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U.S. SECURITIES AND EXCHANGE COMMISSIONWASHINGTON D.C. 20549

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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, 2001
|/ /                                      | 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

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PERCEPTRONICS, INC.

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

10345 West Olympic Boulevard, 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: $187,514.

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 7, 2001$2,757,815.

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 7, 200111,031,260

Documents
Incorporated by Reference: Portions of the Proxy Statement for the 2001 annual meeting of stockholders are incorporated by reference into Part III of this report. The
Information Statement on Schedule 14C, filed on May 30, 2000 is incorporated by reference into Part I of this report.

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PART I

ITEM 1. BUSINESS

G e n e r a l

Perceptronics, Inc. (the "Company") is a Delaware Corporation incorporated September 9, 1987. The Company is focused entirely on developing,
producing and marketing new commercial products in the area of Peer-to-Peer Internet Collaboration. The product line, consisting of the IC3DtmFramework and
IC3D/WyTHtm Technologies, is directed toward the rapidly growing market for multi-person, online collaborative interaction over the Internet, involving multiple media such as streaming
video and audio, animation, documentation and 3D simulation. The major market applications for the IC3D Framework are entertainment, education, e-commerce and business communication.

Our
strategic course is based on our firm belief that the market for Internet collaborative interactivity is in the early process of rapid and large-scale growth, that we have a
strong competitive advantage in that market, and that it is to the benefit of the Company and its shareholders to focus wholly on this opportunity.

Our
proprietary, patent pending products, which we call the IC3D Framework and the WyTH Technologies, are designed to allow multiple users to interact
collaboratively in real time on the Internet, using a variety of media, separately or in combination. Our Java based, peer-to-peer technology allows our products to be used
simply and efficientlywithout the need for prior downloads, extensive participant scheduling, or additional servers on the customer side typical of competitive products.

Our
development efforts were initially focused on allowing multiple users to collaborate in 3D virtual environments over the Internet via the IC3D Framework. We subsequently showed
that the IC3D Framework technology permits collaborative interaction with a variety of additional Internet media, including animation, streaming video and audio, and forms and documents, and will
support such
widespread commercial products as Microsoft's Windows Media Player and Realnetworks' Real Audio and Real Video as well as Macromedia's Flash and Shockwave. This expansion is potentially very
significant financially, because we believe that in the near term, Internet applications based on these and similar media products will greatly outnumber applications based on 3D simulation.

We
have initiated marketing and technical strategic alliances to help develop and promote the IC3D and WyTH technologies and products in their key vertical application areas. These
are identified as entertainment, e-commerce, education and business communication. We see an immediate market for our IC3D products and services, and believe we can achieve a steady
increase in market size as the Internet reaches the 300 million-user mark and beyond in the next few years.

As
part of our Internet focused business strategy, we have divested ourselves of our Precision Gunnery Training System ("PGTS") product line by selling the PGTS assets to Eidetics
Corp., a developer and manufacturer of defense simulation products.

Defense
simulator revenues have historically represented a significant portion of our revenues, but the tightening of defense budgets worldwide, combined with the continuing
consolidation and intense competition in the defense industry, have negatively impacted the growth and profit opportunities for small companies such as Perceptronics. As a background to the PGTS
divestiture, we experienced a decline in PGTS revenues and a lack of valuation in the financial markets with respect to our defense-related simulator products. In contrast, the Internet market has
been experiencing, and will continue to experience, a continuous expansion in size and opportunity. The Company's Internet venture involves meeting the increasing need for multi-user,
online collaborative interaction on the Internet by adapting and commercializing the advanced networking concepts, architecture and protocols we helped develop for the U.S. Department of Defense.

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The Board of Directors and management believe that our new business strategy is in the best interests of the Company and its stockholders. The Board of Directors, in unanimously
approving the Eidetics Transaction, considered a number of factors, including: (a) our IC3D Technology opportunity offers greater potential for growth and profits, despite the risks of being
wholly dependent on new Internet related products and services; (b) the PGTS marketing efforts, contracting and financing conditions, manufacturing infrastructure and future development
requirements are not compatible with the IC3D strategic direction, and involve a completely separate set of resources, including intellectual property, facilities, and personnel; (c) recent
activity in PGTS product line has been sporadic, with considerable and costly gaps between contracts, which cause a further drain on critical cash resources; (d) divestiture of the
defense-oriented PGTS product line and complete future focus on the Internet-related IC3D could result in a higher overall valuation for the Company, despite the near term reduction in revenues;
(e) the total purchase price is fair and improves our balance sheet, which will potentially help in achieving required future financing; and (f) we may continue to benefit from the PGTS
product line through future royalty fees on contracts, which could potentially provide important revenues and cash resources.

In
summary, the Company's long-term growth strategy focuses entirely on further developing and more extensively marketing the IC3D Framework and WyTH Technologies
commercial products and services. The Company's near-term business strategy is to initiate marketing activities via direct sales and strategic alliances. The Company's ability to complete
these strategies in full will depend on generating sufficient cash resources from operations and on obtaining additional funding from private and public investments for further development and
marketing of its products, neither of which can be assured.

The
Company's business activities during past fiscal years fall into three main areas: Training and Instrumentation Systems, Simulation Networking R&D, and Commercial Software
Products.

Training and Instrumentation Systems.This area includes sales to the U.S. Government and international customers of
the Company's standard training devices and system products, customized systems and/or components, and supporting services.

In
fiscal years 1998 and 1997, the Company had sales of $2.1 million and $1.5 million, respectively, on a subcontract for TOW PGTS simulator systems for a foreign
customer. The Company also started production in the fourth quarter of fiscal 1998, on a contract with the Government of Egypt valued at $3.0 million for TOW PGTS simulator systems. The
contract with the Government of Egypt was completed in the fourth quarter of fiscal 1999. During fiscal year 2000, the team of Perceptronics and Eidetics was awarded a new $3.0 million contract
from the Government of Egypt for development and production of ITV (Improved TOW Vehicle) PGTS systems. This contract made possible completion of our sale of the PGTS operation to Eidetics in fiscal
year 2001; the contract is currently being transfered to Eidetics as part of the sale agreement, and Perceptronics will receive a 3% fee under the agreement.

Also
included in this area are sales of specialized systems and software in such areas as process modeling, instrumentation and neural network software, and other advanced
applications of the Company's technology in artificial intelligence (AI), computer-based modeling and simulation and electronics. In fiscal 1998, the Company was awarded a SBIR Phase I contract from
DARPA for design of COVER (Commander's Observation Vehicle for Elevated Reconnaissance), a system concept Perceptronics has promoted for a number of years, which is well suited to the future Army's
need for improved sensing capabilities at the small unit level. The SBIR Phase I contract was completed during fiscal 1999, and there was no follow-on contract.

Training
and Instrumentation Systems accounted for 8% of revenues in fiscal 2001, 1% of revenues in fiscal 2000, and 67% in fiscal 1999.

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Simulation Networking R&D.This area includes sale to the U.S. Government and other customers of research and
development services on networked simulation and related technologies. In fiscal 1998, work was performed on SBIR Phase I and Interim Phase contracts from STRICOM for adaptation of the DoD's HLA (High
Level Architecture) to commercial, multi-player, online 3D games; this work was the predecessor for the SBIR Phase II IC3D Framework contract described above. In June 1998, the Company was
awarded and began work on the SBIR Phase II contract. In July 1998, the Company was awarded a grant under the California Technology Investment Partnership Program. This grant provided funding
for planning and initiating a marketing strategy for the new commercial products. In June 2000, the Company was awarded an R&D contract from STRICOM for further research in and testing of HLA
concepts and software. This contract ended March 31, 2001. In fiscal year 2001, 2000, and 1999 and 1998 Networked Simulation R&D represented 81%, 99%, and 33% of revenues, respectively.

Commercial Software Products.This area includes the licensing, sale and support of the Company's commercial software
packages and associated services, including the new IC3D Framework for Internet collaboration and the previous CACE/PM® software for modeling and analyzing product development and
manufacturing processes and PERCNET® software for modeling and simulating man-machine interfaces. In November 2000 the Company announced its first sale of an IC3D
software license to DNA Studio, a Beverly Hills, CA developer of Web sites for feature films and other entertainment. DNA licensed the Company's IC3D/Wyth Software to add collaborative group play to a
DNA-produced online Web game promoting an upcoming major television event. In fiscal 2001, 2000, and 1999, Software Products represented 11%, 0%, 0% and 1% of revenues, respectively.

U.S. Government Contracts

Approximately 81% and 88% of the Company's revenue in fiscal years 2001 and 2000, respectively, were derived from contracts and subcontracts involving the U.S.
Government. As is the case with many companies deriving a portion of their revenue from defense contracts, the Company is subject to various business risks, including changes in governmental
appropriations and changes in national defense policies and priorities. Over the past several years, economic and budgetary constraints have caused reductions in overall defense spending. These
circumstances have had a material adverse effect on the Company since many of the Company's U.S. Government contracts have been curtailed or reduced, and new programs have not been initiated. See
"Backlog" in "Item 6 Management's Discussion".

The
Company's U.S. Government contracts are structured on either a cost-plus-fixed-fee (CPFF) or a firm-fixed-price (FFP) basis. Under
CPFF contracts, the Company is reimbursed periodically for allowable costs together with a portion of the fee with certain amounts being withheld pending the Government's determination of final fiscal
year indirect rates. Under FFP contracts, the Company generally receives progress payments of allowable costs incurred; the remainder (including profits) is billed upon delivery and final acceptance
of the product. For work performed under FFP contracts, the Company carries a greater burden of risk associated with cost overruns. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section). In fiscal years 2001 and 2000 respectively, 100% of the Company's U.S. Government contract related revenues were attributable to CPFF contracts and 0% of such
revenues were attributable to FFP contracts.

The
Company's U.S. Government contracts and subcontracts are subject to termination, reduction or modification in the event of changes in the Government's requirements or budgetary
constraints. Should a contract be terminated for such reasons, the Company would be reimbursed for its allowable costs to the date of termination and would be paid a proportionate amount of the
stipulated profits or fees attributable to the work actually performed. During fiscal year 2000, none of the Company's U. S. Government contracts were terminated. When the Company participates as a
subcontractor, it is also subject to the risk that the prime contractor may fail or be unable to perform the prime contract.

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During fiscal year 2000, all of the Company's contracts were as a prime contractor to the U.S. Government.

The
books and records of the Company are subject to audit by the Defense Contract Audit Agency (DCAA). At March 31, 2001, the DCAA had an open audit of a large
multi-year contract that was completed in 1994. The Company believes that the costs charged to this contract were proper and should not result in a significant adjustment. The Company's
overhead costs have been audited and approved by the DCAA through fiscal year 1998. The Company believes that it is in substantial compliance with Government record-keeping and
cost-allocation requirements, and does not expect any significant adjustments as a result of the future audit of 2000 and 1999 overhead costs.

Marketing and Customers

At present, the Company is conducting its IC3D and WyTH commercial software product and services marketing activities using its own personnel and marketing
consultants. Primary marketing and sales objectives include developing immediate revenue generating opportunities for WyTH Technologies products in the Internet entertainment, education and
e-commerce markets and also establishing marketing contacts and strategic alliances with major Internet infrastructure and service companies. The company has already established a number
of strategic alliances with firms in the Internet area that add to its marketing reach.

In
recent years 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 submits 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.

The
Company has historically had marketing arrangements for its PGTS and other defense products in a number of foreign countries. During fiscal 2001, 2000 and 1999 foreign sales of
defense training
systems accounted for approximately 8%, 0% and 65% of total Company revenues, respectively. Foreign sales are subject to risks associated with political or economic instability of a foreign country,
currency controls, exchange rate fluctuations, changes in import/export regulations, trade policies and tariffs. As previously mentioned, in fiscal 2001 the Company divested the PGTS product line;
consequently, the Company currently has no foreign sales representatives.

Rights to Technology

The Company has applied for patent protection related to its basic IC3D Framework and IC3D/Wyth technology, and is in the process of preparing a additional
applications for further developments. The Company generally considers its business to be primarily dependent upon proprietary knowledge and on rapid assimilation of innovations, however, it 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, the Company retains all rights to inventions discovered with Government funding. This right is 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

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use such inventions in the course of performing their Government contracts. Unless otherwise specifically stated in the contract, the Government retains unlimited rights to technical data and computer
software developed under the contract. Government 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, Perceptronics 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 shall 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 and Supplies

The Company currently does not perform any manufacturing activities. As previously stated, the Company is has divested the PGTS and defense simulator segment
of its business, which previously comprised the Company's entire manufacturing operation.

Competition

In its strategic business area of enabling technology for Internet Collaboration, the Company faces several types of competitors who have already entered the
market. Our competitive advantage comes from our unique positioning in this market and our superior peer-to-peer technology.

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, these experiences 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 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. While games have high visibility, they actually constitute much less than
5% of the Internet market. Companies 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 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 include IVT, Rotor, Centra, Videoscape and other TC system and service suppliers.

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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 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 include Centra Software, PeopleSupport, OSC Teleservices, Smartpeer, HelloNetwork, Brightware and others.

With
respect to the above, Perceptronics' establishes a unique market subspace by positioning its IC3D Framework and WyTH Technologies products as clearly defined "component parts"
and focusing its marketing efforts on developers and service providers rather than end users. The IC3D 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 an 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 IC3D/WyTH 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, Perceptronics avoids marketing to end-users, and avoids the
requirement for the end-user to choose Perceptronics.

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,
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, Perceptronics is
positioning itself as the technology behind the Web applications that appeal most to end users. Developers and service providers will
choose IC3D because of its technical and performance advantages, and because it allows them to increase their capabilities and/or meet specific market needs.

In
addition, the Company's products enjoy a number of performance-based competitive advantages due to our proprietary, patent pending technology; these include:

RealTime Response.Proprietary peer-to-peer computing technology and innovative adaptive
message compression techniques minimize lags and delays providing essentially real time interactions within collaborative group.

No Plug-In.This derives from the efficient Java-based coding of the JRTI, which enables
end-user-transparent initiation of group formation and collaborative interaction at the Web site, potentially as fast as a "one-click" action.

Highly Flexible and Adaptable.Basically Web-centric, truly modular construction with real reusability of
software components, along with user selection of TCP/IP or UDP on a channel-by-channel basis, allows use of multiple media in applications as well as quick and easy
development of new applications.

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Non-Intrusive.The ability to add IC3D to existing Web sites and applications with little or no intrusion
allows efficient, cost-effective reuse of existing content and software.

Open System Standards.Incorporation of existing and planned Internet standards and protocols insures ease of
integration with other component technologies within applications.

At
the same time, management recognizes that other competitors have more commercial experience and greater resources and may also have an established customer base, and there is no
assurance the Company will be able to compete successfully in the Internet market area.

In
the case of competitively bid defense contracts the Company's typical competitors for R&D and system development contracts include SAIC, Litton, 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 high-end 3-D and streaming
media experiences on the Internet.

Employees

As of March 31, 2001, the Company had 9 full-time and part-time employees and consultants, consisting of 2 management personnel,
1 marketing person, 2 administrative and support personnel, 4 scientific and technical personnel. 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 in a 2,200 square foot rented facility in Los Angeles, California, adjacent to Century City. The basic monthly rent for this
space is $5,500, and the space is leased until September 15, 2001.

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

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

The holders of a majority of the shares of Common Stock of the Company, by written consent effective May 8, 2000, approved the sale of the Company's
PGTS product line to Eidetics Corporation. The Company's definitive Information Statement on Schedule 14C, filed on May 30, 2000, is incorporated by reference herein.

At
the Annual Meeting of Shareholders of Perceptronics, Inc., held on September 15, 2000, the shareholders voted to approve (a) an amendment to the Company's
Certificate of Incorporation to increase the number of common shares authorized from 15 million to 30 million and the number of preferred shares authorized from 1 million to
2 million and (b) an amendment to the Company's 1999 Stock Option Plan to increase the number of options available from 500,000 shares to 1 million shares. The Company's
definitive Proxy Statement on Schedule 14A, filed on August 10, 2000 is incorporated by reference herein.

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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 "PCTR". 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 2000

High

LowJune 30, 1999

$
1.47

$
0.75September 30, 1999


1.19


0.41December 31, 1999


0.66


0.38March 31, 2000


2.44


0.53


Fiscal Year 2001

High

LowJune 30, 2000

$
1.34

$
0.69September 30, 2000


0.78


0.32December 31, 2000


0.47


0.13March 31, 2001


0.30


0.14


During
the three month period ended March 31, 2001, the Company issued 450,000 shares of common stock in conjunction with stock purchase subscription agreements with several
investors for a purchase price of $150,000. The subscription agreements also provided for the issuance of three-year warrants to the investors for the purchase of up to 450,000 shares of
common stock at an exercise prices that range from $.20 to $0.50. The common shares and warrants are not registered under the Securities Act in reliance on section 4 (2) thereof.

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, Perceptronics' CEO, for payment of
accrued expenses, loans and salary totaling $95,000; and (b) 225,000 shares of common stock to Dr. Gershon Weltman, Perceptronics' President, for payment of accrued expenses and salary
totaling $45,000.

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 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 and $150,000 were paid on
May 5, 2001 and June 5, 2001 for 500,000 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, may be paid at the option of Global Alpha. There is no assurance that all or any future purchases will be made by Global Alpha.

As
of March 31, 2001, the Company had approximately 350 shareholders of record of its Common Stock.

The
Company has never paid dividends and it does not expect to declare or pay any dividends in the foreseeable future.

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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

Perceptronics, Inc., (the "Company"), has focused entirely on developing new commercial products in the area of Internet Collaboration during the past
fiscal year. The product, called IC3D Framework, is directed toward the rapidly growing market for multi-person, online, collaborative interactions in 3D virtual environments, animation
and streaming media accessed over the Internet. The major market applications for IC3D Framework are entertainment, education, e-commerce and business communication. The
Company has 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. However, the tightening of defense budgets worldwide, combined with the continuing consolidation and intense competition in the
defense industry, have negatively impacted the growth and profit opportunities for small companies such as Perceptronics. Accordingly, as part of the Company's current business strategy, the Company
has divested itself of the PGTS product line by selling the PGTS assets to Eidetics Corporation, a developer and manufacturer of specialized defense simulation products. Refer to the 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 consolidated 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 Consolidated 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 it's 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 is fully depreciated and has been valued at $10,000 and the identifiable intangible assets, which are not capitalized, are valued at approximately $140,000 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.

11

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

|                  |  | 2001 |        | 2000 |   | 1999    
|----------------- |  | ---- | ------ | ---- | - | --------
|Net Sales         |  | $    | 17,000 |      | $ |        
|Net income (loss) |  | $    | 17,000 |      | $ | (451,000

Results of Operations

Net Sales.Net sales for the fiscal year 2001 of $188,000 decreased by $533,000 or 74% compared to fiscal 2000. Sales
from training simulator systems during fiscal 2001 amounted to $17,000 consisting of fees and royalties from PGTS trainer sales by Eidetics Corporation. Simulation network technology sales, which
represented 81% of net sales during fiscal 2001, decreased $563,000 or 79%. 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. Net sales from IC3D commercial software license fees, which represented 8% of net sales during fiscal 2001, increased by $20,000;
there were no sales from IC3D license fees in fiscal 2000.

Cost of Sales.Cost of sales for fiscal 2001 decreased 81% from fiscal 2000 as a result of the 74% decrease in sales
discussed above. Cost of sales as a percentage of sales during fiscal 2001, was 79% compared to 123% during the fiscal 2000. Continued reductions in fixed and semi-fixed expenses
contributed to the lower percentage of cost of sales to net sales during fiscal 2001.

Selling, General and Administrative Expenses.Selling, general and administrative expenses increased $12,000 or 1.6% in
fiscal 2001 compared to fiscal 2000.

The
Company's management continues to pursue cost reduction measures consistent with the level of business wherever opportunities can be identified. The company has moved its
principal offices during the fiscal year resulting in reduction in overall rent expense for the year. During the fiscal year reductions have also been made in personnel to reduce payroll related
expenses.

Interest Expense.Interest expense decreased 68% or $27,000 in fiscal 2001 compared to fiscal 2000. Interest expense
decreased significantly because of the completion of all PGTS production contracts and consequently no further interest expense associated with any export credit facility for the year ended
March 31, 2001.

Liquidity and Capital Resources.

The Company is experiencing continuing liquidity problems due to a lack of revenues and the absence of cash reserves. At March 31, 2001, the Company's
unrestricted cash balances of $12,400 were 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 $847,000 at March 31, 2001, compared to negative working capital of $357,000 at March 31, 2000. The Company continues to have difficulty in meeting all of its obligations as they come
due. At March 31, 2001, vendor accounts totaling $225,000 are past due. The lack of sufficient working capital continues to restrict the Company's ability to expand its revenue base. See
Note B of the Notes to Financial Statements, which is hereby incorporated herein by reference.

During
fiscal 2001, the Company divested its PGTS training simulator development and manufacturing operation. The Company plans to concentrate its efforts on the development of
technology and total solutions for collaborative interaction on the Internet and other networks, including its IC3D Framework and WyTH Technologies software. The Company's management believes that
while the PGTS training simulator systems product line has historically been a significant portion of the Company's business and has provided the majority of the Company's revenues, the product line
offers less potential for future growth than the Internet related products. On December 31, 1999, the Company entered into a Memorandum of Understanding and a Teaming Agreement with Eidetics

12

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Corporation, which would lead to the purchase of the PGTS training simulator product line by Eidetics once a new contract is awarded to the Company by the Government of Egypt. On March 14,
2000, the Company and the Government of Egypt signed a contract for the production and delivery of improved TOW PGTS simulator systems and applicable engineering and support at a fixed contract price
of $2,998,000. The sale of the PGTS training simulator systems product line assets to Eidetics Corporation was completed on July 20, 2000. There is no assurance that the divestiture of the PGTS
product line will improve the Company's viability.

The
Company requires significant financing from external sources to be able to fund the development of the IC3D Framework and WyTH Technologies commercial software
products. During the April, May and June 2001 the Company received $500,000 from Global Alpha Corporation pursuant to a stock purchase subscription agreement for the purchase of up to
14,000,000 shares of common stock. There is no assurance that the Company will be able to continue to raise the financing required to fund
operations in the future and whether the commercial software products will start to generate revenue and profits. 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 the short and long-term objectives.

The
Company has a 24-month note payable with a starting principal of $100,000 that bears interest at 8% per annum. At March 31, 2001, the outstanding balance on
this note payable was $35,000. At March 31, 2001, the Company is past due on scheduled monthly payments on this note as a result of the cash flow limitations previously discussed. The Company
intends to address this past due note once there is sufficient operating cash-flow.

The
Company's operating activities used cash of approximately $640,000 during the fiscal year ended March 31, 2001 resulting primarily from the operating loss incurred during
the period due to reduced sales levels and costs associated with the development of the its commercial software products.

The
Company's financing activities provided cash of $470,000 during the fiscal year ended March 31, 2001 primarily as a result of selling common stock. Long term debt was
reduced by approximately $174,000 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.

Going Concern Issue and Severe Liquidity Problems.The Company's financial statements for the fiscal year ended
March 31, 2001 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. 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 bid for, obtain and perform larger contracts. Even if the Company overcomes
its liquidity problems,

13

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there can be no assurance that in the future the Company will be able to increase revenues or operate profitably.

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 IC3D Framework and WytH Technologies software. 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 IC3D Framework and WyTH Technologies software will be a commercially feasible product, or that the Company will be able to successfully market the
resulting 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 IC3D Framework and WyTH Technologies software and other commercial products. There can be no
assurance that the IC3D Framework and WyTH Technologies 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.

Dependence on One Customer and on Foreign Sales.The Company has historically derived a substantial portion of its
revenues from the sale of PGTS Training Simulator systems primarily to a limited number of foreign customers. The Company has divested its training simulator product line as previously planned. There
is no assurance that the divestiture will improve the Company's viability.

Dependence on Defense-Related Business.The Company has historically derived a substantial portion of its revenues from
U.S. and foreign government defense-related contracts. As a result, the Company's business has been impacted by reductions in the U.S. federal defense budget and this business will continue to be
subject to risks affecting the defense industry, including changes in governmental appropriations and changes in national defense policies and priorities. The Company has sought to reduce its
dependence on defense-related business by developing products with commercial applications, such as the proposed IC3D Framework and WyTH Technologies software networking
products. As noted above, there can be no assurance that these products will achieve market acceptance, resulting in increased revenues and profitability.

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 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 effect its ability to satisfy customer demand in a timely fashion. Failure to manage growth
effectively could adversely effect the Company's financial condition and results of operations.

14

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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 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

15

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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 2001 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 2001 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 2001 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 2001 Annual Meeting of Stockholders.

16

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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                                                                                            
| |     |  | 3.2                                                                                            
| |     |  | * 10.1                                                                                         
| |     |  | * 10.2                                                                                         
| |     |  | * 10.3                                                                                         
| |     |  | * 10.4                                                                                         
| |     |  | * 10.5                                                                                         
| |     |  | 10.6                                                                                           
| |     |  | 10.7                                                                                           
| |     |  | 10.8                                                                                           
| |     |  | 10.9                                                                                           
| |     |  | 10.10                                                                                          
| |     |  | 10.11                                                                                          
| | (b) |  | The Registrant filed no reports on Form-8K during the quarter ended March 31, 2001.            

17

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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 9, 2001 |  | PERCEPTRONICS, INC.
|------------------- |  | -------------------
|                    |  | By:                

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/RICHARD MOSKOWITZRichard Moskowitz     |  | Chief Executive Officer
(Principal Executive Officer) |  | July 9, 2001
|/s/DR. GERSHON WELTMANDr. Gershon Weltman |  | Chairman, President (Principal Financial Officer)     |  | July 9, 2001
|/s/STANLEY SCHNEIDERStanley Schneider     |  | Director                                              |  | July 9, 2001
|/s/ROBERT PARKERRobert Parker Director    |  | Director                                              |  | July 9, 2001
|/s/DR. AMOS FREEDYDr. Amos Freedy         |  | Director                                              |  | July 9, 2001

18

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INDEPENDENT AUDITOR'S REPORT

To
the Board of Directors and
Perceptronics, Inc.

We
have audited the accompanying balance sheets of Perceptronics, Inc. as of March 31, 2001 and 2000, and the related statements of operations, shareholders' equity, 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 Perceptronics, Inc. as of March 31, 2001
and 2000, and the results of its operations and its cash flows for the year 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 a net loss
of $872,000 for the year ended March 31, 2001. As of March 31, 2001, the Company's current liabilities exceeded current assets by $847,000 and had net equity of $96,000. As described
more fully in Note A to the financial statements, the Company is in arrears on accounts with certain vendor creditors which, among other things, causes the balances to become due on demand.
These conditions 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
June 29, 2001

19

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PERCEPTRONICS, INC.  BALANCE SHEETS

|                                                   |                                                | March 31,        
|-------------------------------------------------- | ---------------------------------------------- | -----------------
|
|ASSETS                                             |                                                |                  
|CURRENT ASSETS                                     |                                                |                  
|                                                   | Cash and short-term investments                |                  
|                                                   | Receivables                                    |                  
|                                                   |                                                | BilledNote B    
|                                                   |                                                | UnbilledNote B  
|                                                   |                                                | Other receivables
|                                                   | Inventory                                      |                  
|                                                   | Pre-contract costs                             |                  
|                                                   | Prepaid expenses                               |                  
|                                                   |                                                |                  
|TOTAL CURRENT ASSETS                               |                                                |                  
|EQUIPMENT & LEASEHOLD IMPROVEMENTS, at cost Note C |                                                |                  
|                                                   | Less accumulated depreciation and amortization |                  
|                                                   |                                                |                  
|                                                   |                                                |                  
|DEFERRED TAXESNote F                              |                                                |                  
|OTHER ASSETS                                       |                                                |                  
|                                                   |                                                |                  
|                                                   |                                                | TOTAL ASSETS     
|                                                   |                                                |                  

See
notes to financial statements

20

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PERCEPTRONICS, INC.
BALANCE SHEETS (Continued)

|                                          |                                                                                                                   | March 31.                                |        
|----------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | -------
|
|LIABILITIES AND SHAREHOLDERS' EQUITY      |                                                                                                                   |                                          |        
|CURRENT LIABILITIES                       |                                                                                                                   |                                          |        
|                                          | Current portion of long term debtNote D                                                                          |                                          | $      
|                                          | Short term debtNote D                                                                                            |                                          |        
|                                          | Accounts payable                                                                                                  |                                          |        
|                                          | Accrued compensation                                                                                              |                                          |        
|                                          | Other accrued liabilities                                                                                         |                                          |        
|                                          | Loans payable to shareholdersNote D                                                                              |                                          |        
|                                          |                                                                                                                   | TOTAL CURRENT LIABILITIES                |        
|LONG TERM DEBT                            |                                                                                                                   |                                          |        
|                                          | Long term debt, net of current portionNote D                                                                     |                                          |        
|                                          | Other long term liabilities                                                                                       |                                          |        
|COMMITMENTS AND CONTINGENCIESNOTES B & E |                                                                                                                   |                                          |        
|                                          |                                                                                                                   |                                          |        
|Total Liabilities                         |                                                                                                                   |                                          | 892,310
|SHAREHOLDERS' EQUITY                      |                                                                                                                   |                                          |        
|                                          | Common stockpar value $.001; authorized 30,000,000 shares; 9,381,260 and 7,732,260 shares issued and outstanding |                                          |        
|                                          | Additional paid-in capital                                                                                        |                                          |        
|                                          | Accumulated deficit                                                                                               |                                          |        
|                                          |                                                                                                                   |                                          |        
|                                          |                                                                                                                   | TOTAL SHAREHOLDERS' EQUITY               |        
|                                          |                                                                                                                   |                                          |        
|                                          |                                                                                                                   | TOTAL LIABILITIES & SHAREHOLDERS' EQUITY |        
|                                          |                                                                                                                   |                                          |        

See
notes to financial statements

21

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PERCEPTRONICS, INC.  STATEMENTS OF OPERATIONS

|                                                      |          | Year Ended March 31, |         
|----------------------------------------------------- | -------- | -------------------- | --------
|
|Net sales                                             |          | $                    | 187,514 
|Cost of sales                                         |          |                      | 148,119 
|                                                      |          |                      |         
|Cost of sales                                         |          |                      | 39,395  
|Cost and expenses:                                    |          |                      |         
|Selling, general and administrative                   |          |                      | 782,438 
|Research and development                              |          |                      | 249,825 
|                                                      |          |                      |         
|Operating income (loss)                               |          |                      | (992,868
|Net Gain on Sale of AssetsNote A >>>                 |          |                      | 133,490 
|Interest income                                       |          |                      | 1,012   
|Interest expense                                      |          |                      | (12,878 
|Income (loss) before taxes                            |          |                      | (871,244
|Income tax provisionNote F                           |          |                      | 800     
|                                                      |          |                      |         
|Net income (loss)                                     |          | $                    | (872,044
|                                                      |          |                      |         
|Earnings per share:                                   |          |                      |         
|                                                      | Basic:   |                      |         
|                                                      |          | Net income (loss)    |         
|                                                      | Diluted: |                      |         
|                                                      |          | Net income (loss)    |         
|                                                      |          |                      |         
|Weighted average common and common equivalent shares: |          |                      |         
|                                                      | Basic    |                      |         
|                                                      |          |                      |         
|                                                      | Diluted  |                      |         
|                                                      |          |                      |         

See
notes to financial statements

22

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PERCEPTRONICS, INC.  STATEMENTS OF SHAREHOLDERS EQUITY

|                                  |  | Common Stock |  |   |       |  |   |            | 
|--------------------------------- |  | ------------ |  | - | ----- |  | - | ---------- | 
|
|
|Balance at March 31, 1999         |  | 5,629,930    |  | $ | 5,630 |  | $ | 12,673,643 | 
|Exercise of options               |  | 33,600       |  |   | 34    |  |   | 8,945      | 
|Common shares issued              |  | 2,068,730    |  |   | 2,069 |  |   | 847,931    | 
|Net Income                        |  |              |  |   |       |  |   |            | 
|                                  |  |              |  |   |       |  |   |            | 
|Balance at March 31, 2000         |  | 7,732,260    |  | $ | 7,733 |  | $ | 13,530,519 | 
|Exercise of options               |  | 26,500       |  |   | 26    |  |   | 12,139     | 
|Common shares issued for cash     |  | 1,116, 750   |  |   | 1116  |  |   | 282,143    | 
|Common shares issued for services |  | 405,750      |  |   | 406   |  |   | 136,450    | 
|Net Income                        |  |              |  |   |       |  |   |            | 
|Balance at March 31, 2001         |  | 9,281,260    |  | $ | 9,281 |  | $ | 13,961,251 | 
|                                  |  |              |  |   |       |  |   |            | 

See
Notes to Financial Statements

23

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PERCEPTRONICS, INC.  STATEMENTS OF CASH FLOWS

|                                      |                                             | Year Ended March 31,                                                          |                                      
|------------------------------------- | ------------------------------------------- | ----------------------------------------------------------------------------- | -------------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                             |                                                                               |                                      
|                                      | Net income                                  |                                                                               | ($                                   
|                                      |                                             | Adjustments to reconcile net income to net cash used in operating activities: |                                      
|                                      |                                             |                                                                               | Loss on disposal of assets           
|                                      |                                             |                                                                               | Depreciation and amortization        
|                                      |                                             | Changes in assets and liabilities:                                            |                                      
|                                      |                                             |                                                                               | Receivables                          
|                                      |                                             |                                                                               | Inventory                            
|                                      |                                             |                                                                               | Pre-contract costs                   
|                                      |                                             |                                                                               | Prepaid expenses                     
|                                      |                                             |                                                                               | Other assets                         
|                                      |                                             |                                                                               | Accounts payable                     
|                                      |                                             |                                                                               | Accrued compensation                 
|                                      |                                             |                                                                               | Other accrued liabilities            
|                                      |                                             |                                                                               | Other long term liabilities          
|                                      |                                             |                                                                               |                                      
|                                      |                                             |                                                                               |                                      
|CASH FLOWS FROM INVESTING ACTIVITY:   |                                             |                                                                               |                                      
|                                      | Capital additions/disposition               |                                                                               |                                      
|                                      |                                             |                                                                               |                                      
|                                      |                                             |                                                                               | NET CASH USED IN INVESTING ACTIVITIES
|CASH FLOWS FROM FINANCING ACTIVITIES: |                                             |                                                                               |                                      
|                                      | Exercise of stock options and warrants      |                                                                               |                                      
|                                      |                                             | Payment of long term debt                                                     |                                      
|                                      | Increase (decrease) in other long term debt |                                                                               |                                      
|                                      |                                             | Loans from shareholders                                                       |                                      
|                                      |                                             | Proceeds from sale of common stock                                            |                                      
|                                      |                                             |                                                                               |                                      
|                                      |                                             |                                                                               |                                      
|                                      |                                             |                                                                               |                                      
|                                      |                                             |                                                                               |                                      
|                                      |                                             |                                                                               |                                      
|                                      |                                             |                                                                               |                                      
|                                      |                                             |                                                                               |                                      
|                                      |                                             |                                                                               |                                      
|                                      |                                             |                                                                               |                                      
|                                      |                                             |                                                                               |                                      
|                                      |                                             |                                                                               |                                      

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 $154,982.

See
Notes to Financial Statements

24

---



PERCEPTRONICS, INC.  NOTES TO AUDITED FINANCIAL STATEMENTS

NOTE ASUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of the Company:Perceptronics, Inc., (the "Company") is currently focused entirely on building a new
position in commercial products and services for Internet Collaborative Interactivity from its previous dual focus on networking technology and defense simulation product and services. The Company
calls its new Internet product lines the IC3D Framework and WyTH Technologies.

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, 2001 and requires
substantial amounts of working capital to support its operations. At March 31, 2001, current liabilities exceed current assets by $847,495. The Company continues to have difficulty in meeting
its obligations as they become due. Payments to vendors, totaling approximately $225,000 at March 31, 2001 are past due. The Company's cash flow during the fiscal year ended March 31,
2001 was not sufficient to meet current operating requirements and the Company continues to have difficulty making satisfactory progress toward liquidating its past due obligations. 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 $1,255,000 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 it's 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 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 $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, resulting in a net gain on sale of assets of
$133,490.

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

|                  |  | 2001 |        | 2000 |   | 1999    
|----------------- |  | ---- | ------ | ---- | - | --------
|Net Sales         |  | $    | 16,724 |      | $ |        
|Net income (loss) |  | $    | 16,724 |      | $ | (451,000

25

---

Settlement of Liabilities

Between May 3, 2001 and June 14, 2001 the Company entered into settlement agreements with five suppliers and one lender whereby total liabilities
of approximately $251,000 would be settled with payments totaling approximately $62,500 to be made before August 20, 2001. This total reduction of approximately $188,500 in liabilities depends
on the Company receiving from Global Alpha Corporation on or before August 3, 2001 payment of approximately $1.3 million for exercise of the fourth warrant under the stock purchase
agreement (See Note H), which is not assured. The effect of these settlement agreements is accordingly not reflected in the current financials.

On
May 4, 2001, in consideration for Global Alpha Corporation's agreement to invest in the Company, CEO Richard Moskowitz and President 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 $175,000 and $63,000, respectively, arising from
accrued salary, vacation and loans to the Company, and to accept payment of one hundred dollars ($100) each as full and final payment of the obligations. This further total reduction of approximately
$238,000 in liabilities depends on the Company receiving from Global Alpha Corporation on or before August 3, 2001 payment of approximately $1.3 million for exercise of the fourth
warrant under the stock purchase agreement between the Companies (See Note H), which is not assured. If this payment is not received, the general release and waiver agreements are cancelled.
The effect of these general release and waiver agreements is accordingly not reflected in the current financials.

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

Inventory:Inventory is stated at the lower of cost or market. Cost is determined principally by the
first-in, first-out method.

Pre-contract Costs:Costs incurred in connection with contracts which have not been signed at the balance
sheet date (but where recoverability of costs is probable) are accounted for as pre-contract costs. No revenues or profits have been recognized on these costs. At March 31, 2001 and
March 31, 2000 deferred pre-contract costs were $0 and $220,000, respectively.

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:During fiscal 2001 and 2000, 19% and 12% of the Company's total revenues resulted from products
sold to commercial customers who were either foreign governments or domestic or foreign companies, respectively. Sales of products and services related to United States Government contracts were 81%
and 88% of total revenues, respectively. Of the U.S. Government contract sales, 100% were for contracts that provided for reimbursement of cost plus fixed-fees and 0% were fixed price
contracts. All sales were 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) are 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.

General
and administrative expenses in excess of rates billed on contracts are recorded in the period incurred. Costs related to anticipated future losses on contracts are accrued and
charged to expense in the period when the losses are identified.

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

26

---

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:

|                                                                                        |                                                                                                 | 2001 |           | 2000      |  
|--------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ---- | --------- | --------- | -
|Numerator                                                                               |                                                                                                 |      |           |           |  
|                                                                                        | Basic and diluted earnings per share  net income (loss)                                        |      | $         | (872,044  | )
|                                                                                        |                                                                                                 |      |           |           |  
|Denominator                                                                             |                                                                                                 |      |           |           |  
|                                                                                        | Basic earnings per share  Weighted average number of common shares outstanding during the year |      |           | 8,102,260 |  
|Incremental common shares attributable to assumed exercise of outstanding stock options |                                                                                                 |      | 608,771   |           |  
|                                                                                        |                                                                                                 |      |           |           |  
|Denominator for diluted earnings per share                                              |                                                                                                 |      | 8,711,031 |           |  
|                                                                                        |                                                                                                 |      |           |           |  
|Basic earnings (loss) per share                                                         |                                                                                                 | $    | (0.10     | )         | $
|                                                                                        |                                                                                                 |      |           |           |  
|Diluted earnings (loss) per share                                                       |                                                                                                 | $    | N/A       |           | $
|                                                                                        |                                                                                                 |      |           |           |  

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: 2,232,450 in 2001 and 920,300 in 2000.

NOTE BRECEIVABLES

At March 31, 2001 there were $31,021 billed receivables that represented amounts that had been invoiced on commercial and United States Government
contracts and agreements that remained unpaid at year-end. At March 31, 2000 there were no billed receivables.

Unbilled
receivables at March 31, 2001 are $0 and at March 31, 2000 were $10,501. These balances represent amounts recognized under the
percentage-of-completion method of accounting that have not been billed because of the billing terms of the contract.

The
amount of contract retention included in unbilled receivables was $0 in fiscal 2001 and $10,501 in fiscal 2000.

27

---

The books and records of the Company are subject to audit by the Defense Contract Audit Agency (DCAA). The Company's overhead costs have been audited and approved by the DCAA through
fiscal year 1997. The Company believes that it is in substantial compliance with Government record-keeping and cost-allocation requirements, and does not expect any significant adjustments
as a result of the future audit of 1999 and 1998 overhead costs. As discussed in Note E, a large multi-year contract, which was completed in fiscal 1994, remains open.

NOTE CEQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

2001

2000Computers and other equipment

$
17,400

$
343,953Leasehold improvements





118,069Machinery & equipment





320,006Office furniture & fixtures


12,100


43,22429,500


825,252Accumulated depreciation & amortization


22,848


787,213$
6,652

$
38,039


Depreciation
expense was $9,896 in fiscal 2001 and $39,582 in fiscal 2000.

NOTE DLONG-TERM DEBT AND OTHER FINANCING

Long-term debt included the following at March 31:

|                                                                                                                                                                                                                                                                                         |  | 2001 |        | 2000
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ----
|Note PayableSmall Business Administration (SBA), secured by Company assets, payable in monthly installments of $782 including interest at 4% per annum, due November 2004.                                                                                                              |  | $    |       |     
|Note PayableBank guaranteed by Small Business Administration, secured by Company assets, payable in monthly installments of $4,329 including interest at prime rate plus 2.75 percentage points, due November 2002. At March 31, 2000 the
Company is past due on four monthly payments. |  |      |       |     
|Note PayableConsultant issued to resolve open accounts payable balance. Payable in monthly installments of $4,521 including interest at 8% per annum, outstanding balance was past due as of April 2000.                                                                                |  |      | 35,306 |     
|                                                                                                                                                                                                                                                                                         |  |      |        |     
|                                                                                                                                                                                                                                                                                         |  |      | 35,306 |     
|Current portion of long-term notes payable                                                                                                                                                                                                                                               |  |      | 35,306 |     
|                                                                                                                                                                                                                                                                                         |  |      |        |     
|                                                                                                                                                                                                                                                                                         |  | $    |       |     
|                                                                                                                                                                                                                                                                                         |  |      |        |     

28

---

Maturities
of long-term debt are as follows:

March 31,2002

$
35,3062003


2004


2005


2006


$
35,306


Short-term
debt included the following at March 31, 2001 and 2000:

As
of March 31, 2001 and 2000, there is a loan outstanding of $50,000 with a foreign customer and a note with a former employee of $4,000. The notes bear interest at 6% per
year. The terms of the note required repayment by March 1, 1996 and December 31, 1995 respectively.

As
of March 31, 2001 the Company had loans outstanding of $38,000 to various shareholders. Loans totaling $28,000 and $10,000 are due December 15, 2001 and
February 12, 2002, respectively. The loans are convertible to common stock at $0.15 per share at the option of the note holder.

NOTE ECOMMITMENTS AND CONTINGENCIES

Lease Commitments:Approximate future minimum payments under non-cancelable operating leases with initial
or remaining terms of one year or more at March 31, 2000 consisted of the following:

2002

$
37,9152003


3,0362004


3,0362005 and beyond


253$
44,240


Rent
expense was $69,881 in fiscal year 2001 and $207,000 in fiscal year 2000.

DCAAAudit:The Company's books and records are subject to audit by the Defense Contract Audit Agency
(DCAA). At March 31, 2000, 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 any significant adjustments. The Company has provided $100,000 in reserve for possible contract price adjustments at March 31, 2001. The amount reserved is believed to
be adequate and is included in accrued liabilities.

29

---

NOTE FINCOME TAXES

The provision for income taxes consist of the following:

|          |                                                     | Year Ended March 31, |    
|--------- | --------------------------------------------------- | -------------------- | ---
|
|Current:  |                                                     |                      |    
|          | Federal                                             |                      | $  
|          | State                                               |                      |    
|          |                                                     |                      |    
|          |                                                     |                      | 800
|Deferred: |                                                     |                      |    
|          | (Increase) decrease in benefit of NOL carryforwards |                      |    
|          | Increase (decrease) in valuation allowance          |                      |    
|          |                                                     |                      |    
|          |                                                     | $                    | 800
|          |                                                     |                      |    

At
March 31, 2001, the Company has net operating loss (NOL) carryforwards of approximately $6,540,000 for federal income tax purposes and $190,000 for state income tax
purposes, respectively, expiring in varying amounts through 2015. At March 31, 2001, approximately $3,100,000 of federal and approximately $40,000 of state net operating losses expired. The
Federal NOL carryforwards, which are available to offset future profits of the Company and are subject to limitations should a "change in ownership" as defined by the Internal Revenue Code occur,
expire between 2002 and 2016 if not utilized. State net operating loss carryforwards at March 31, 2001 expire between 2002 and 2011, if not utilized.

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 sufficient to realize the recorded deferred tax asset of $6,730,000 net of a valuation
allowance of $5,797,000.

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 2002 and 2016 and state income tax operating loss carryforwards will expire between fiscal 2002 and 2011 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.

2001

2000Federal statutory rate

34.00
%
34.00
%Increase (reductions) in taxes due to:State income taxes (net of federal benefit)

5.83
%
5.83
%Valuation allowance adjustment

(39.74)
%
(39.90)
%(0.09)
%
(0.07)
%


Income
taxes paid amounted to $800 in fiscal 2001 and $800 in fiscal 2000.

30

---

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 in fiscal 2000 and 1999. 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 fiscal 2001 and 2000.

NOTE HSHAREHOLDERS' EQUITY

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 and 37,800 shares were outstanding and
exercisable under this plan at March 31, 2001 and 2000, respectively.

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 and 250,250 shares were outstanding under this plan at March 31, 2001 and March 31,
2000, of which 217,500 and 231,850 shares were exercisable.

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 1st
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 and 18,000 shares were outstanding and exercisable under this plan at March 31, 2001 and 2000, respectively. No options can be
granted under this plan after July 1998.

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 1st 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 50,000 and 62,500 shares were outstanding on March 31, 2001 and 2000, 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

31

---

are 10% or more shareholders). Options to purchase 805,000 shares of common stock were outstanding under this plan at March 31, 2001, of which 575,000 were exercisable. No options to purchase
common shares were outstanding under this plan at March 31, 2000.

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, 2001, 447,500 shares of common stock had been issued to qualified consultants.

On
February 4, 2000, the Company granted non-qualified stock options pursuant to employment agreements with two employees. The non-qualified stock
options for the issuance of 465,000 shares of common stock were issued to the two employees at an exercise price of $.77. The option shares become exercisable in installments and at March 31,
2001, there were 415,000 shares exercisable.

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.

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.

Changes
in the status of options are summarized as follows for fiscal years ended

March 31:

|                                   |                            | 2001 |           | 2000      |  
|---------------------------------- | -------------------------- | ---- | --------- | --------- | -
|Outstanding at beginning of year   |                            |      | 833,550   |           |  
|Granted                            |                            |      | 390,000   |           |  
|Canceled or expired                |                            |      | (119,200  | )         |  
|Exercised                          |                            |      | (16,000   | )         |  
|                                   |                            |      |           |           |  
|Outstanding at end of year         |                            |      | 1,088,300 |           |  
|Available for grant at end of year |                            |      | 345,000   |           |  
|Price range of options:            |                            |      |           |           |  
|                                   | Outstanding at end of year |      | $         | .11$3.00 |  
|Exercised                          |                            | $    | .18$ .47 |           | $

At
March 31, 2001 and 2000, options for the purchase of 858,300 and 400,150 shares were exercisable.

32

---

At March 31, 2001 the following warrants to purchase common shares were outstanding:

Quantity

Exercise Price

Expiration Date44,693

$
.32

October 30, 2002100,000

$
.25

November 18, 2002111,111

$
.56

November 30, 2002400,000

$
.25

December 14, 200230,000

$
.50

December 17, 200250,000

$
.25

December 20, 200244,693

$
.29

January 28, 200328,809

$
.78

January 31, 200375,000

$
.50

February 18, 200325,000

$
.30

March 06, 200357,143

$
.57

March 16, 2003240,000

$
.50

March 30, 200345,264

$
.74

April 28, 200366,667

$
.75

June 5, 200355,556

$
.75

June 10, 2003200,000

$
.75

June 17, 2003444,444

$
.70

June 17, 200355,556

$
.75

July 1, 2003200,000

$
.50

July 27, 200351,540

$
.53

July 28, 2003250,000

$
.20

October 13, 200354,307

$
.47

October 26, 2003222,222

$
.56

December 2, 200337,500

$
.75

January 29, 200437,500

$
.75

February 5, 200450,000

$
.85

April 6, 200475,000

$
.50

April 22, 20045,000

$
.97

May 4, 2004200,000

$
.85

July 6, 200460,000

$
.44

October 31, 200420,000

$
.50

November 3, 200420,000

$
.50

November 3, 200440,000

$
.50

November 3, 200475,000

$
.01

March 27, 2006


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

33

---

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) |             | 2001 |   | 2000  |  
|--------------------------------------- | ----------- | ---- | - | ----- | -
|Net earnings                            |             |      |   |       |  
|                                        | As reported |      | $ | (872  | )
|                                        | Pro forma   |      | $ | (973  | )
|Net earnings per share                  |             |      |   |       |  
|                                        | As reported |      | $ | (0.10 | )
|                                        | Pro forma   |      | $ | (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 2001 and 2000, respectively: dividend yield of 0%, expected volatility of 20% and 20%, risk-free interest rates of 5.00% and 5.00%, and expected lives of
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.

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 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 and $150,000 were paid on
May 5, 2001 and June 5, 2001 for 500,000 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, may be paid at the option of Global Alpha. There is no assurance that all or any future purchases will be made by Global Alpha.

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).

34

---



INDEX TO EXHIBITS



| | (a) |  | Exhibit Index (Management contracts, compensation plans and arrangements are identified
by (*).
| | --- |  | -----------------------------------------------------------------------------------------------
| |     |  | 3.1                                                                                            
| |     |  | 3.2                                                                                            
| |     |  | * 10.1                                                                                         
| |     |  | * 10.2                                                                                         
| |     |  | * 10.3                                                                                         
| |     |  | * 10.4                                                                                         
| |     |  | * 10.5                                                                                         
| |     |  | 10.6                                                                                           
| |     |  | 10.7                                                                                           
| |     |  | 10.8                                                                                           
| |     |  | 10.9                                                                                           
| |     |  | 10.10                                                                                          
| |     |  | 10.11                                                                                          
| | (b) |  | The registrant filed no reports on Form-8K during the quarter ended March 31, 2000.            

35

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