within our target market. We also had a decrease in marketing personnel costs, as we are staffed with 8 marketing-related employees as of June 30, 2002, down from 14 such employees as of June 30, 2001. Marketing expenses associated with the Grant Program for the three months ended June 30, 2002 were $65,419 less than those in the same period last year. Our outside consulting expenses related to sales and marketing activities were lower by $130,250, while depreciation associated with these groups decreased $52,101 from the same period last year. We had 26 employees in our sa les department at June 30, 2002 and 33 at June 30, 2001.

General and Administrative. General and administrative expenses decreased to $1,585,460 for the three months ended June 30, 2002 from $1,941,462 for the three months ended June 30, 2001. The decrease was primarily due to a decrease in executive and other administrative personnel costs. Other cost savings in our administrative departments have outweighed slight increases in corporate insurance costs. The number of general and administrative personnel as of June 30, 2002 was 35 as compared to 45 as of June 30, 2001.

Since inception, we have incurred aggregate deferred compensation of $4,452,702 in connection with the grant of 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. During the three months ended June 30, 2002 and 2001, we recorded compensation expense of $49,475 and $181,611, respectively. 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.

Pursuant to APB Opinion No. 25, no compensation expense has been recorded related to the option granted to our Chief Executive Officer to purchase up to 101,156 shares of common stock in lieu of an annual salary. Furthermore, no stock-based compensation expense was recorded during the three months ended June 30, 2002 related to the second option granted to our Chief Executive Officer that vests based on our meeting corporate bonus targets.

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 $48,101 for the three months ended June 30, 2002, from $268,830 for the three months ended June 30, 2001. This decrease is primarily due to a decrease in cash invested in interest bearing securities as a result of the use of such cash in our operations. Interest expense, primarily related to our capital lease lines of credit and borrowings on our revolving line of credit, was $67,843 and $65,190 for the quarters ending June 30, 2002 and 2001, respectively.

Net Loss. Our net loss decreased to $1,554,578, or $0.10 per share, from $3,810,987, or $0.24 per share, for the three months ended June 30, 2002 and 2001, respectively.

Revenue. Revenue increased 29% to $11,360,935 for the six months ended June 30, 2002 from $8,840,194 for the six months ended June 30, 2001. The increase in revenue is primarily due to an approximate 59% increase in the number of student enrollments in online courses begun in the Spring and Summer academic terms compared to the same academic terms in 2001. Student fees from eCourse and eCompanion enrollments increased 45% and represented $8,636,899 and $5,973,296 of total revenue for the six months ended June 30, 2002 and 2001, respectively. Campus and course fees represented $1,876,380 and $2,196,102 of total revenue, respectively, for these same periods, reflecting the fact that more customers are self-developing their online courses. NIST grant revenue decreased to $95,203 from $359,442 for the six months ended June 30, 2002 and 2001, respectively, due to the expiration of our grant in 2002. Other revenue includes professional consulting revenue of $552,055 and $188,645, resp ectively, for these same periods.

Cost of Revenue. Cost of revenue decreased to $5,981,942 for the six months ended June 30, 2002 from $7,196,297 for the six months ended June 30, 2001. Our cost of revenue decreased primarily due to a reduction of expenses related to our Grant Program, reduced personnel costs for our operations and account management groups and reduced outside consulting expenses. Direct expenses associated with the Grant Program were $53,028 and $681,615 for the six months ended June 30, 2002 and 2001, respectively. Our average number of personnel in the operations and account management areas decreased to 102 in the six months ended June 30, 2002 from 139 in the same period in 2001, as we were able to improve on our operating efficiencies of our course development, help desk and consulting services while also concluding our NIST research program. Amortization expense related to our capitalized software costs for the six months ended June 30, 2002 and 2001 was $627,251 and $313,626, respectively.

Gross Profit. We experienced a gross profit of $5,378,993 for the six months ended June 30, 2002 as compared to a gross profit of $1,643,897 for the six months ended June 30, 2001. The favorable increase of $3,735,096 in gross profit was primarily due to the increase in our student fees, which have a higher contribution margin than most of our other revenue sources, improved utilization of our professional services staff as we continue to improve the technology and business processes used to develop campuses and courses for our customers, and realization of operating leverage on our fixed expenses as our revenue increased.

Product Development. Product development expenses of $2,741,526 for the six months ended June 30, 2002 were consistent with the $2,731,276 expenses incurred for the six months ended June 30, 2001. As we continue to internally design and develop enhanced features for our eCollege AU platform and other product offerings, our personnel cost in the development group have increased. However, the increase in personnel costs was partially offset by a decrease of $336,131 in external consulting costs incurred during the six months ended June 30, 2002 as compared with the same period in 2001.

Selling and Marketing. Selling and marketing expenses decreased to $2,915,565 for the six months ended June 30, 2002 from $4,260,591 for the six months ended June 30, 2001. The decrease was due to decreases in direct mail and trade conference expenses of $488,062, which were somewhat offset by increased promotion costs of $62,339, as we focus on more activities directed at key decision makers within our target market. Our marketing personnel costs decreased, as we were staffed with an average of 10 marketing-related employees during the six months ended June 30, 2002, down from an average of 18 such employees in 2001.We also had a decrease in outside consulting services of $296,015, while depreciation expense associated with these groups decreased $94,919 from the same period last year. Marketing expenses associated with the Grant Program for the six months ended June 30, 2002 were $120,819 less than those in the same period last year.

General and Administrative. General and administrative expenses decreased to $3,082,071 for the six months ended June 30, 2002 from $3,775,677 for the six months ended June 30, 2001. The decrease was primarily due to a decrease in executive compensation and severance and amortization of deferred compensation, as well as other cost savings due to improved efficiencies. Amortization of deferred compensation decreased by $233,818 to $128,304 in the six months ended June 30, 2002 from $362,122 in 2001. Other administrative cost savings have outweighed slight increases in corporate insurance and building occupancy costs.

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 $107,217 for the six months ended June 30, 2002, from $544,326 for the six months ended June 30, 2001. This decrease is primarily due to a decrease in cash invested in interest bearing securities as a result of the use of such cash in our operations. Interest expense, primarily related to our capital lease lines of credit and borrowings on our revolving line of credit, was $130,341 and $137,544 for the six months ended June 30, 2002 and 2001, respectively.

Net Loss. Our net loss decreased to $3,383,293, or $0.21 per share, from $8,732,300, or $0.54 per share, for the six months ended June 30, 2002 and 2001, respectively.

The Company's cash and cash equivalents decreased $2,303,168 from $16,625,705 at December 31, 2001, to $14,322,537 at June 30, 2002. The decrease from December 31, 2001 was primarily due to cash used in operating activities of $2,065,747 and investments in fixed assets of $958,937 offset by cash provided by financing activities of $721,516, including a net increase on our outstanding line of credit of $438,000.

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 $85,256,261 from inception through June 30, 2002, including our initial public offering. 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 have 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 will purchase the equipment for 8.5% of the amount drawn. We have leased $1,037,316 of equipment under a $1,500,000 sale-leaseback agreement entered into in the second quarter of 2001, and therefore have $462,684 available under the second agreement. At the end of the initial 36-month lease term, we will purchase the equipment for 8.25% of the amount drawn. The lease agreements contain certain financial covenants. These leases are treated as capital leases for accounting purposes. The weighted average interest rate of borrowings under the capital lease agreements was 12% as of June 30, 2002.

We expect our current cash, cash equivalents and short-term investments, together with cash generated from operations, to meet our working capital and capital expenditure requirements for at least the next twelve months. Because we expect to incur a net loss for the remainder of the current year, our cash and cash equivalents are expected to decrease as necessary to fund such losses and make capital investments.

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 through additional public offerings or exercised stock options, 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.

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 June 30, 2002, 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 $13,347,026 at June 30, 2002. 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 policy during the third quarter of 2001 to limit risk exposure, all of our invested cash is in money market accounts as of June 30, 2002. As a result, the interest rate market risk implicit in these investments at June 30, 2002, is low. However, factors influencing the financial condition of securities issuers may impact their ability meet their financial obligations and could impact the realizability of our securities portfolio. The Company has not undertaken any other interest rate market risk management activities.

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 its cash equivalents, nor would it materially impact the Company's earnings or cash flow associated with the Company's cash investments. Although the Company's 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 June 30, 2002 would not have a material effect on the Company's earnings and cash flows in 2002, as the entire borrowings outstanding at December 31, 2001, March 31 and June 30, 2002 were repaid on January 2, 2002, April 1, 2002 and July 1, 2002, respectively.  During the remainder of 2002 we anticipate drawing on our line of credit only for short-term periods.

We are not a party to any material legal proceedings.

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 underwriters' overallotment, 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 June 30, 2002, we have used approximately: $2,050,000 to repay bank debt; $37,749,000 to fund operations and provide working capital; and $6,899,000 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.

Not applicable.

Not applicable.

Not applicable.

(a) Exhibits

The following is a list of exhibits filed as part of this Report on Form 10-Q. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated parenthetically except for in those situations where the exhibit number was the same as set forth below.

(b) The Company did not file any reports on Form 8-K during the three months ended June 30, 2002. The Company filed a report on Form 8-K on July 1, 2002.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized in Denver, Colorado, on this 14^th day of August, 2002.