U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                   FORM 10-KSB


 /x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
                  For the fiscal year ended March 31, 2002

 / / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF 1934
                  For the transition period from ______ to ______

                         Commission File number 0-12392


                               ALPHA VIRTUAL, INC.

               Delaware                                  95-2577731
       ------------------------            ------------------------------------
       (State of Incorporation)            (I.R.S. Employer Identification No.)


     10345 West Olympic Boulevard, Suite 300, Los Angeles, California 90064
                                  310-432-6200

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

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

   Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes /x/ No //

   Check if there is no disclosure of delinquent filers in response to item 405
of Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB / /

   State Issuer's revenues for its most recent fiscal year: $49,242.00.

   State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: As of June 30, 2002 $838,624.

   State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of June 30, 2002 there are
23,486,045 shares outstanding.

  Documents Incorporated by Reference: Portions of the Proxy Statement for the
            2002 annual meeting of stockholders are incorporated by
                    reference into Part III of this report.



                                       1
<PAGE>
                                     PART I

ITEM 1. BUSINESS

G e n e r a l

To leverage our  proprietary  technology,  in 2000 we refocused  our business to
develop  and  market  innovative,   real-time  Web  collaboration  products  for
business,  consumer entertainment,  education,  and government markets. In 2001,
Global  Alpha  Corporation  provided  private  equity  financing  of  $3,226,000
($2,400,000 of which was received in fiscal 2002). We also now have a management
team with Internet  product and  distribution  expertise in place. Our company's
corporate name was changed from  Perceptronics,  Inc. to Alpha Virtual,  Inc. on
October 12, 2001, and remains a Delaware corporation. Our Common Stock trades on
the Over-the-Counter- Bulletin Board under the symbol "APHV."

Our patent-pending OneView(TM) product platform meets the growing demand for new
multi-user interactivity - integrating browser, Instant Messaging, and real-time
group  collaboration in an on-demand basis.  OneView allows users to immediately
form groups and explore Web sites  together,  sharing the same experience at the
same  time,  whether  they are  located  in the next room or half way around the
world.  As  such,  it  is  the  fastest,  most  convenient  way  to  collaborate
synchronously over the Internet today.

History of Our Technology Development

Alpha  Virtual and its OneView  products  bring a unique  heritage of  long-term
research and  development  to the  collaborative  marketplace  achieved from our
government  and private  research and  development  operations and while we were
doing business as  Perceptronics.  A division of Alpha Virtual since April 2001,
Perceptronics  continues to perform  government  and private R&D  projects  that
improve and expand the applications of Alpha Virtual's core OneView  technology.
Perceptronics  shares  resources and flows its R&D results into Alpha  Virtual's
commercial products.

The Perceptronics division is headed by founders Dr. Amos Freedy and Dr. Gershon
Weltman, who, from 1970 to present,  conducted over $250 million in R&D projects
focused on the areas of  intelligent  systems,  human  performance  analysis and
modeling, decision aiding and decision support, man-machine communications,  and
simulation and training for a variety of U.S. Government agencies and commercial
companies.  From its very  beginnings  as an offshoot of the UCLA  Biotechnology
Laboratory,  the underlying theme of Perceptronics'  work has been to enable the
process of learning and  collaboration  via computers  and  networks.  Our first
product  was based on our  research  into  human/machine  interactivity  for the
military. It was a tabletop tank gunnery trainer that provided the military a 97
percent  savings  over  traditional  training  methods.  Based on that  success,
Perceptronics was awarded a contract to co-develop what is known today as SimNet
(Simulator  Network) - a virtual  reality  training  system  that was one of the
first virtual reality environments.  Over the years,  Perceptronics' R&D results
have  made  and  continue  to make  major  contributions  to  networked  virtual
simulation,  artificial  intelligence,   real-time,  synchronous  collaboration,
real-time   decision   support,   adaptive  process   modeling,   and  cognitive
collaboration.  Its R&D  innovations  have  provided  a solid  computer  science
foundation for Alpha Virtual's OneView products.



                                       2
<PAGE>
OneView Technololgy

Alpha Virtual's  patent-pending  OneView(TM)  product platform meets the growing
demand  for  new  multi-user   interactivity  -  integrating  browser,   Instant
Messaging,  and real-time group collaboration in an on-demand basis.  OneView is
the fastest, most convenient way to collaborate  synchronously over the Internet
today.

On the server side, OneView technology enables Internet developers to easily add
collaboration  functionality  to their Web site projects with minimal Web server
integration - providing  significant new add-on features that provide  solutions
and enhance experiences for a wide range of audiences.

On the user side,  with a standard Web  browser,  OneView  applications  empower
users to instantaneously form peer groups whose members can simultaneously view,
discuss,  and  interact  with  any form of  Web-based  content  in real  time to
significantly  improve the speed and  efficiency  of  collaborative  information
gathering,  knowledge exchange, and decision-making  activities.  Users can also
experience  entertaining  rich  media  content in new and  exciting  ways and be
influenced to buy goods and services through group shopping adventures.  OneView
requires no end user installs and provides a customizable, easy-to-use graphical
user interface.

OneView allows users to immediately  form groups and explore Web sites together,
sharing the same  experience  at the same time,  whether they are located in the
next room or half way around the world.

The ability to enhance user experiences by bringing  together groups of users is
a  breakthrough  that will  change the way people  use the  Internet.  Much like
calling a friend to say,  "Quick,  turn on channel 7, you won't  believe  what's
on," easy-to-use  OneView-enabled  Web sites will encourage users to explore and
enjoy Web experiences together in shared environments for the first time.

Using  OneView,  buddy groups of teens will cruise the Web together  looking for
new  entertainment.  Educators and researchers will lead each other to new found
knowledge  resources.  Parents will "network" to find the most  appropriate  Web
sites for their toddlers and preview films for themselves. Doctors, lawyers, and
business  executives  will soon be seen  holding  both a phone and a mouse while
reviewing medical images,  scrutinizing  legal documents,  and revising projects
and plans with colleagues online. And sales and customer support representatives
will help clients click  through  volumes of inventory to reach the perfect sale
item.

Alpha  Virtual's  OneView  Web   collaboration   products  have  been  developed
specifically to deliver these capabilities and will inspire developers to create
a whole new genre of Web  applications  expressly  designed to engage  groups of
simultaneous users.

How OneView Works

OneView  makes joining a group,  chatting,  and viewing rich media content quick
and easy. The interactive buttons,  selectors,  and readouts are clearly labeled
in a simple, intuitive graphical interface.  Inviting chat buddies or joining an
existing group is simply a matter of a few mouse clicks.



                                       3
<PAGE>
When users create or join collaborative sessions at OneView-enabled Web sites, a
lightweight  Java  applet is  automatically  sent from the site's  server to the
requesting  client  machine,  which  immediately  connects  the user to  another
individual or group.  Each user can send invites to others via e-mail or instant
message,  and  respondents  simply click on the enclosed link to be connected to
each other. Unlike plug-ins or installation-required downloads, OneView's applet
loads  itself.  In a matter  of  seconds,  the user is ready to create or join a
group collaboration session.

After  creating or joining a group,  each group  member is  empowered to explore
OneView-enabled  Internet sites together. And depending on which OneView modules
are integrated into the site, users can launch and view streaming media, explore
Flash(TM)  and 3D  environments,  fill out  forms,  and chat  interactively  via
instant text messaging.

Each  user sees the same  content  at the same  time.  One or more  members  can
control the navigation while each member is free to comment via the chat window,
keeping the experience lively and collaborative.

OneView Architecture

Over the past two decades, Perceptronics focused on building the core foundation
on top of High Level Architecture (HLA) and Run Time Infrastructure (RTI) layers
through  development  contracts with  government  agencies and the Department of
Defense.  The RTI  implementations  are now in their third  generation as an RTI
subset with essential Java  components  comprising the core.  This core layer is
based on IEEE P1516, supports W3C standards,  and uses SSL (secure socket layer)
as a secure communications option.


Peer-to-Peer Connectivity

All OneView  collaboration  and  messaging  between  users are  handled  through
peer-to-peer  communications and do not require support from the host's servers.
OneView's Java applet makes each user's computer an active peer, able to conduct
direct peer-to-peer communications on its own.

Further, OneView maintains the traditional  client/server model used by Web site
providers to deliver  content.  The user's  relationship to the Web site and its
content  is  not  modified,   thus  retaining  all  content  security  and  user
authentication.  A site's Web page content is still  requested by each  client's
Web browser and is delivered by the site's Web  servers.  This is important  for
maintaining content control and digital rights management (DRM) compatibility.


The Lobby and Relay Server

In addition  to its  fundamental  P2P  connectivity,  OneView  uses two types of
servers to accommodate initial peer connections and firewall compatibility.

Lobby Server
First, the Lobby Server provides the initial  discovery  services for all peers,
determining  which peers belong to which peer group and  tracking the  "joining"
and "disconnecting" of peers during the process.



                                       4
<PAGE>
Users  create new groups via the invite  process.  Invitees can respond to these
invitations  (clicking  on link) which will send them to the Lobby  Server to be
introduced to the first user. Once they "handshake",  a direct P2P connection is
established   between  each  user.   At  this  point,   no   additional   server
infrastructure  is  needed  and all  collaborative  messaging  happens  directly
between users.  When other invitees join the group,  they are introduced via the
Lobby  Server to the  other  members  of the group in the same way.  When a user
leaves a session, the Lobby Server is notified to update the group roster.

Relay Server
If users are behind firewalls and no direct P2P connection can be made, then the
connection  is handed off to a OneView  Relay  Server which will act as a proxy,
relaying  messages between those peers. This is a standard  client/server  model
for communication and is deployed as a fall-back measure to assure  connectivity
between multiple firewall users.

OneView Modules


OneView Cruising with Forms

OneView Cruising(TM) is one of the primary tools for OneView users. Its friendly
interface  guides  OneView  users to form  collaborative  groups using e-mail or
third-party Instant Messenger services, and helps each member navigate Web sites
together. Full navigation of Web sites is shared by the group, allowing users to
view entire Web sites  synchronously.  Shared scrolling ensures that everyone is
seeing the same thing even within a single Web page,  and remote  cursors  allow
users to see each other's cursors for pointing and natural collaboration.

OneView  Forms(TM)  permits  two or  more  users  to fill  out  HTML  forms  and
questionnaires  together.  Each member sees the text being written in the form's
fields as it is occurring.  When the collaborative  group (or its leader) agrees
on the final version, it is submitted via the normal client/server  connectivity
to the host  system  for  processing  or  storage.  This  functionality  greatly
simplifies and speeds  information  submission for collaborative  group shopping
sessions,  for e-commerce  assistance between a sales agent and a customer,  and
for eCRM at the crucial  shopping cart stage in order to assist shoppers who are
confused or have questions about filling out the forms.


OneView Media Room

OneView  Media  Room(TM)  provides  synchronous,  interactive  group  viewing of
streaming media in a virtual screening room located within an enabled site. This
module integrates  seamlessly with existing media players,  including  Microsoft
Windows Media Player,  RealNetworks  Player, and Apple QuickTime.  Every user is
able to control the action (play,  stop, pause, fast  forward/rewind) as well as
change the play list  selection  and chat about the  material  with other  group
members.  All  users  see the same  video  frames  in  real-time  for  training,
e-learning, and entertainment applications.

OneView for Flash

Web sites powered by Macromedia Flash(TM) technology offer an extra dimension of



                                       5

<PAGE>
rich media with integrated audio,  graphics, and video that enhances the OneView
user experience with interactive movement and sound.

The Software  Developer's Kit (SDK) for Macromedia Flash(TM) includes all of the
tools  developers  need to easily add  multi-user  functionality  to Flash-based
applications.  The SDK's Flash components allow developers to create  multi-user
experiences without the need to install,  program, or configure servers. This is
a breakthrough  advantage to the process of creating rich multi-user experiences
in Flash.  A developer  can  program in  ActionScript,  or simply  drag-and-drop
pre-made UI components, and OneView handles the rest.


--------------------------------------------------------------
OneView's Hybrid P2P Collaboration Advantage
--------------------------------------------------------------
o    Client/server meets P2P in new Web applications.
o    Unlike P2P file-sharing systems, OneView simultaneously
     enables peer-to-peer  connections for collaboration and
     standard  server-to-browser  content  delivery from Web
     site providers.
o    OneView  is  easy to  integrate  into a Web site and is
     fully customizable.
--------------------------------------------------------------


OneView's Technology Benefits

Before the  introduction  of  OneView,  creating  true  real-time  collaborative
interaction  via the  Internet  was a  difficult  process due to the expense and
complexity of custom servers, confusing software installation requirements,  and
counter-intuitive  user  interfaces for  collaboration.  Creating Web sites with
full navigational features,  media formats, and programming was difficult enough
without  the  challenge  of  adding  real-time  collaboration.   However,  Alpha
Virtual's  patent-pending  OneView technology now easily enables groups of users
to  share  real-time,   synchronized  Web  experiences  with  standard  Internet
media/data types - streaming video and audio, animation, 3D simulation,  and Web
documents.

Further,  OneView  delivers  several  important  benefits  never  before seen in
combination:

o    Efficient,  cost-effective  use of  existing  content  and  software  allow
     OneView  capabilities  to  be  added   non-obtrusively  to  Web  sites  and
     applications.
o    Streamlined   communication   directly  between  user  machines   maintains
     application  responsiveness and delivers  real-time  interaction within the
     collaborative group.
o    Efficient  Java-based coding and Run Time  Infrastructure  (RTI) components
     eliminate the need for special plug-ins or downloads.
o    Natural group formation at the host Web site is potentially as fast as "one
     or two  clicks and  you're  together."
o    Existing  and  planned  Internet  standards  and  protocols  ensure ease of
     integration with other component technologies.
o    When the OneView application is installed on a Web site, it integrates with
     existing registration  procedures,  authentication schemes,  databases, and
     other existing components.

                                       6
<PAGE>
OneView Specifications and Minimum System Requirements
--------------------- --------------------------------------------------------
Processor Speed        350 megahertz (MHz) Pentium processor
--------------------- --------------------------------------------------------
Memory                 64 megabytes (MB) of RAM (Depends on OS used)
--------------------- --------------------------------------------------------
Operating System       Microsoft Windows 98, NT 4.0 (Service Pack 4),2000, XP
--------------------- --------------------------------------------------------
Browser                Microsoft Internet Explorer version 5.5 through 6.0+
--------------------- --------------------------------------------------------
Connection Type        DSL, ISDN, or local area network (LAN), 33K+ Dial-up
--------------------- --------------------------------------------------------
Media Room             Windows Media Player: 7.0+
                       Real Networks Player: 8.0+
                       Apple QuickTime Player: 4.5+
--------------------- --------------------------------------------------------

Copyright  2002,  Alpha Virtual,  Inc. Alpha Virtual,  OneView,  and OneMind are
service  trademarks of Alpha  Virtual,  Inc. All other product and company names
are trademarks of their respective holders.

Target Markets; Marketing

     Internet Collaborative Products and Services
     --------------------------------------------
OneView  products  are  a  revolutionary  advancement  that  is  propelling  the
popularity of several  clearly defined target markets by bringing users together
for the first time in the same Web environments through shared interactivity and
collaboration. Our products have application in the following markets:

Entertainment  and Media:  The  integration  of the  Internet  with  traditional
entertainment   and  media  content  has  greatly  enhanced  the  attraction  of
collaborative,  real-time sharing of Web experiences,  from video games to movie
marketing,  product  promotions to online dating.  OneView technology lets users
form  live,  interactive  groups  to find  and  explore  entertaining  resources
together synchronously.  This adds an entirely new, high-value dimension - group
participation - to the world of  entertainment on the Web. Each participant then
becomes a potential return visitor, leading a fresh group of collaborative users
back to the site.

eLearning:  Education is changing  rapidly as millions of users log on to access
Web-based  learning  resources that are  complimenting  traditional  classrooms.
However,  as convenient and focused as these online  environments  are - with no
integrated  collaboration,  they  address  only  one  user at a  time.  OneView,
however,  re-introduces  the real-time  question-and-answer  interactivity  of a
teacher-led, multi-student classroom to virtually any Web-based learning site.

eBusiness: While online shopping is not expected to replace the person-to-person
advantages  of a  brick-and-mortar  business,  OneView  technology  gives online
businesses  the  opportunity  to provide  live sales and service  agents to help
customers make purchase  decisions,  fill out forms, and locate resources within
their existing Web environments.  In addition, group shopping can occur as users
band together to cruise OneView-enabled Web sites during collaborative sessions.




                                       7
<PAGE>
Government:   Faster,   better   decision-making   through  live,  online  group
collaboration  is  a  key  that  will  unlock  the  productivity  potential  and
accelerate   the   traditional   governmental   process.   As  Alpha   Virtual's
Perceptronics  division  has  proven  over and over  again,  OneView  technology
provides the  immediacy of multi-user  information  access,  collaboration,  and
consensus  that  government  workgroups  require for cost  savings and  improved
effectiveness.

The Company  uses its own  personnel  and  marketing  consultants  to market and
distribute its OneView suite of products and services. Our primary marketing and
sales objectives include developing  immediate revenue generating  opportunities
for our products and services within our targeted markets and also  establishing
marketing  contacts and strategic  alliances with major Internet  infrastructure
and  service  companies.  The  company  continues  its  efforts in  establishing
strategic  alliances  with firms in the Internet  area that add to its marketing
reach.

     R&D Services
     ------------
The Company has primarily marketed its research and development  services to the
U.S.  Department of Defense,  other U.S.  government  agencies and other defense
industry  prime  contractors.  The Company will  continue to submit  unsolicited
research and system  development  proposals in areas where it has original ideas
and unique capabilities, and also responds to requests for proposals in areas of
Company capability.

Rights to Technology

The  Company  has  applied  for  patent  protection  related  to its basic  IC3D
Framework  technology,   and  is  in  the  process  of  preparing  a  additional
applications for further developments.  However, the Company generally considers
its business to be primarily  dependent upon proprietary  knowledge and on rapid
assimilation  of  innovations,  but we will  seek  patent  protection  for  such
knowledge and innovations where it is feasible.

The  Company's  technology  developments  are the  result of  internally  funded
projects and  customer-sponsored  contracts.  In the case of  internally  funded
developments,  the Company retains all rights to the development. In the case of
customer-sponsored  contracts,  the  Company's  rights to the  developments  and
requirements to disseminate  the development  data are governed by its agreement
with the customer. Under U.S. Government contracts, the situation depends on the
type of contract and the assertion of  proprietary  rights to technology and /or
data when entering into the contract.

In  general,  in the past,  the Company has  retained  all rights to  inventions
discovered with Government  funding,  subject to the information  below, and the
company  expects to  continue  this  practice  with  future  Government  funding
contracts.

Our rights  are  subject to the  Government's  non-exclusive,  non-transferable,
non-royalty bearing,  worldwide license to use and sell the invention itself. In
addition,  the Company may be obligated to grant non-royalty bearing licenses to
companies  selected by the  Government in  competitive  procurement  to use such
inventions in the course of performing  their Government  contracts.  Government



                                       8
<PAGE>
contracts usually call for delivery of specific data and software items.  Unless
otherwise  stated in the contract,  the Government  retains  unlimited rights to
such technical data and computer software  developed under the contract.  In the
special case of SBIR (Small Business Innovation Research) contracts, such as the
August 1998 SBIR II contract under which parts of the IC3D development was done,
the  Government  has limited  rights to the delivered  data for five years after
project completion (for evaluation purposes only, release with permission of the
contractor,  or for  emergency  repairs of delivered  equipment),  and unlimited
rights  after five years.  Data  delivered  under the 1998 IC3D SBIR II contract
consisted  of  Quarterly  and Final  Reports,  and the project was  completed in
December 1999.

Under non-Government  development  contracts and/or licenses,  Alpha Virtual and
the customer agree as part of the contract who owns the rights to technology and
products used for the development and also developed under the contract, as well
as how those  rights  are to be  compensated  during  and after the  development
project.  In general,  the Company does not grant any proprietary  rights in its
core IC3D technology as part of a license for  demonstration,  operation  and/or
development using that technology.

Manufacturing

Since the  disposition  of our PGTS and defense  simulator  business in 2001, we
conduct no manufacturing activities.

Competition

     Internet Collaborative Products
     -------------------------------
In  our   strategic   business   area  of  enabling   technology   for  Internet
collaboration,  we face  several  types of  competitors  who have gained  market
share,  and many of whom have greater  financial and other resources than we do.
In our  analysis,  the  Internet  collaborative  technology  space is  currently
occupied  by  companies  operating  in several  different  market  segments,  as
described below.

 Virtual  3D  Communities.  These  typically  provide  end-users  with  assorted
interactive   experiences  in  pre-established  3D  virtual  worlds,  which  are
generally   unstructured  and  may  be  both  realtime  and  non-realtime.   The
application  software  is  tailored  to the  particular  environments.  This  is
currently a very small market segment.  Companies in this segment include Active
World, Blaxxun, HearMe, Avaterra, Paraworld, Geome-trek and others.

   3D Games and  Simulations.  Multi-user  online  games range from role playing
fantasy games,  through first person shooter games, to elaborate military battle
simulations  and are typically  marketed  directly to end users.  Game rules are
superimposed on structured environments using proprietary 3D engines and largely
point-solution  MU  services   providing   limited  realtime   interactivity  to
relatively small groups of simultaneous users. Companies in this segment include
Sony Online (EverQuest),  Electronic Arts (Ultima Online), Microsoft (Asherton's
Call), Heat, Mak Technologies, Lionhearth, and others.

Teleconfering/Telecasting.  This is a relatively specialized  collaborative area
directed  primarily  toward   one-to-many   Webcasts  of  streaming  live  video



                                       9
<PAGE>
presentations  with limited  auxiliary  media.  Marketing is almost  entirely to
enterprises.  MU interaction,  if any, is individual  participants back to video
source and not within groups of participants.  Companies in this segment include
IVT, Rotor, Centra, Videoscape and other TC system and service suppliers.

 Meeting Environments. This is the best defined market area in terms of business
applications.  The intent is a total solution,  usually site-based, for enabling
real time Web meetings  and  person-to-person  contact as well as non-real  time
performance of multi-person work tasks in business,  engineering, etc. Marketing
is to end-users and enterprises. MU interaction is based primarily on text chat,
with   voiceover  in  some  cases,   shared  charts  and  shared   applications.
Capabilities  for dynamic media are limited.  Set-up is  frequently  complex and
time consuming,  including  downloads.  Companies in this segment include WebEx,
Webline, Groove, Centra, VRTelecom, Tribal Voice, Gooey, Ichat, IContact, iKena,
Mimio,  LivePerson,  The Palace,  Crowdburst,  Parallel  Graphics,  OriginalSim,
Extempo, Learning Space, Webscope, Cocreate and others.

 C-Commerce  . A new market area termed  C-Commerce  ("collaborative  commerce")
focuses on  collaborative  interactions  at various  points along the industrial
supply chain,  such as purchasing,  processing,  sales,  support,  etc. Customer
relations  management  (CRM),  and  particularly  online sales  support,  is the
sub-area most involved  with  realtime  applications.  Companies in this segment
include   Centra   Software,   PeopleSupport,   OSC   Teleservices,   Smartpeer,
HelloNetwork, Brightware and others.

We  have  a  two-fold  significant  competitive  advantage.  We  offer  superior
peer-to-peer  technology and we can position our software as a subcomponent with
a focus on marketing and sales effort on developers and service providers rather
than end users.

Because  our  technology   allows  customers  to  create  unique   collaborative
applications involving all types of media, singly and in combination, with reuse
of content and minimal or no interference to current  operating  software,  each
customer  effectively creates a new enabling technology that can also be used by
others,  thus  exponentially  expanding our customer base and greatly increasing
the  sales  potential.  The end  user is able  to  access  OneView  capabilities
directly from a large number of different Web applications  without any prior or
separate  download,  so the ability to  collaborate  within each  particular Web
application comes simply,  easily and transparently.  By its focus on developers
and service providers,  Alpha Virtual avoids marketing to end-users,  and avoids
the requirement for the end-user to choose Alpha Virtual.  This is a substantial
differentiating factor and marketing advantage, and is in direct contrast to the
major Meeting Environment and C-Commerce companies, such as WebEx and Groove and
others.  Such  companies,  and Groove in  particular,  are  primarily  trying to
position themselves as the virtual meeting space that appeals most to end users.
In contrast,  we are positioning  our products as the technology  behind the Web
applications  that  appeal most to end users.  We believe  that  developers  and
service  providers will choose OneView  because of its technical and performance
advantages,  and because it allows them to increase  their  capabilities  and/or
meet specific market needs.

     R&D Services
     ------------
In the  case of  competitively  bid  defense  contracts  the  Company's  typical
competitors  for R&D and system  development  contracts  include  SAIC,  Litton,


                                       10
<PAGE>
Lockheed Martin, and TRW.  Competitors for training and command support products
include Lockheed Martin,  General Electric Company, ECC International,  CAE, and
such  foreign  companies as Wegmann,  SAAB and  Giravions  Dorand.  All of these
companies have substantial  financial,  technological  and marketing  resources,
which enables them to bid on larger  contracts.  There can be no assurance  that
the Company will be able to compete successfully in the future.

Strategic Partnering and Teaming Agreements

In the area of Internet  products and services,  the Company intends to minimize
investment risk by entering into a series of business alliances with established
suppliers  of  Internet  tools and content and with major  and/or  leading  edge
developers  of  Internet  Web sites.  Utilizing  such  alliances  will allow the
Company to minimize the amount of capital investment  required to enter into the
market,  and would help bring new  know-how  into the  Company.  The Company has
already  established or is actively exploring  alliances with companies involved
with online games and entertainment,  e-commerce,  education and communications,
as well as developers and suppliers of tools for multi- media experiences on the
Internet.

Employees

As of March 31, 2002,  the Company had 17 full-time,  consisting of 4 management
personnel, 5 in marketing and sales, 2 administrative and support personnel, and
6 scientific and technical  personnel.  We also use  independent  consultants to
staff  projects or specialty  workload.  At the date of this  report,  we had 20
consultants.

None of the Company's employees are represented by a labor union and the Company
has experienced no work stoppages.  Research and development  costs, as reported
in the  Company's  Consolidated  Statements  of  Operations  are  funded  by the
Company.  The Company is  primarily  a computer  software  business  and has not
incurred any material costs associated with compliance with environmental laws.

ITEM 2. PROPERTIES

The Company's offices are located at 10345 W. Olympic Boulevard,  Suite 300, Los
Angeles,  CA 90064.  Our lease covers  approximately  5,700 square feet, and the
basic monthly rent is $14,550.00. Our lease expires September 30, 2002, and will
continue on a month to month basis. The Company is negotiating a reduced monthly
rate with the landlord.

The Company has no  significant  investments  or interests in real estate,  real
estate mortgages, or securities of or interests in entities primarily engaged in
real estate activities.

ITEM 3. LEGAL PROCEEDINGS

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.




                                       11
<PAGE>
                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The  Company's  Common Stock is currently  traded on the over the counter  (OTC)
Bulletin Board under the symbol "APHV".  The following table sets forth the high
and low prices for the Common  Stock as reported by the NASDAQ  Bulletin  Board,
for the three-month  periods listed.  The  over-the-counter  quotations  reflect
inter-dealer prices,  without retail mark-up,  markdown or commissions,  and may
not represent actual transactions.




Fiscal Year 2001                High       Low

June 30, 2000                 $   1.34   $   0.69
September 30, 2000                0.78       0.32
December 31, 2000                 0.47       0.13
March 31, 2001                    0.30       0.14


Fiscal Year 2002                High       Low

June 30, 2001                 $   0.23   $   0.23
September 30, 2001                0.16       0.15
December 31, 2001                 0.36       0.30
March 31, 2002                    0.15       0.15


Fiscal Year 2003                High       Low

June 30, 2002                 $   0.10   $   0.10






During the three month  period  ended March 31, 2001,  the Company  issued:  (a)
150,000  shares of common  stock to David  Goldsmith  in payment for  consulting
services of $30,000;  (b) 40,000  shares of common  stock to William  Barnett in
payment for legal services of $10,000; and (c) 60,000 shares of common stock and
three-year  warrants for the purchase of up to 75,000  shares of common stock at
an exercise price of $0.01 to Balter Guth Aloni for legal services of $45,000.

During the three month period ended March 31, 2001, the Company also issued: (a)
475,000 shares of common stock to Richard Moskowitz, Alpha Virtual's former CEO,
for payment of accrued  expenses,  loans and salary  totaling  $95,000;  and (b)
225,000 shares of common stock to Dr. Gershon  Weltman,  Alpha Virtual's  former
President, for payment of accrued expenses and salary totaling $45,000.

 On April 5, 2001 we entered into a Securities  Purchase  Agreement  with Global
Alpha  Corporation,  a British Virgin Islands company ("Global Alpha"),  wherein



                                       12
<PAGE>
the Company agreed to sell up to 14,616,444 shares of its common stock to Global
Alpha for total  purchase  price of  $3,226,200.  In fiscal  2002,  we  received
$2,400,000 of the purchase  price,  and the balance had been received as of June
30, 2002.

As of March 31, 2002, the Company had  approximately  314 shareholders of record
of its Common Stock.

We  have  never  paid  dividends  and we do not  expect  to  declare  or pay any
dividends in the foreseeable future.















































                                       13
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

General

Since fiscal 2001,  our business  refocus has been  entirely on  developing  new
commercial  products in the area of Internet  collaboration.  Our patent-pending
OneView(TM)  product  platform  meets  the  growing  demand  for new  multi-user
interactivity  - integrating  browser,  Instant  Messaging,  and real-time group
collaboration  in an on-demand  basis.  OneView allows users to immediately form
groups and explore Web sites  together,  sharing the same experience at the same
time, whether they are located in the next room or half way around the world. As
such, it is the fastest,  most convenient way to collaborate  synchronously over
the Internet today.

Prior to our refocus on Internet  collaboration  product design, our company had
historically   engaged  in  the   design,   development   and   manufacture   of
computer-based  simulation  systems for  training and  decision  support.  These
systems  include both  hardware and software and are used to train  personnel in
the  use of  various  military  and  commercial  equipment,  including  weapons,
vehicles and aircraft.  Much of the company's simulator business has been in the
foreign  defense   industry  where  the  company  has  built  an   international
reputation.  The  tightening  of defense  budgets  worldwide,  combined with the
continuing  consolidation and intense  competition in the defense industry,  had
negatively impacted the growth and profit opportunities for small companies such
as Alpha Virtual. As a result, in July 2000, the Company sold the assets related
to the PGTS product line to Eidetics  Corporation,  a developer and manufacturer
of  specialized  defense  simulation  products.  From the  disposition  of those
assets,  the company  will earn  certain  royalties.  Refer to the "Sale of PGTS
Assets" and "Liquidity and Capital  Resources" section below for a discussion of
the Company's divestiture of the training simulator system product line.

Going Concern Qualification

The following  discussion is based on the audited financial statements contained
elsewhere in this report. The audited financial statements have been prepared in
conformity with generally  accepted  accounting  principals,  which  contemplate
continuation of the Company as a going concern.  The financial statements do not
include  any   adjustments  to  reflect  the  possible  future  effects  on  the
recoverability and  classification of assets or the amounts and  classifications
of the liabilities that may result from the possible inability of the Company to
continue as a going concern. See Note A of Notes to Financial Statements.

Sale of PGTS Assets

 On  December  27,  1999,  the  Company  and  Eidetics  Corporation  executed  a
Memorandum  of  Understanding  regarding  the sale of the PGTS  product  line to
Eidetics   Corporation.   In  March  2000,  the  Company  commenced  significant
discussions with Eidetics  Corporation  leading to the sale of substantially all
of the  inventory,  leaseholds,  equipment and certain  identifiable  intangible
assets of its PGTS training  simulator  product line.  The agreement of the sale
was  completed  and signed by the  parties  in July 2000.  The book value of the
assets sold was  $315,649.  The  equipment  was fully  depreciated  and had been




                                       14

<PAGE>
valued  at  $10,000  and the  identifiable  intangible  assets,  which  were not
capitalized,  were  valued at  approximately  $145,000  for a total  purchase of
$470,630. In consideration for the purchase of the product line assets, Eidetics
Corporation  paid off a bank loan of the Company's valued at $126,538 and a loan
with the Small Business Administration valued at $43,014.  Eidetics also assumed
the  Company's  account  payable  liability of $301,078  with a foreign  support
services  representative.  The Company will also be entitled to royalty payments
under the  agreement  on future PGTS  Training  System  sales by Eidetics  for a
four-year period from the date of sale. The Company consequently reported a gain
of approximately  $154,981 applicable to the fully depreciated equipment and the
identifiable intangible assets.


   Operating result of the PGTS Training Systems product line were as follows;

                            2002          2001            2000
Net sales              $     19,242   $    16,724     $      -----
Net income (loss)      $     19,242   $    16,724     $   (451,000)


Results of Operations

Our  business  activities  in fiscal  2002 have been  primarily  focused  on the
completion of the OneView product suite and marketing activities associated with
its commercial introduction.

   Net  Sales.  Net  sales for the  fiscal  year 2002 of  $49,242  decreased  by
$138,272  or 73.7%  compared  to  fiscal  2001 due to our  concentration  on the
completion of software products in 2002 and the products'  limited  introduction
into the market  place.  Net sales of $49,242  consist of fees for  services and
royalties from PGTS trainer sales by Eidetics  Corporation.  Simulation  network
technology sales during the fiscal 2001 resulted from a U.S. Government contract
for HLA software development. This contract was completed on March 31, 2001.

   Cost of Sales.  Cost of sales for fiscal  2002  decreased  81.4 % from fiscal
2001  due to the  company's  disposition  of the  PGTS  product  line in 2000 as
discussed above.  Cost of sales as a percentage of sales during fiscal 2002, was
55.3% compared to 79% during the fiscal 2001.  Continued reductions in fixed and
semi-fixed expenses  contributed to the lower percentage of cost of sales to net
sales during fiscal 2002.

   Selling,   General  and  Administrative   Expenses.   Selling,   general  and
administrative  expenses  increased $667,254 or 85.3% in fiscal 2002 compared to
fiscal 2001.  This increase was the result of increased  staffing levels to grow
operations and develop the OneView software products for market launch.

   Interest  Expense.  Interest expense  decreased in fiscal 2002 to $1,678 from
$12,878 in fiscal 2001. Interest expense decreased  significantly because of the
disposition  of the PGTS product  line and  associated  loans and export  credit
facility outstanding as of the date of the July 2000 disposition.

Liquidity and Capital Resources

The  Company is  experiencing  continuing  liquidity  problems  due to a lack of



                                       15
<PAGE>
revenues  and the absence of cash  reserves.  At March 31, 2002,  the  Company's
unrestricted  cash and cash  equivalent  balance  of  $19,807  was the result of
equity  investments  made during the third  quarter of fiscal 2001 and  revenues
from contracts and fees. The Company had negative working capital of $457,313 at
March 31, 2002,  compared to negative  working  capital of $847,495 at March 31,
2001.  The  improvement in negative  working  capital was due to the infusion of
cash  received  from the Common  Stock  sold to Alpha  Global  Corporation.  The
Company  continues to have  difficulty in meeting all of its obligations as they
come due. In addition, the Company did not pay approximately $140,000 of payroll
taxes in the last quarter of fiscal 2002 and may not have sufficient  capital to
pay payroll  taxes in the first  quarter of fiscal 2003.  The lack of sufficient
working  capital  continues  to  restrict  the  Company's  ability to market its
OneView products to expand its revenue base.

 The Company requires significant  additional financing from external sources to
be able to fund the development of enhancements to its OneView product suite and
to provide for marketing and sales personnel and related expenses to gain market
acceptance of its commercial  software products.  Although we were successful in
fiscal 2002 in obtaining  private  equity  financing  that fulfilled our capital
requirements at planned  expense levels,  we cannot assure that the company will
be able to raise the  additional  monies  required to fund  operations in fiscal
2003  and  thereafter.  We also  are  unable  to  provide  assurances  that  our
commercial  software  products  will  start to  generate  significant  levels of
revenue or that we will  become  profitable.  Also,  the terms of any  financing
could be  unfavorable  to the Company  and  dilutive  to its  shareholders.  The
Company continues to pursue U.S. Government sponsored development contracts that
have provided  technical inputs to the commercial  software  products as well as
providing revenue and income.  The Company is also exploring  strategic business
alliances and  potential  business  combinations  in order to meet our short and
long-term objectives.

The Company's  operating  activities  used cash of $2,373,370  during the fiscal
year ended March 31, 2002  resulting  primarily from the operating loss incurred
during  the period due to reduced  sales  levels and costs  associated  with the
development and commercial introduction of the its commercial software products.

The Company's financing activities provided cash of $2,397,083 during the fiscal
year ended March 31, 2002  primarily as a result of selling  common stock.  Long
term debt was reduced to a negligible amount primarily through the assumption of
liabilities  by Eidetics  Corporation  relating to the sale of the PGTS  product
line.

Forward Looking Statements

   Except for the historical  information contained herein, this report contains
forward-looking  statements  (identified  by the  words  "estimate,"  "project,"
"anticipate,"  "plan," "expect,"  "intend,"  "believe,"  "hope,"  "strategy" and
similar  expressions) which are based on Management's  current  expectations and
speak only as of the date made. These forward-looking  statements are subject to
various risks, uncertainties and factors, including,  without limitation,  those
described below,  that could cause actual results to differ  materially from the
results anticipated in the forward-looking statements.





                                       16
<PAGE>
   Going Concern Issue and Severe Liquidity  Problems.  The Company's  financial
statements  for the  fiscal  year ended  March 31,  2002 have been  prepared  in
conformity with generally  accepted  accounting  principals,  which  contemplate
continuation of the Company as a going concern.  See the  Independent  Auditors'
Report  and Note A of  Notes  to  Consolidated  Financial  Statements  contained
elsewhere  herein.  The financial  statements do not include any  adjustments to
reflect the possible future effects on the  recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern.  The Company's
revenue levels have  significantly  declined  during the fiscal year ended March
31, 2001 and 2002.  The Company has also  sustained  operating  losses in recent
years and requires substantial amounts of working capital in its operations.  As
a result,  the Company  suffers from limited cash  resources  that  restrict its
ability  to  market  its  commercial  software  products.  Even  if the  Company
overcomes its liquidity  problems,  there can be no assurance that in the future
the  Company  will be able to  increase  revenues  or  operate  profitably.  The
Company's  liquidity problem could also result in vendors seeking legal recourse
should the company  continue to have  insufficient  cash to pay its debts as and
when due.

   Business  Strategy:  Internet Software  Products and Services.  The Company's
long  term  business  strategy  is to focus  on the  development  of  commercial
software  products  derived from the Company's  defense  related  technology and
expertise  in order to  expand  its  customer  base and  reduce  its  historical
dependence  on defense  contracts.  The Company will require  additional  equity
funding to be able to fully  commercialize,  market and exploit the OneView line
of products. There can be no assurance that all future funding requirements will
be obtained and at terms that will be advantageous from an economic  standpoint.
Furthermore,  there can be no assurance  that the Company will be  successful in
its  development   efforts,  or  that  the  OneView  product  suite  will  be  a
commercially  feasible product, or that the Company will be able to successfully
market its software products.

   Product  Development and Technological  Change. The Internet software markets
are characterized by rapid technological change and are highly competitive.  The
Company's  success is  dependent  on its  ability to develop  new  products  and
product enhancements to keep up with technological advances and to meet customer
needs.  Any  failure by the  Company to  anticipate  or  respond  adequately  to
technological developments and customer requirements,  or any significant delays
in product development or introduction,  could have a material adverse effect on
the Company's  financial  condition and results of  operations.  The Company has
limited  manufacturing  and marketing  capabilities and financial  resources and
will be dependent upon establishing  relationships  with strategic and marketing
partners  to be able to fully  exploit  the  OneView  product  suite  and  other
commercial  products.  There can be no assurance that the OneView  product suite
software  or future new  products  will  achieve  market  acceptance,  result in
increased  revenues,  or be  profitable.  Such products could also be subject to
technological  obsolescence and intense  competition from companies with greater
resources than the Company.

   Management  of  Growth.  Successful  expansion  of the  Company's  operations
will depend on, among other things, the ability to develop and commercialize new
products,  to continue to effectively market existing  products,  to attract and




                                       17
<PAGE>
retain skilled  management and other personnel and to secure adequate sources of
capital to finance growth at reasonable terms. To manage growth effectively, the
Company  will  have to  continue  to  improve  its  operational,  financial  and
management information systems, procedures and controls. As the Company expands,
it may from time to time experience  constraints  that will adversely affect its
ability to satisfy customer demand in a timely fashion. Failure to manage growth
effectively could adversely affect the Company's financial condition and results
of operations.

   Competition. The Company expects to encounter intense competition in the area
of  networked  on-line  computer  software  products  from  companies  that have
substantially greater financial,  manufacturing and marketing  capabilities than
the  Company.  The  Company  could also  experience  competition  from  emerging
companies.  There  can be no  assurance  that  the  Company's  products  will be
competitive with existing or future  products,  or that the Company will be able
to establish or maintain a profitable  price  structure  for its  products.  The
Company also experiences intense competition for U.S. and foreign government R&D
contracts from companies such as SAIC,  Litton,  Lockheed  Martin and TRW, which
have  substantially  greater resources than the Company.  The Company's size and
financial condition impedes its ability to compete in many areas.

   Protection of Intellectual  Property.  The Company relies on a combination of
patents,  trademarks,  trade  secrets,  and  other  intellectual  property  law,
nondisclosure   agreements  and  other  protective   measures  to  preserve  its
proprietary  rights pertaining to its technology and products.  Such protection,
however,  may not preclude  competitors  from developing  products or technology
similar or superior to the Company's.  In addition,  the laws of certain foreign
countries do not protect intellectual  property rights to the same extent as the
laws  of  the  United  States.  Although  the  Company  continues  to  implement
protective  measures and intends to defend its proprietary  rights to the extent
it has the  financial  resources to do so, there can be no assurance  that these
efforts will be  successful.  Furthermore,  there can be no  assurance  that the
Company's  products or  technologies  are not or will not be in violation of the
patent rights of third parties.

ITEM 7.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   The Company's  Consolidated Financial Statements are contained in this report
beginning at page F-l.

ITEM 8.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

   None













                                       18
<PAGE>
                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

   The  information  required  hereunder is  incorporated  by reference from the
sections entitled "Election of Directors",  "Executive  Officers" and "Ownership
of Common Stock--Section 16(a) Beneficial Ownership Reporting Compliance" of the
Company's Proxy Statement to be filed in connection with its 2002 Annual Meeting
of Stockholders.

ITEM 10. EXECUTIVE COMPENSATION

   The  information  required  hereunder is  incorporated  by reference from the
section     entitled     "Executive     Compensation"     and    "Election    of
Directors--Compensation  of Directors" of the  Company's  Proxy  Statement to be
filed in connection with its 2002 Annual Meeting of Stockholders.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The  information  required  hereunder is  incorporated  by reference from the
section entitled "Ownership of Common Stock" of the Company's Proxy Statement to
be filed in connection with its 2002 Annual Meeting of Stockholders.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   The  information  required  hereunder is  incorporated  by reference from the
section entitled  "Certain  Transactions" of the Company's Proxy Statement to be
filed in connection with its 2002 Annual Meeting of Stockholders.




























                                       19
<PAGE>
                                     PART IV

                                INDEX TO EXHIBITS

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

 (a)  Exhibit Index (Management contracts, compensation plans and
      arrangements are identified by (*).
         3.1    Certificate of Incorporation, as amended (1)
         3.2    By-Laws amended. (1)
      * 10.1    1992 Stock Option Plan (8)
      * 10.2    Employment Agreement  with  Gershon Weltman dated August 1, 1989
                and First Amendment dated October 22, 1991. (9)
      * 10.3    1988 Directors' Stock Option Plan. (8)
      * 10.4    Second  Amendment  to  Employment Agreement with Gershon Weltman
                dated August 27, 1996. (2)
      * 10.5    Employment  agreement  with  Thomas Lubaczewski dated January 1,
                1997. (3)
        10.6    Loan  Agreement  and  note  dated September 23, 1997 between the
                Company and The Pacific Bank. (4)
        10.7    1999 Stock Option Plan (5)
        10.8    1999 Stock Option Plan for Non-Employee Directors (5)
        10.9    Employment Agreement with Richard Moskowitz dated January 3,2000
                and Memorandum of Agreement dated November 19, 1999. (6)
       10.10    Employment Agreement with Andreas Kemkes dated February 4, 2000.
                (10)
       10.11    Stock Compensation Plan for Consultants (7)


 (b) The  Registrant  did not file any  report s on Form-8K  during the  quarter
ended March 31, 2002.


(1)
     Incorporated by reference to the Company's  Registration  Statement on Form
S-8 filed on March 9, 2000.

(2)
     Incorporated  by reference to the Company's  Form 10-KSB for the year ended
March 31, 1996.

(3)
     Incorporated  by reference to the Company's  Form 10-KSB for the year ended
March 31, 1997.

(4)
     Incorporated  by reference to the  Company's  Form 10-QSB for the quarterly
period ended September 30, 1997.

(5)
     Incorporated  by reference to the  Company's  Form 10-QSB for the quarterly
period ended September 30, 1999.

(6)
     Incorporated  by reference to the  Company's  Form 10-QSB for the quarterly
period ended December 31, 1999.

                                       20
<PAGE>
(7)
     Incorporated by reference to the Company's  Registration  Statement on Form
S-8 filed on October 15, 1999.

(8)
     Incorporated  by reference to the Company's  Form 10-KSB for the year ended
March 31, 1993.

(9)
     Incorporated  by reference to the Company's  Form 10-KSB for the year ended
March 31, 1992.

(10)
     Incorporated  by reference to the Company's  Form 10-KSB for the year ended
March 31, 2000.










































                                       21
<PAGE>
                                   SIGNATURES

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

Dated: July 15, 2002           ALPHA VIRTUAL, INC.

                               By:     /s/  DAN MAPES
                                       ---------------------------------
                                       Dan Mapes
                                       Chief Executive Officer and Chief
                                       Financial Officer


   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.

       Signature                       Title                              Date


/s/ Dan Mapes             Chief Executive Officer, Chief           July 15, 2002
----------------------    Financial Officer and Director
Dan Mapes


/s/ Richard Moskowitz
----------------------    Vice President Business Development      July 15, 2002
Richard Moskowitz         and Chairman of the Board


/s/ Dr. Amos Freedy
----------------------    Director                                 July 15, 2002
Dr. Amos Freedy


/s/ Barry Didato
----------------------    Director                                 July 15, 2002
Barry Didato



----------------------    Director                                 July 15, 2002
Mohsen Hashemi












                                       22
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Alpha Virtual, Inc.

   We have audited the accompanying balance sheets of Alpha Virtual,  Inc. as of
March 31, 2002 and 2001, and the related statements of operations, shareholders'
deficit, and cash flows for the years then ended. 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 audit.

   We  conducted  our audits in  accordance  with  generally  accepted  auditing
standards in the United States of America.  Those standards require that we plan
and  perform  the  audits 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
audit provides 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 Alpha Virtual, Inc. as of March
31, 2002 and 2001,  and the results of its operations and its cash flows for the
years then ended in conformity with accounting  principles generally accepted in
United States of America.

   The accompanying  financial  statements have been prepared  assuming that the
Company will continue as a going concern. As shown in the financial  statements,
the Company had net losses of $2,957,000  and $872,000 for the years ended March
31, 2002 and 2001.  As of March 31,  2002,  the  Company's  current  liabilities
exceeded current assets by $457,000 and total liabilities  exceeded total assets
by $423,000. These factors, and the others described more fully in Note A to the
financial  statements,  raise  substantial  doubt about the Company's ability to
continue  as a going  concern.  The  financial  statements  do not  include  any
adjustments that might result from the outcome of this uncertainty.

Agoura Hills, California
July 5, 2002


















                                      F-1
<PAGE>
                               ALPHA VIRTUAL, INC.
                                 BALANCE SHEETS

                                                            March 31,
                                               --------------   ---------------
                                                      2002             2001
                                               --------------   ---------------
ASSETS
CURRENT ASSETS
    Cash and cash equivalents                  $       19,807   $        12,444
    Receivables, net of allowance of $3,000            27,070            31,021
    and $0 as of March 31, 2002 and
    2001 - Note B
    Prepaid expenses                                   24,481             1,350
                                               --------------   ---------------
TOTAL CURRENT ASSETS                                   71,358            44,815

EQUIPMENT & LEASEHOLD IMPROVEMENTS, at cost
    Note C                                             45,850            29,500
    Less accumulated depreciation and
    amortization                                       28,038            22,848
                                               --------------   ---------------
                                                       17,812             6,652

DEFERRED TAXES--Note F                                      0           932,566
OTHER ASSETS                                           21,825             4,080
                                               --------------   ---------------

                      TOTAL ASSETS             $      110,995   $       988,113
                                               ==============   ===============


                        See notes to financial statements
























                                      F-2
<PAGE>
                               ALPHA VIRTUAL, INC.
                           BALANCE SHEETS (Continued)

                                                           March 31,
                                               --------------   ---------------
                                                      2002             2001
                                               --------------   ---------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
    Accounts payable                           $      111,546  $        326,868
    Payroll taxes payable                             138,167                 0
    Accrued compensation                               47,853           298,292
    Other accrued liabilities                          49,929            39,844
    Short term debt--Note D                            50,000            54,000
    Current portion of long term debt--Note D               0            35,306
    Current portion of obligation under capital lease   3,176                 0
    Loans payable to shareholders--Note D              28,000            38,000
    Rate reserve - DCAA                               100,000           100,000
                                               --------------   ---------------
                    TOTAL CURRENT LIABILITIES         528,671           892,310

LONG TERM DEBT
    Obligation under capital lease                      5,813                 0


COMMITMENTS AND CONTINGENCIES--NOTE E
                                               --------------   ---------------
Total Liabilities                                     534,484           892,310

SHAREHOLDERS' DEFICIT
    Common stock--par value $.001;
    authorized 60,000,000 shares;                      21,144             9,281
    21,144,378 and 9,281,260 shares issued
    and outstanding
    Additional paid-in capital                     16,386,788        13,961,251
    Accumulated deficit                           (16,831,421)      (13,874,729)
                                               --------------   ---------------
                    TOTAL SHAREHOLDERS' DEFICIT      (423,489)           95,803
                                               --------------   ---------------
                    TOTAL LIABILITIES &
                    SHAREHOLDERS' DEFICIT      $      110,995 $         988,113
                                               ==============   ===============


                        See notes to financial statements












                                      F-3
<PAGE>
                               ALPHA VIRTUAL, INC.
                            STATEMENTS OF OPERATIONS

                                                     Year Ended March 31,
                                               --------------   ---------------
                                                    2002              2001
                                               --------------   ---------------
Net sales                                    $        49,242    $      187,514
Cost of sales                                         27,482           148,119
                                               --------------   ---------------
Gross profit                                          21,760            39,395

Cost and expenses:
Selling, general and administrative                1,519,692           782,438
Research and development                             933,312           249,825
                                               --------------   ---------------
Operating loss                                    (2,431,244)         (992,868)

Forgiveness of debt---Note A                         409,596                 0
Net gain on sale of assets--Note A                         0           133,490
Interest income                                            0             1,012
Interest expense                                      (1,678)          (12,878)
                                               --------------   ---------------

Loss before taxes                                 (2,023,326)         (871,244)
Income tax provision--Note F                         933,366               800
                                               --------------   ---------------

Net loss                                     $    (2,956,692)   $     (872,044)
                                               ==============   ===============
Earnings per share:
                 Basic:
                              Net loss       $         (0.19)   $        (0.10)
                 Diluted:
                              Net loss       $         (0.19)   $        (0.10)
Weighted average common and common
 equivalent shares:
                 Basic                            15,601,215         8,102,260
                 Diluted                          15,601,215         8,102,260


                        See notes to financial statements















                                      F-4

<PAGE>
                               ALPHA VIRTUAL, INC.
                       STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<S>                                       <C>        <C>       <C>           <C>            <C>
                                               Common Stock      Additional   Accumulated
                                          --------------------    Paid In       Deficit
                                             Shares    Amount     Capital                       Total
                                          ---------- --------- ------------- -------------  -------------
Balance at March 31, 2000                  7,732,260 $   7,733 $  13,530,519 $ (13,002,685) $     535,567

Exercise of options                           26,500        26        12,139                       12,165
Common shares issued for cash              1,116,750     1,116       282,143                      283,259
Common shares issued for services            405,750       406       136,450                      136,856
Net loss                                                                          (872,044)      (872,044)
                                          ---------- --------- ------------- -------------  -------------

Balance at March 31, 2001                  9,281,260 $   9,281 $  13,961,251 $ (13,874,729) $      95,803

Common shares issued for cash             11,691,449    11,691     2,388,309                    2,400,000
Common shares issued for services            105,000       105        27,295                       27,400
Common shares issued for debt conversion      66,669        67         9,933                       10,000
Net loss                                                                        (2,956,692)    (2,956,692)
                                          ---------- --------- ------------- -------------  -------------

Balance at March 31,2002                  21,144,378 $  21,144 $  16,386,788 $ (16,831,421) $    (423,489)
                                          ========== ========= ============= =============  =============

</TABLE>

                        See Notes to Financial Statements
































                                       F-5

<PAGE>
                               ALPHA VIRTUAL, INC.
                            STATEMENTS OF CASH FLOWS

                                                         Year Ended March 31,
                                                      2002                2001
CASH FLOWS FROM OPERATING ACTIVITIES:               ------------   ------------
Net income                                         $ (2,956,692)  $   (872,044)
    Adjustments to reconcile net income to
    net cash used in operating activities:
               Loss on disposal of assets                      0         21,491
               Depreciation and amortization               5,190          9,896
    Changes in assets and liabilities:
               Receivables                                 3,951        (20,448)
               Inventory                                       0         80,620
               Pre-contract costs                              0        220,000
               Prepaid expenses                          (23,131)        16,270
               Deferred taxes                            932,566              0
               Other assets                              (17,745)        78,850
               Accounts payable                         (215,322)      (261,343)
               Accrued compensation                     (250,439)       125,793
               Other accrued liabilities                 148,252         18,407
               Other long term liabilities                     0        (57,500)
                                                    ------------   ------------
        NET CASH USED IN OPERATING ACTIVITIES         (2,373,370)      (640,008)
CASH FLOWS FROM INVESTING ACTIVITY:
    Capital additions/disposition                        (16,350)             0
                                                    ------------   ------------
        NET CASH USED IN INVESTING ACTIVITIES            (16,350)             0
CASH FLOWS FROM FINANCING ACTIVITIES:

    Payments on debt                                     (39,306)      (173,609)
    Proceeds from capital lease obligation                10,000              0
    Principal payments on capital lease                   (1,011)             0

    Loans from shareholders                              (10,000)        38,000
    Proceeds from sale of common stock                 2,437,400        432,280
                                                    ------------   ------------
        NET CASH PROVIDED BY FINANCING ACTIVITIES      2,397,083        296,671
        NET INCREASE (DECREASE) IN CASH AND CASH           7,363       (343,337)
        EQUIVALENTS
        CASH AND CASH EQUIVALENTS AT THE BEGINNING        12,444        355,781
        OF THE YEAR
        CASH AND CASH EQUIVALENTS AT END OF YEAR    $     19,807   $     12,444
                                                    ============   ============
        CASH PAID DURING PERIOD
                                 Interest           $      1,678   $     15,407
                                 Income Taxes       $        800   $        800


Supplemental Disclosure of Non-Cash Activity:

   During the year ended March 31, 2001 the Company sold its assets  relating to
its PGTS product  line. As  compensation  for these assets the buyer assumed the
liabilities  relating to the  product  line.  The book value of the  liabilities
exceeded the book value of the assets resulting in a gain of $154,981.

                        See Notes to Financial Statements

                                       F-6

<PAGE>
                               ALPHA VIRTUAL, INC.
                      NOTES TO AUDITED FINANCIAL STATEMENTS

NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of the Company:  Alpha Virtual,  Inc., (the  "Company")develops  and
markets innovative,  real-time Web collaboration products for business, consumer
entertainment,  education,  and government markets. The Company's patent pending
OneViewTM   product  platform  meets  the  growing  demand  for  new  multi-user
interactivity-integrating   browser,  Instant  Messaging,  and  real-time  group
collaboration in an on-demand basis.

   Basis of  Presentation:  The  accompanying  financial  statements  have  been
prepared in conformity  with generally  accepted  accounting  principles,  which
contemplate  continuation  of the  Company as a going  concern.  The Company has
sustained  operating  losses  during the fiscal  year ended  March 31,  2002 and
requires  substantial  amounts of working capital to support its operations.  At
March 31, 2002  current  liabilities  exceed  current  assets by  $457,313.  The
Company  continues to have  difficulty in meeting its obligations as they become
due. The ability of the Company to operate its business and generate  sufficient
positive  cash flows is dependent on raising  additional  investment  capital to
fund development of commercial software products.  Since September 30, 1999, the
Company has raised  approximately  $3,305,000 of investment  capital,  which has
been the primary  source of funding for  continuing  operations.  The  Company's
financial  statements  do not include any  adjustments  to reflect the  possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
the Company to continue as a going concern.

   Sale of PGTS Training  System  Assets:  On December 27, 1999, the Company and
Eidetics Corporation  executed a Memorandum of Understanding  regarding the sale
of the PGTS product  line to Eidetics  Corporation.  In March 2000,  the Company
commenced significant  discussions with Eidetics Corporation leading to the sale
of  substantially  all of  the  inventory,  leaseholds,  equipment  and  certain
identifiable  intangible  assets of its PGTS Training  System  product line. The
agreement  of the sale was  completed  on July 20,  2000.  The book value of the
assets sold was  $315,649.  The  equipment  was fully  depreciated  and has been
valued  at  $10,000  and  the  identifiable  intangible  assets,  which  are not
capitalized,  are  valued at  $144,981  for a total  purchase  of  $470,630.  In
consideration for the purchase of the product line assets,  Eidetics Corporation
paid off a bank loan of the  Company's  valued at  $126,538  and a loan with the
Small  Business  Administration  valued at $43,014.  Eidetics  also  assumed the
Company's  account payable liability of $301,078 with a foreign support services
representative.  The Company is entitled to royalty payments under the agreement
on future PGTS Training System sales by Eidetics for a four-year period from the
date of sale. The Company consequently reported a gain of $154,981 applicable to
the fully depreciated equipment and the identifiable intangible assets.

   In addition  to the sale of the PGTS  assets the Company  disposed of various
furniture and equipment resulting in a book loss of $21,491.

   The result of both  transactions was a net gain on sale of assets of $133,490
for the fiscal year ended March 31, 2001.



                                      F-7

<PAGE>
   Operating results of the PGTS Training Systems product line were as follows;

                             2002       2001          2000
Net Sales/Royalties         19,242   $   16,724   $        --
Net income (loss)           19,242   $   16,724   $  (451,000)

Settlement of Liabilities

   During the fiscal year ended March 31, 2002,  the Company was  forgiven  over
$235,000 of  liabilities  from  various  suppliers  and  lenders.  Additionally,
Richard  Moskowitz  and Dr.  Gershon  Weltman  entered into general  release and
waiver  agreements  with the Company  whereby  Moskowitz  and Weltman  agreed to
cancel  previously  booked  obligations of  approximately  $179,000 and $65,000,
respectively,  arising from accrued  salary,  vacation and loans to the Company,
and to accept payment of $100 each as full and final payment of the obligations.

   Cash Equivalents:  All  highly liquid investments maturing in three months or
less when purchased are considered as cash equivalents.

   Equipment and Leasehold  Improvements:  Equipment and leasehold  improvements
are  stated  at  cost.   Depreciation  of  equipment  is  provided  for  by  the
straight-line  method over their estimated useful lives, which range from 3 to 5
years.   Amortization   of  leasehold   improvements  is  provided  for  by  the
straight-line  method over the  shorter of the useful  lives or the terms of the
leases.

   Revenue  Recognition:  Sales of  services  are  recorded  when  performed  in
accordance with contracts.  Revenues from long-term contracts are recorded using
the  percentage-of-completion  (cost-to-cost)  method of accounting.  Under this
method,  sales are  recorded  as costs  (including  general  and  administrative
expenses) as incurred,  plus a portion of the profit  expected to be realized on
each contract in the ratio that costs  incurred to date bear to total  estimated
cost at completion. Revenues from software sales are recorded in accordance with
SOP 97-2 "Software Revenue Recognition",  which requires that revenue recognized
from  software  arrangements  be  allocated  to  the  various  elements  of  the
arrangement  based on the relative  fair value values of the  elements,  such as
software  products,  upgrades,  enhancements,  post contract  customer  support,
installation  or training.  Revenue from product  services are recognized at the
time services are provided.  The Company has been developing and marketing their
OneViewTM  software products and services,  however,  as of March 31, 2002 there
were no revenues related to these products.

   Income Taxes: Provisions for federal and state income taxes are calculated on
reported  financial  statement  income  based  on  the  current  tax  law.  Such
provisions  differ from the amounts  currently  payable because certain items of
income and expense, known as temporary differences, are recognized.










                                      F-8

<PAGE>
in different  tax periods for financial  reporting  purposes than for income tax
purposes.  Deferred  income  taxes  are the  result  of the  recognition  of tax
benefits  that  management  expects  to  realize  from  the  utilization  of net
operating  loss  carryforwards.  The  amounts  recorded  are net of a  valuation
allowance and represent  management's estimate of the amount that is more likely
than not to be realized.

   Use of  Estimates:  Company  management  has made a number of  estimates  and
assumptions relating to the reporting of assets and liabilities and the reported
amounts  of  revenues  and  expenses,  in  conformity  with  generally  accepted
accounting principles. Actual amounts could differ from these estimates.

   Earnings (Loss) per Share:  Effective  December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
No. 128").  This statement  replaces the previously  reported  primary and fully
diluted  earnings  per share with basic and diluted  earnings  per share.  Basic
earnings per share is computed by dividing net income (loss) available to common
stockholders by the weighted average number of common shares  outstanding during
the   period.   Diluted   earnings   per   share   is   very   similar   to  the
previously-reported primary earnings per share in that it includes the effect of
the additional common shares which would have been outstanding if dilutive stock
options had been exercised. All earnings per share amounts have been restated to
conform to the SFAS No. 128 requirements.

   The following table  summarizes the calculation of basic and diluted earnings
per share for the years ended March 31:

                                                 2002           2001
Numerator
  Basic and diluted earnings per
  share-- net income (loss)                $  (2,956,692)  $    (872,044)
Denominator
  Basic earnings per share-- Weighted         15,601,215       8,102,260
  average number of common shares
  outstanding during the year
Incremental common shares attributable                 -               -
to assumed exercise of outstanding stock
options
Denominator for diluted earnings per share    15,601,215       8,102,260
Basic earnings (loss) per share            $       (0.19)  $       (0.10)
Diluted earnings (loss) per share          $       (0.19)  $       (0.10)


   The  calculations of earnings  excluded the effect of the assumed exercise of
the following  numbers of outstanding  common stock options and warrants because
their  effect was  antidilutive:  4,657,805  for the fiscal year ended March 31,
2002 and 2,232,450 for the fiscal year ended March 31, 2001.

NOTE B--RECEIVABLES

   At March 31, 2002 there were $27,070 of receivables that represented  amounts
from services  performed and royalties from the Eidetics sale. At March 31, 2001
there were $31,021 of receivables  from commercial and United States  Government
contracts and agreements.



                                       F-9
<PAGE>
NOTE C--EQUIPMENT AND LEASEHOLD IMPROVEMENTS

   Equipment and leasehold improvements consist of the following at March 31:

                                                     2002          2001
                                                -----------    ----------
Computers and other equipment                   $    23,750    $   17,400


Office furniture & fixtures                          12,100        12,100
Property held under capital lease                    10,000             0
                                                -----------    ----------
                                                     45,850        29,500
Accumulated depreciation & amortization              28,038        22,848
                                                -----------    ----------
                                                $    17,812    $    6,652
                                                ===========    ==========


   Depreciation  expense was $5,190 and $9,896 for the fiscal  years ended March
31, 2002 and 2001, respectively.


NOTE D--LONG-TERM DEBT AND OTHER FINANCING

   Long-term debt included the following at March 31:

                                                    2002          2001
                                                -----------    ----------

Note Payable--Consultant issued to resolve open
accounts payable balance. Payable in monthly
installments of $4,521 including interest
at 8% per annum,                                $         0    $   35,306
                                                -----------    ----------
                                                          0        35,306
Less: Current portion of long-term notes payable          0        35,306
                                                -----------    ----------
Non-Current portion of long-term debt           $         0    $        0
                                                ===========    ==========


   Short-term debt included the following at March 31, 2002 and 2001:

   As of March 31, 2002 and 2001,  there is a loan outstanding of $50,000 with a
foreign customer.  The note bears interest at 6% per year. The terms of the note
required repayment by March 1, 1996.

   As of March 31, 2002 and 2001 the Company  had loans  outstanding  of $28,000
and  $38,000 to various  shareholders.  These loans are past due as of March 31,
2002. The loans are convertible to common stock at $0.15 per share at the option
of the note holder.





                                      F-10
<PAGE>

NOTE E--LEASES AND COMMITMENTS

   Lease Commitments:  Approximate future minimum payments under  non-cancelable
operating  leases with initial or  remaining  terms of one year or more at March
31, 2002 consisted of the following:

                 2003                     $   112,482
                 2004                          25,182
                 2005                          12,623
                 2006 and beyond                    0
                                          -----------
                                          $   150,287

 During the years ended March 31, 2002 and 2001,  lease expense was $138,438 and
$69,881, respectively.

The Company also leases office equipment under a capital lease expiring in 2004.
Future  minimum lease  payments as of March 31, 2002 under this  agreement is as
follows:

      2003                                               $       3,705
      2004                                                       3,705
      2005                                                       2,470
                                                         ---------------
                                                                 9,880
      Less: amounts representing interest                       (  891  )
                                                         ---------------
      Present value of minimum lease payments                    8,989
      Less: current portion                                    ( 3,176  )
                                                         ---------------
                                                         $       5,813
                                                         ===============

The asset and  liability  is  recorded  at the  present  value of minimum  lease
payments.  The asset is being depreciated over the lease term and is included in
depreciation expense for the year ended March 31, 2002.

The following is a summary of property held under capital lease:

                                                 Year Ended March 31,
                                                 2002          2001
                                               -------       -------
      Computer                                  10,000             0
      Less: Accumulated Depreciation             1,389             0
                                               -------       -------
      Property held under capital lease         $8,611            $0

   DCAA--Audit:  The  Company's  books and  records  are subject to audit by the
Defense  Contract Audit Agency (DCAA).  At March 31, 2002, there is a DCAA audit
open of a large  multi-year  contract  which was completed in 1994.  The Company
believes the costs charged to this contract were proper and should not result in
adjustments  in excess of the  $100,000  reserved for  possible  contract  price
adjustments  at March 31, 2002.  The amount  reserved is believed to be adequate
and is included in current liabilities.


                                      F-11
<PAGE>
NOTE F--INCOME TAXES

   The provision for income taxes consist of the following:

                                                 Year Ended March 31,
                                                2002              2001
Current:                                    -----------      ------------
   Federal                                  $         0      $          0
   State                                            800               800
                                            -----------      ------------
                                                    800      $        800
Deferred:
   Decrease in benefit of NOL carryforwards   4,755,566           677,000
   Increase in valuation allowance           (3,823,000)         (677,000)
                                            -----------      ------------
                                            $   933,366      $        800

On April 5, 2001, there was an ownership  change in the Company.  Under Internal
Revenue  Code  Section  382, the Company is limited in the amount of income that
can be offset by net operating loss (NOL) carryovers from losses incurred before
the date of ownership  change.  This limitation is calculated by multiplying the
Company's  value at the time of ownership  change of  $1,581,000  by the federal
long-term  tax-exempt  rate of 4.92% for April 2001.  The Section 382 limitation
reduces the allowable NOL  carryforward  by  $4,374,000.  At March 31, 2002, the
Company has NOL carryforwards of approximately  $2,378,000 for federal and state
income tax  purposes,  expiring in varying  amounts  through  2016. At March 31,
2002,  approximately $3,660,000 and $130,000 of federal and state NOL carryovers
expired,  respectively.  SFAS 109 requires  that the tax benefit of such NOLs be
recorded using current tax rates as an asset to the extent  management  assesses
the  utilization  of such  NOLs to be  more  likely  than  not.  Management  has
determined  that future  taxable income of the Company will more likely than not
be  insufficient  to  realize  the  deferred  tax  asset of  $2,378,000  and has
therefore taken a valuation allowance of $2,378,000.

   Realization of the future tax benefits of the NOL  carryforwards is dependent
on the Company's  ability to generate  taxable  income  within the  carryforward
period.   In  assessing   the   likelihood  of   utilization   of  existing  NOL
carryforwards,  management  considered  the  historical  results  of  continuing
operations  over the last three years and the current  economic  environment  in
which  the  Company  operates.  Management  did  not  consider  any  non-routine
transactions in assessing the likelihood of realization of the recorded deferred
tax asset.

   Federal income tax NOL carryforwards will expire between fiscal 2003 and 2016
and state income tax operating  loss  carryforwards  will expire  between fiscal
2003 and 2012 if not used to offset taxable income.

   The  following  reconciles  the  federal  statutory  income  tax  rate to the
effective rate of the provision for income taxes.
                                                         2002         2001
                                                      ---------    ---------
Federal statutory rate                                  34.00%       34.00%
Increase (reductions) in taxes due to:
     State income taxes (net of federal benefit)         5.83%        5.83%
     Negative valuation allowance adjustment and
     reduction of NOL carryforwards                    (85.96)%     (39.74)%
                                                      ---------    ---------
                                                       (46.13)%      (0.09)%
                                                      ---------    ---------
                                      F-12
<PAGE>
   Income taxes paid  amounted to $800 in for the years ended March 31, 2002 and
2001.


NOTE G--EMPLOYEE BENEFITS

   The  Company  has a  combined  profit  sharing  and  retirement/savings  plan
qualifying  for  treatment  under  Internal  Revenue  Code Section  401(k).  All
employees  aged 21 and older,  except those  covered by a collective  bargaining
agreement, are eligible following six months of employment in which at least 500
hours are paid.  Under the profit sharing portion of the plan,  contributions to
the plan are  determined  by the  Board of  Directors  and are  allocated  among
eligible   participants  in  proportion  to  their   salaries.   There  were  no
contributions  made by the  Company  during the years  ended  March 31, 2002 and
2001.  Under the  retirement/savings  portion of the plan, the Company may match
75% of eligible employees' voluntary contributions to a maximum of 4.5% of their
salaries.   There  were  no  Company  matching   contributions  made  under  the
retirement/savings plan portion in years ended March 31, 2002 and 2001.

NOTE H--SHAREHOLDERS' DEFICIT

   At the Annual  Meeting of  Shareholders  of the  Company  held on October 10,
2001,  the  shareholders   voted  to  approve  an  amendment  to  the  Company's
Certificate of Incorporation to increase the number of common shares  authorized
from 30,000,000 to 60,000,000.

   The  Company's  1982  Employee  Incentive  Stock  Option  Plan,  as  amended,
authorized  the issuance of options to purchase  690,000  shares of common stock
which may be  granted to  employees,  including  officers,  of the  Company.  No
options may be granted under this plan after November 1992.  Options to purchase
3,800 shares were outstanding and exercisable  under this plan at March 31, 2002
and 2001.

   In September 1992, the Company's  shareholders approved the 1992 Stock Option
Plan which  authorizes  the issuance of incentive and  non-qualified  options to
purchase  300,000  shares of Common  Stock  which may be granted  to  employees,
directors, consultants and advisors. The exercise price of the incentive options
may not be less than 100% of the fair  market  value of the common  stock on the
date of grant (110% with respect to optionees  who are 10% or more  shareholders
of the Company).  The exercise price of  non-qualified  stock options may not be
less than 85% of fair market value.  Options become  exercisable in installments
as determined at the time of grant.  Options expire no later than ten years from
date of grant (five years with respect to incentive options granted to optionees
who are 10% or more  shareholders).  Options to  purchase  217,500  shares  were
outstanding  and  exercisable  under  this plan at March 31,  2002 and March 31,
2001.

   The 1988  Directors'  Option  Plan  authorizes  the  issuance  of  options to
purchase 100,000 shares of common stock. The options are  automatically  granted
on April 1 st of each year and expire  five years  after the date of grant.  The
options are fully vested and  exercisable at date of grant.  The exercise prices
may not be less than 100% of fair market  value of the common  stock on the date
of grant.  Options to purchase  12,000 shares were  outstanding  and exercisable
under this plan at March 31, 2002 and 2001. No options can be granted under this
plan after July 1998.



                                      F-13
<PAGE>
   In September 1999, the Company's  shareholders approved the 1999 Stock Option
Plan for Non Employee Directors. The Non Employee Director's plan authorizes the
issuance  of options to purchase  250,000  shares of common  stock.  Options are
automatically  granted under the plan on September 14, 1999 and on April 1 st of
each year thereafter and expire five years after the date of grant.  The options
are fully vested and exercisable at date of grant. The exercise price may not be
less than 100% of fair  market  value of the common  stock on the date of grant.
Options to purchase 87,500 and 50,000 shares were  outstanding on March 31, 2002
and 2001, respectively.

   In September 1999, the Company's  shareholders approved the 1999 Stock Option
Plan which  authorizes  the issuance of incentive and  non-qualified  options to
purchase  500,000  shares of Common Stock which may be granted to employees  and
consultants and advisors. The exercise price of the incentive options may not be
less than 100% of the fair market  value of the common  stock on the date of the
grant (110% with respect to optionees  who are 10% or more  shareholders  of the
Company). The exercise price of non-qualified stock options may not be less than
85% of the fair market value.  Options  become  exercisable in  installments  as
determined at the time of grant. Options expire no later then 10 years from date
of grant (five years with respect to incentive options  granted to optionees who
are 10% or more shareholders).  Options to purchase 1,441,000 and 805,000 shares
of common  stock were  outstanding  under this plan at March 31,  2002 and 2001,
respectively.  Of those options, 1,222,667 and 575,000 were exercisable at March
31, 2002 and 2001, respectively.

   Effective  September 29, 1999 the Company's  Board of Directors  approved the
adoption  of  a  stock   compensation  plan  to  compensate   certain  qualified
consultants.  The plan allows for the issue of 700,000  shares of common  stock.
Under the plan the Board of Directors makes a determination  of the value of the
services rendered by the consultant and authorizes the issuance of shares valued
at 100% of the fair market  value at the date the shares are  granted.  At March
31, 2002 and 2001, 552,500 and 447,500 shares of common stock had been issued to
qualified consultants.

   On July 21, 2000, the Company granted  incentive stock options to an employee
for  outstanding  business  contributions.  The qualified  stock options for the
issuance of 100,000  shares of common  stock were  issued to the  employee at an
exercise price of $0.75.

   In September  2000, the Company's  shareholders  approved an amendment to the
1999 Stock Option Plan which increases the number of incentive and non-qualified
options to purchase to 1,000,000  shares of Common Stock which may be granted to
employees and consultants and advisors. At the Annual Meeting of Shareholders of
the  Company  held on October 10,  2001,  the  shareholders  voted to approve an
amendment to the Company's 1999 Stock Option Plan that would increase the number
of options authorized for grant from 1,000,000 to 3,000,000.

   On January 4, 2001, the Company granted  non-qualified stock options pursuant
to an employment agreement with an employee. The non-qualified stock options for
the issuance of 240,000 shares of common stock were issued to the employee at an
exercise price of $0.20.






                                      F-14

<PAGE>
   Changes in the status of options are  summarized  as follows for fiscal years
ended March 31:
                                                     2002         2001
Outstanding at beginning of year                   1,088,300         833,500
Granted                                              673,500         390,000
Canceled or expired                                       -0-       (119,200)
Exercised                                                 -0-        (16,000)
                                               -------------- --------------
Outstanding at end of year                         1,761,800       1,088,300
Available for grant at end of year                 1,804,000         477,500
Price range of options:
                  Outstanding at end of year   $  .11--$3.00  $   .11--$3.00
                  Exercised                    $           -  $   .11--$ .47


   At March 31, 2002 and 2001, options for the purchase of 1,543,467 and 858,300
shares were exercisable.


   At March 31,  2002 the  following  warrants to  purchase  common  shares were
outstanding:

         Quantity     Exercise Price       Expiration Date

          44,693      $            .32 October 30, 2002
         100,000      $            .25 November 18, 2002
         111,111      $            .56 November 30, 2002
         400,000      $            .25 December 14, 2002
          30,000      $            .50 December 17, 2002
          50,000      $            .25 December 20, 2002
          44,693      $            .29 January 28, 2003
          28,809      $            .78 January 31, 2003
          75,000      $            .50 February 18, 2003
          25,000      $            .30 March 06, 2003
          57,143      $            .57 March 16, 2003
         240,000      $            .50 March 30, 2003
          75,000      $            .50 April 22, 2003
          45,264      $            .74 April 28, 2003
          66,667      $            .75 June 5, 2003
          55,556      $            .75 June 10, 2003
         200,000      $            .75 June 17, 2003
         444,444      $            .70 June 17, 2003
          55,556      $            .75 July 1, 2003
         200,000      $            .50 July 27, 2003
          51,540      $            .53 July 28, 2003
         250,000      $            .20 October 13, 2003
          54,307      $            .47 October 26, 2003
         222,222      $            .56 December 2, 2003
          37,500      $            .75 January 29, 2004
          37,500      $            .75 February 5, 2004
          50,000      $            .81 April 6, 2004
           5,000      $            .97 May 4, 2004
         200,000      $           1.09 July 6, 2004
          60,000      $            .44 October 31, 2004
          20,000      $            .50 November 3, 2004
          20,000      $            .50 November 3, 2004
          40,000      $            .50 November 3, 2004
          75,000      $            .01 March 27, 2006

                                      F-15
<PAGE>
   The  Company  applies  APB 25 in  accounting  for its  Stock  Option  Program
described  above.  The option  price under the Stock  Option  Program  equals or
exceeds  the fair  market  value of the common  shares on the date of grant and,
accordingly,  no compensation  cost has been recognized  under the provisions of
APB 25 for stock options.  Under SFAS 123,  compensation cost is measured at the
grant date based on the value of the award and is  recognized  over the  service
(or  vesting)  period.  Had  compensation  cost for the  Company's  Stock Option
Program  and  other  stock  based  compensation been determined  under SFAS 123,
based on the fair market  value at the grant dates, the  Company's pro forma net
earnings and net earnings per share would have been reflected as follows:

(In thousands, except per share amount)         2002            2001
----------------------------------------     ----------     -----------
Net earnings
                       As reported           $   (2,957)    $      (872)
                       Pro forma             $   (3,387)    $      (973)
Net earnings per share
                       As reported           $    (0.19)    $     (0.10)
                       Pro forma             $    (0.22)    $     (0.12)


   The fair value of each option and warrant  grant is  estimated on the date of
grant  using  the   Black-Scholes   option  pricing  model  with  the  following
weighted-average  assumption  used for those  options  granted in 2002 and 2001,
respectively:  dividend yield of 0% and 0%, expected  volatility of 26% and 20%,
risk-free  interest  rates of 5.43% and 5.00%,  and expected  lives equal to the
life of the option or warrant and 5 years.

   During the fiscal year ended March 31, 2001,  the Company  entered into stock
purchase  subscription  agreements  with several  investors  for the purchase of
450,000  shares  of  common  stock  for  a  purchase  price  of  $150,000.   The
subscription  agreements  also  provide  for the  issuance  of  warrants  to the
investors  for the purchase of up to 450,000  shares of common stock at exercise
prices that range from $.20 to $.50.

   During the fiscal  year ended March 31,  2001,  the  Company  issued  222,500
shares of common stock to several persons in payment for consulting  services of
$102,206,  and also issued 850,000  shares of common stock to several  employees
for  payment of accrued  expenses  and salary of  $170,000.  These  shares  were
issued,  fully vested and  non-forfeitable,  subsequent  to the  performance  of
services.

   During the fiscal year ended March 31, 2001, the Company  issued  warrants to
consultants and advisors,  under the terms of agreements with these  consultants
and  advisors,  for the  purchase  of up to  150,000  shares of common  stock at
exercise prices that range from $.01 to $.50.

   On April 5, 2001 the Company  entered  into a Securities  Purchase  Agreement
with  Global  Alpha  Corporation,  a British  Virgin  Islands  company  ("Global
Alpha"),  wherein  the  Company  agreed to sell up to  14,616,444  shares of its






                                      F-16
<PAGE>
common stock to Global  Alpha for  aggregate  consideration  of  $3,226,200.  In
accordance with the Agreement,  the shares are being purchased, at the option of
Global Alpha,  over a six-month  period.  The first  installment of $100,000 was
paid on April 6, 2001 for 500,000 shares.  Subsequent  installments of $100,000;
$150,000 and $150,000  were paid on May 5, June 5, and July 3, 2001 for 500,000;
750,000;  and 750,000  shares,  respectively.  Additional  monthly  installments
increasing to $1,332,809 on August 3, 2001,  and  $1,393,391 on October 2, 2001,
were to be paid at the option of Global Alpha.

   On August 3, 2001,  the Securities  Purchase  Agreement with Global Alpha was
amended  to cancel  the  August 3, 2001 and  October  2, 2001  installments  and
replace  them with nine other stock  purchase  installments.  Under the terms of
this amendment,  Global Alpha would purchase in monthly  installments,  at their
discretion,  12,116,442  shares of the  Company's  common  stock  for  aggregate
consideration of $2,726,000 as follows:


August 7, 2001    1,363,636 shares at an exercise price of $300,000
September 7, 2001 1,363,636 shares at an exercise price of $300,000
October 5, 2001   1,363,636 shares at an exercise price of $300,000
November 9, 2001  1,363,636 shares at an exercise price of $300,000
December 7, 2001  1,330,593 shares at an exercise price of $300,000
January 4, 2002   1,304,348 shares at an exercise price of $300,000
February 8, 2002  1,304,348 shares at an exercise price of $300,000
March 8, 2002     1,304,348 shares at an exercise price of $300,000
April 5, 2002     1,418,261 shares at an exercise price of $326,200

   As of June 30, 2002,  Global  Alpha has  purchased  14,616,444  shares of the
Company's common stock as required by the Securities Purchase Agreement.

NOTE I--SIGNIFICANT CUSTOMERS

   During  fiscal  year  2001,  sales  to  the  United  States  Government  were
approximately  $150,450 (81% of total sales). All other customers  accounted for
approximately  $36,700 (19% of total sales).  During fiscal year 2000,  sales to
the United States Government were  approximately  $640,000 (88% of total sales),
while all other  customers  accounted  for  approximately  $80,000 (12% of total
sales).


















                                      F-17

<PAGE>
                                INDEX TO EXHIBITS

       EXHIBITS AND REPORTS ON FORM 8-K

 (a)  Exhibit Index (Management contracts, compensation  plans and  arrangements
      are identified by (*).
          3.1   Certificate of Incorporation, as amended (1)
          3.2   By-Laws amended. (1)
       * 10.1   1992 Stock Option Plan (8)
       * 10.2   Employment  Agreement  with Gershon Weltman dated August 1, 1989
                and First Amendment dated October 22, 1991. (9)
       * 10.3   1988 Directors' Stock Option Plan. (8)
       * 10.4   Second  Amendment  to  Employment Agreement with Gershon Weltman
                dated August 27,1996. (2)
       * 10.5   Employment  agreement  with  Thomas Lubaczewski dated January 1,
                1997. (3)
         10.6   Loan  Agreement  and  note  dated September 23, 1997 between the
                Company and The Pacific Bank. (4)
         10.7   1999 Stock Option Plan (5)
         10.8   1999 Stock Option Plan for Non-Employee Directors (5)
         10.9   Employment Agreement with Richard Moskowitz dated January 3,2000
                and Memorandum of Agreement dated November 19, 1999. (6)
        10.10   Employment Agreement with Andreas Kemkes dated February 4, 2000.
                (10)
        10.11   Stock Compensation Plan for Consultants (7)

 (b) The  registrant  filed no reports on Form-8K during the quarter ended March
31, 2000.


(1)  Incorporated by reference to the Company's  Registration  Statement on Form
S-8 filed on March 9, 2000.

(2)  Incorporated  by reference to the Company's  Form 10-KSB for the year ended
March 31, 1996.

(3)  Incorporated  by reference to the Company's  Form 10-KSB for the year ended
March 31, 1997.

(4)  Incorporated  by reference to the  Company's  Form 10-QSB for the quarterly
period ended September 30, 1997.

(5)  Incorporated  by reference to the  Company's  Form 10-QSB for the quarterly
Period ended September 30, 1999.

(6)  Incorporated  by reference to the  Company's  Form 10-QSB for the quarterly
period ended December 31, 1999.

(7)  Incorporated by reference to the Company's  Registration  Statement on Form
S-8 filed on October 15, 1999.






                                      F-18
<PAGE>
(8)  Incorporated  by reference to the Company's  Form 10-KSB for the year ended
March 31, 1993.

(9)  Incorporated  by reference to the Company's  Form 10-KSB for the year ended
March 31, 1992.

(10) Incorporated  by reference to the Company's  Form 10-KSB for the year ended
March 31, 2000.
















































                                      F-19