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                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

                                   (Mark One)

              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

                       THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2001

                                       OR

            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

                       THE SECURITIES EXCHANGE ACT OF 1934

              For the transition period from _________ to _________

                        Commission file number 000-29750

                          IENTERTAINMENT NETWORK, INC.

                 (Name of small business issuer in its charter)



         North Carolina                                          56-2092059
         --------------                                          ----------
(State of other jurisdiction of                              (I.R.S. Employer
         incorporation)                                   Identification Number)


                                 124 Quade Drive

                           Cary, North Carolina 27513

                     (Address of principal executive office)

                    Issuer's telephone number: (919) 678-8301

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

                                      None

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

                          Common Stock, $.10 par value

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

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The Registrant's revenue for the year ended December 31, 2001 was $1,624,000.

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant based upon the closing price of the common
stock as of the close of business on March 26, 2002, was approximately
$4,017,662.

As of March 26, 2002, there were 33,480,515 shares of the Registrant's common
stock, $.10 par value per share, issued and outstanding.

    Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]

                       DOCUMENTS INCORPORATED BY REFERENCE

No documents are incorporated by reference into this report.

See the Exhibit Index hereto.

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                                     PART I

                    NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-KSB contains forward-looking statements within the meaning of the
"safe harbor" provisions under Section 21E of the Securities Exchange Act of
1934 and the Private Securities Litigation Reform Act of 1995. We use
forward-looking statements in our description of our plans and objectives for
future operations and assumptions underlying these plans and objectives.
Forward-looking terminology includes the words "may," "expects," "believes,"
"anticipates," "intends," "projects," or similar terms, variations of such terms
or the negative of such terms. These forward-looking statements are based on
management's current expectations and are subject to factors and uncertainties
that could cause actual results to differ materially from those described in
such forward-looking statements. We expressly disclaim any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained in this Form 10-KSB to reflect any change in our
expectations or any changes in events, conditions or circumstances upon which
any forward-looking statement is based. Factors that could cause such results to
differ materially from those described in the forward-looking statements include
those set forth under "Risk Factors" and elsewhere in, or incorporated by
reference into this Form 10-KSB. These factors include the following: we have
incurred significant operating losses and we cannot predict whether we will
become profitable; we have changed our business focus and we may not be
successful operating a new business; we have significant capital requirements,
and if we do not obtain sufficient additional funds our ability to grow may be
limited; our growth strategy, including acquisitions, may not succeed and may
adversely effect our financial condition, results of operations and cash flows;
if we are unable to introduce new products and incorporate rapidly developing
technologies into our products, our business may be adversely affected; we
depend on the continued growth in use of the Internet; intense competition may
adversely affect our operating results; and other risks.

Item 1: Description of Business

(a) BUSINESS DEVELOPMENT

iEntertainment Network, Inc. (the "Company") develops and publishes proprietary
Internet and online multi-player games. The Company also operates online game
services and offers online gamers a variety of free and subscription games and
services, including simulation, parlor, strategy, role-playing and action games
through its Internet distribution infrastructure.

              During the year ended December 31, 2001, the Company:

.. Completed a shift in its business focus to an Internet-only strategy;

.. Launched in-house online ad serving operations, tracking systems, and
operational staff support;

.. Established a primary ad inventory representation partnership with AdJuggler;
and

.. Successfully upgraded Warbirds II(TM) technology, design and architecture,
forming the foundation for an advanced Warbirds III(TM) online flight simulation
experience.

The Company was incorporated under the laws of the State of Maryland on June 16,
1994 under the name "SP Enterprises, Inc." and changed its name to "Interactive
Magic, Inc." in March 1996. On July 1, 1998, the Company reincorporated in North
Carolina, and subsequently changed its name to "iEntertainment Network, Inc." on
December 30, 1999. The Company's address is 124 Quade Drive, Cary, North
Carolina 27513, and its telephone number is (919) 678-8301.

(b) BUSINESS OF THE REGISTRANT

                                    OVERVIEW

The Company is a developer and publisher of Internet and online games and an
operator of online game services. The Company develops and publishes proprietary
online multi-player games, and through its Internet distribution infrastructure,
offers online gamers a variety of free and subscription based games and
services, including simulation, parlor, strategy, role playing and action games.


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The Company introduced its first large-scale online multi-player game
("WarBirds(TM)") in April 1997 following the acquisition of Interactive
Creations, Inc. ("ICI"). WarBirds(TM), an award winning World War II air combat
simulation game, has logged over 2.5 million hours of online game time with
players in more than 70 countries.

The Company is a technological leader within the online gaming industry with a
number of leading-edge online and multi-player gaming technologies that enhance
the play value of its games and augment its service capabilities. The Company's
MEGAplayer technology enables the implementation of large-scale multi-player
games on the Internet, allowing over 300 players to play simultaneously in the
same game arena by minimizing latency and addressing problems such as onscreen
"warping." The Company has been issued a US patent for the management of
Internet Latency for games on the Internet. The Company believes many online
gaming companies are in violation of the Company's patent and intends to
vigourously defend its patent rights.

Through its acquisition of MPG-Net in February 1999, the Company acquired a
series of advertising-supported bingo, casino, and other free games. The Company
continues to improve these games and offers new games, contests, and prizes from
time to time.

                             ONLINE GAMING INDUSTRY

The evolution of the Internet into an accessible, easy-to-use,
platform-independent global network capable of supporting multimedia
applications, has led to the development of online gaming. Online gaming is an
emerging market covering several gaming paradigms, including: (i) the electronic
distribution of pay-for-play or subscription-based games; and (ii) the
implementation of multi-player features on traditional games with the use of the
Internet or on-line services as the wide-area network connecting multiple
physically-distant players.

The Internet and online services present a new platform upon which traditional
game publishers and distributors can market, advertise and distribute their
products, whether through direct sales from Web sites or through sponsoring
multi-player on-line tournaments featuring their games. The ability to compete
on-line is an additional product feature that may increase demand for
interactive entertainment software products. The development of the Internet has
also led to the emergence of online gaming services that aggregate numerous
licensed and/or proprietary software titles and online developers that make
their server-based titles exclusively available online. As PC and Internet
access prices continue to decline, these gaming services are attracting a
rapidly growing number of users.

Revenue sources in the online gaming model include pay-for-play fees,
subscriptions, e-commerce transaction fees, advertising and direct
merchandising. Online gaming presents favorable economics, minimizes
distribution channel issues, provides for a large number of potential revenue
sources and enables publishers to maintain an intimate relationship with their
customers.

Two major categories of market participants have emerged in the online gaming
industry: online gaming software developers and online gaming aggregators.Online
gaming developers offer server-based games directly to consumers over the
Internet or through retail channels involving an upfront charge to the buyer.
These developers also maintain Web sites where they host their games and match
up opponents. Under the online publishing model, game developers publish
server-based titles (typically massively multi-player or "immersive" games)
exclusively for online play and typically sell unlimited usage or time-based
subscriptions to the game, typically ranging from $4.95 to $19.95 a month.

Online gaming aggregators offer a variety of third-party games and related
services and seek to generate revenues through a combination of usage fees
and/or advertising. Online aggregators focus on providing server hosting,
match-making services and tournaments for multi-player games published by third
parties, as well as community-building services such as chat rooms and bulletin
boards. Typically, these services offer many of the same games on a
non-exclusive basis. Chat accounts for as much as 50% of usage on aggregation
sites, as consumers come for games and stay for community. Furthermore,
aggregators seek to enhance their customers' online gaming experience by
minimizing latency for Internet-based games. The Company believes that latency,
or the length of time it takes to communicate from the host server to the
player's computer, is the most important technical constraint impeding game play
on the Internet. The typical delay on the Internet is approximately 4/10th of a
second, which significantly affects the quality of multi-player action games. A
majority of the competitors vying for the online and Internet gaming market are
focused on multi-player action games that require low latency data links between
the players and the host. Online game networks include Microsoft's Internet
Gaming Zone, Lycos Gamesville, Pogo and FlipSide/Uproar.


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Traditional publishers of games for the PC platform are also increasingly
including options for online play in their game software. Taking this idea a
step farther, Electronic Arts -a leader in PC game development -has recently
migrated a host of their popular sports-oriented PC games to an online
subscription-based offering. Sony Online Corp's launch of Everquest has also
propelled this traditional PC game manufacturer into the online game publishing
environment.

As the Internet develops into a popular medium for online gaming, traditional
game publishers, which are primarily focused on retail distribution, are
increasingly using the Internet to directly promote traditional retail titles by
providing free online play on their Web sites as an added benefit to retail
buyers.

                                 ONLINE PRODUCTS

The Company currently offers four real-time large-scale online games.
WarBirds(TM) is available on a subscription basis. The Company charges players a
relatively modest monthly subscription fee to play the basic version of its
online games and a larger monthly subscription fee for the full featured
versions of those games. The Company believes that this flexible pricing plan
caters to the needs of a variety of players ranging from novices to experts and
provides players with an incentive to become immersed in regularized game play.

The Company's sites are distinguished by the real-time large-scale nature of its
online games. While a number of multi-player games are available over the
Internet, generally only four, eight or 16 players can play simultaneously with
or against each other. By contrast, large-scale multi-player games permit a
significantly greater number, frequently hundreds, of simultaneous players. The
Company believes it is one of the few online developers that have the knowledge,
skill and experience necessary, and are recognized within the industry for its
ability to, successfully develop and operate large-scale online multi-player
games.

The Company hosts numerous playing arenas for large-scale multi-player online
games on its highly scalable, redundant and secure high performance
client-server network. The Company believes this game server network can be
expanded and distributed as needed to accommodate growth in the Company's
customer base. The Company believes that its massively multi-player online games
create a gaming experience that constantly engage the player, presenting fresh
challenges. Large-scale online games are infinitely expandable and can grow
organically through regular development and modification. As such, they have a
longer shelf life than mission-oriented or level-based CD-ROM games. These games
present ongoing submersive play experiences where players can choose to reenter
the game environment at any time, 24 hours a day, seven days a week.

The Company believes that as its massively multi-player games develop a loyal
following, they become ideal environments around which to form communities. The
Company believes that its customers wish to socialize and form relationships
while competing online against one another. Accordingly, the Company designs its
massively multi-player online games to be inherently conducive to community
building by allowing hundreds of people from around the world to play
simultaneously. WarBirds(TM), for example, allows players to fly in squadrons,
participate in organized special events, gain status and build careers as pilots
for their online personas. In addition to playing games, the Company's customers
are given the opportunity to participate in a rich social environment, including
chat, competitive tournaments and live event broadcasts.

The Company's sites currently include the following online titles:

WARBIRDS(TM). WarBirds(TM), an award winning World War II air combat simulation
game, allows hundreds of players from around the world to simultaneously fly air
combat missions in a single campaign. To date, there have been as many as 350
WarBirds(TM) players online at one time, but average usage is significantly
lower. WarBirds(TM) combines strategy, realism and community building to offer
players a unique, compelling and engaging online gaming experience. Players
choose to fly for one of four teams, select an airplane from an array of 50
historically accurate bombers or fighters and choose a role as a pilot, gunner
or bomber. Individual combatants then engage in dogfights or fly bombing
missions over enemy territories, with the outcome of each individual mission
affecting the outcome of the overall campaign. The incorporation of 3D rolling
terrain graphics and the Company's MEGAplayer technology, which minimizes
latency and onscreen "warping," add to the realism of the playing experience.


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WarBirds(TM) is played on a continuous basis, allowing players to enter the game
24 hours a day, seven days a week. To encourage recurring play, the Company
promotes the development of communities of regular WarBirds(TM) players that
participate in special promotional events such as squadron conferences,
conventions and competitions around the world. WarBirds(TM) has been named
"Online Only Game of the Year" every year from 1996 - 1999 by PC Games, and the
1999 and 2000 "Dogfighter.com Online Flight Simulation Game of the Year."

DAWN OF ACES(TM). Dawn of Aces(TM) is a WWI air combat simulation game based on
the WarBirds(TM) engine. Dawn Of Aces(TM) places players in the middle of an
ongoing WWI air battle over Continental Europe and carries a more historic feel
than WarBirds(TM). Dawn of Aces(TM) allows players to fly either as Allied
(British or French) or Central (German) pilots, with the goal of helping their
side capture enemy aerodromes and advance front lines. Players can chose their
aircraft from a variety of historically accurate models available to their team
and can change sides in the on-going battle each time they rejoin the game.

The Company's iEN, GameHub, and The Games Arena websites are full-featured
entertainment destinations containing software downloads, free and premium
games, news updates, online advertising, tournaments and special game events.
These destination feature:

                                 Premium Games:

.. WarBirds II(TM), the award-winning World War II flight simulation;

.. WarBirds III(TM)(currently offered in open Beta format);

.. WarBirds(TM)Air Combat;

.. Dawn of Aces(TM), an exciting World War I air combat simulation;


              Free Advertising-Supported Game Category Selections:

Bingo, Casino Games, Card Games, Arcade Games, Puzzle, War Games, Simulations
and Word Games.

The Company offers a three-tier service structure, which it believes will expand
its user base and build a successful mainstream online entertainment service.

The Company's first-tier services consist of free entertainment in the form of
chat, messaging and online parlor games such as Poker, Hearts, Spades and Bingo
to attract a large user audience to the Company's site. Following the lead of
major Internet portals that have used free advertising-supported services to
aggregate large communities of online users, the Company offers these online
gaming services free of charge in order to build a large and loyal customer
base.

The Company's second-tier services consist of subscription-based access to more
traditional action, simulation and strategy games and related services. The
Company also hosts multi-player arenas for a variety of popular Internet-enabled
CD-ROM titles published by the Company and third-party publishers. Additional
services include tournament play with rankings, contests, special events and
prizes.

The Company's third-tier services target avid gamers. In addition to all of the
services included in the second-tier, the third tier offers the most
sophisticated online only games on a pay-per-play basis, including massively
multi-player games such as WarBirds(TM) and Dawn of Aces(TM). These games
include titles that are differentiated enough from generic online gaming
offerings to warrant premium pricing. The Company plans to offer hourly, daily
and monthly game time purchases.

The Company has expanded the community-orientation of its services by providing
feature-rich, easy-to-use chat and messaging services that enhance the social
experience of playing the Company's broad offering of free, subscription-based
and pay-per-play games. The Company believes that these chat rooms and messaging
services encourage player congregation at its sites and facilitate social
interaction and player matching for multi-player games. To support these free
services, the Company is leveraging its Web traffic to draw revenue from
advertising.


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                                    MARKETING

The Company's online marketing focuses on strategies for increasing recurring
revenues from the current customer base while recruiting new customers. The
Company seeks to increase revenues from its current customer base through
community building programs such as regular e-mail information updates,
sponsorship of online events, contests and conventions attended by subscribers.
For example, the Company is promoting the development of "communities" of
regular WarBirds(TM) flyers that participate in special promotional events, such
as squadron conferences, conventions and competitions around the world. To date,
over 200 of these informal squadrons or communities have been formed. In
addition, the Company is committed to providing extensive technical support to
its customers. The Company believes that as a result of these efforts, it has
developed significant customer loyalty, encouraging long-term customer game
play.

                                   TECHNOLOGY

The Company has developed proprietary technologies that create an enhanced
gaming experience for the user and enable the Company to create highly realistic
games. The Company does not currently maintain patents on its technology, and
others may be able to develop similar technologies in the future. The Company
has been issued a US patent on its MEGAplayer technology, which minimizes
latency and addresses problems such as "warping" that are is inherent in high
and variable latency networks such as the Internet. The Company intends to
enforce its patent rights vigorously.

                               PRODUCT DEVELOPMENT

The development cycle for new online products is continuous throughout the life
of the product. Generally, each new internally developed product begins as a
brief design document proposed by the Company's internal development staff.
Following management approval, the product's designer drafts a detailed product
design specification, programmers develop the software design and create a
schedule based on that design, and artists develop storyboards and the art
production schedule. The Company then develops the overall project schedule and
budget, including a scheduled release date and a marketing and sales plan.

The Company typically reviews externally developed products in various stages of
development, and, once the Company has selected and contracted for a product,
the Company's product development staff then manages the product development
process with the external developer in a manner similar to the Company's
internal development process.

Throughout the development phase of each product, whether internally or
externally developed, the Company implements a number of quality control
procedures. The software is carefully designed, implemented and tested by the
programmers, followed by frequent testing releases. Each product is played and
critiqued by the Company's in-house play-test staff and other Company employees.
Products are then submitted to groups of up to 50 external playtesters. This
product test process reduces implementation defects and provides design and
playability feedback in a timely manner for incorporation in the finished
product.

                                   COMPETITION

Many companies provide Web sites targeted to audiences seeking various forms of
entertainment content. The Company competes with all of these companies for
visitor traffic, advertising dollars and electronic commerce. There has been
substantial consolidation in the online games market segment, and competition is
expected to intensify as ISPs and major portals seek to acquire free-standing
online game providers. To date, the Company's ability to compete has been
largely dependent upon the perceived value of its content relative to other
available entertainment alternatives, both online and elsewhere. In addition,
the Company is one of the few online entertainment properties capable of
delivering real time interactivity between a large number of simultaneous users.

The Company has many online competitors including:

..        Gamesville/Lycos;



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..        Pogo
..        Zone.com
..        Yahoo! Games
..        FlipSide/UpRoar
..        Microsoft Fighter Aces
..        Aces High

The Company also competes indirectly with many providers of content and services
over the Internet, including search engines and entertainment content sites.
Most of the Company's competitors and potential new competitors have:

.. Significantly greater financial, technical, marketing, sales and customer
support and other resources; and

.. Established reputations for success in the development, licensing and sale of
their products and technology.

These competitors may also be able to:

.. Undertake more extensive marketing campaigns for their brands and services;

.. Adopt more aggressive advertising pricing policies;

.. Use superior technology platforms to deliver their products and services; and

.. Make more attractive offers to potential employees, distribution partners,
product manufacturers, inventory suppliers, advertisers and third-party content
providers.

The Company's competitors may develop better content or content that achieves
greater market acceptance. It is also possible that new competitors may emerge
and acquire significant market share. This could also harm the Company's
business.

The Company also competes with traditional forms of media, like newspapers,
magazines, radio and television for advertisers and advertising revenue. If
advertisers perceive the Internet or the Company's Web sites to be a limited or
an ineffective advertising medium, they may be reluctant to devote a portion of
their advertising budget to the Company's Web sites.

The online entertainment market does not have substantial barriers to entry.
Increased competition could result in lower advertising rates, price reductions
and lower profit margins, loss of visitors, reduced ad impressions and loss of
market share. Any one of these could have a materially adverse affect on the
Company's business, results of operations and financial condition.

The Company's ability to compete successfully depends on many factors, including
the quality of the content provided by the Company and its competitors, how easy
the Company's services are to use compared to those of its competitors, the
success of its sales and marketing efforts and the performance of its
technology.

                              GOVERNMENT REGULATION

General. There are an increasing number of laws and regulations pertaining to
the Internet. In addition, a number of legislative and regulatory proposals are
under consideration by federal, state, local and foreign governments and
agencies. As the Company's game sites can be accessed from almost any country,
the Company is exposed to regulations by many governments. In the past year,
foreign countries have successfully asserted their ability to regulate the U.S.
operations of Internet companies because their citizens can access services
worldwide.

Laws or regulations may be adopted with respect to the Internet relating to
liability for information retrieved from or transmitted over the Internet,
online content regulation, user privacy, taxation and quality of products and
services. Moreover, the applicability to the Internet of existing laws governing
issues such as intellectual property ownership and infringement, copyright,
trademark, trade secret, obscenity, libel, employment and personal privacy is
uncertain and developing. Any new legislation or regulation, or the application
or interpretation of existing laws, may decrease the growth in the use of the
Internet, which could in turn decrease the demand for the Company's services,
increase


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the Company's cost of doing business or otherwise have a material adverse effect
on its business, results of operations and financial condition.

Liability for information retrieved from our websites and from the internet.
Content may be accessed on any of the Company's Web sites or on the Web sites of
its affiliates, and this content may be downloaded by users and subsequently
transmitted to others over the Internet. This could result in claims against the
Company based on a variety of theories, including defamation, obscenity,
negligence, copyright or trademark infringement or other theories based on the
nature, publication and distribution of this content. These types of claims have
been brought, sometimes successfully, against providers of Internet services in
the past. The Company could also be exposed to liability with respect to
third-party content that may be posted by users in chat rooms offered on the
Company's Web sites. It is also possible that if any information provided on its
Web sites contains errors or false or misleading information, third parties
could make claims against the Company for losses incurred in reliance on such
information. The Company's sites contain numerous links to other Web sites. As a
result, the Company may be subject to claims alleging that, by directly or
indirectly providing links to other Web sites, the Company is liable for
copyright or trademark infringement or the wrongful actions of third parties
through their respective Web sites.

The Communications Decency Act of 1996 (the "CDA") was enacted in the United
States to prohibit the transmission over the Internet of indecent, obscene or
offensive content. Although selected parts of the CDA have been deemed
unconstitutional, provisions protecting providers of Internet services from
claims related to third-party content remain effective. Under the CDA, a
provider of Internet services will generally not be treated as a publisher or
speaker of any information available on its service but provided by a
third-party content provider unless the provider of Internet services exerts
editorial control over the content or embraces the content as its own. The
Company's activities may not permit it, in every instance, to take advantage of
this safe harbor provision. Although the Company attempts to reduce its exposure
to this potential liability through, among other things, provisions in our
affiliate agreements, user policies and disclaimers, the enforceability and
effectiveness of such measures are uncertain.

The Company's general liability insurance may not cover all potential claims to
which it is exposed and may not be adequate to indemnify it for all liability
that may be imposed. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage could have a material adverse
effect on the Company's business, results of operations and financial condition.
Even to the extent that these claims do not ultimately result in a determination
of liability, the Company could incur significant costs in investigating and
defending against these claims. Potential liability for information disseminated
through its Web sites could lead the Company to implement measures to reduce its
exposure to such liability, which may require the expenditure of substantial
resources and limit the attractiveness of the Company's service to users.

Online content regulations. Several United States federal and state statutes
prohibit the transmission of indecent, obscene or offensive content over the
Internet to particular groups of persons. The enforcement of these statutes and
initiatives, and any future enforcement activities, statutes and initiatives,
may result in limitations on the type of content and advertisements available on
the Company's Web sites. Legislation regulating online content could dampen the
growth in use of the Internet generally and decrease the acceptance of the
Internet as an advertising and electronic commerce medium.

Regulation of sponsors of contests and sweepstakes. Contests and games of chance
are subject to the gambling, lottery and disclosure laws of various
jurisdictions in which the Company offers its contests and games. A game
sponsor, for example, cannot require the consumer to make a payment, buy its
product or provide a substantial benefit, collectively called "consideration,"
as a condition of entering its game of chance, or in some instances, its contest
of skill. If consideration were interpreted differently in a particular
jurisdiction, the Company may find it necessary to eliminate, modify or cancel
components of our products that could result in additional development costs
and/or the possible loss of revenue. The Company recently settled claims made by
state regulators in North Carolina alleging that the Company's bingo operations
constituted an illegal gambling activity under state law. The Company agreed to
modify and has modified its bingo operations as part of the settlement.

Privacy Concerns. The United States Federal Trade Commission (the "FTC") is
considering adopting regulations regarding the collection and use of personal
identifying information obtained from individuals when accessing Web sites, with
particular emphasis on access by minors. These regulations may include
requirements that companies establish procedures to, among other things:


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.. Give adequate notice to consumers regarding information collection and
disclosure practices;

.. Provide consumers with the ability to have personal identifying information
deleted from a company's database;

.. Provide consumers with access to their personal information and with the
ability to rectify inaccurate information;

.. Clearly identify affiliations or a lack thereof with third parties that may
collect information or sponsor activities on a company's Web site; and

.. Obtain express parental consent prior to collecting and using personal
identifying information obtained from children under 13 years of age.

These regulations may also include enforcement and redress provisions. Moreover,
the Company's business model is based, in part, upon its ability to obtain
registration information about its users and to use this information for
targeted advertising. If new regulations are adopted that limit or eliminate the
Company's ability to use this information, its business, results of operations
and financial condition could be materially adversely affected. Even in the
absence of these regulations, the FTC has begun investigations into the privacy
practices of companies that collect information on the Internet. The FTC's
regulatory and enforcement efforts alone may adversely affect the ability to
collect demographic and personal information from users, which similarly could
have an adverse effect on the Company's ability to provide highly targeted
opportunities for advertisers.

It is also possible that "cookies," or information keyed to a specific server,
file pathway or directory location that is stored on a user's hard drive,
possibly without the user's knowledge, which are used to track demographic
information and to target advertising, may become subject to laws limiting or
prohibiting their use. A number of Internet commentators, advocates and
governmental bodies in the United States and other countries have urged the
passage of laws limiting or abolishing the use of cookies. Limitations on or
elimination of the Company's use of cookies could limit the effectiveness of its
targeting of advertisements, which could have a material adverse effect on its
business, results of operations and financial condition.

The European Union, or EU, has adopted a directive that imposes restrictions on
the collection and use of personal data. Under the directive, EU citizens are
guaranteed rights to access their data, rights to know where the data
originated, rights to have inaccurate data rectified, rights to recourse in the
event of unlawful processing and rights to withhold permission to use their data
for direct marketing. The directive could, among other things, affect companies
that collect information over the Internet from individuals in EU member
countries, and may impose restrictions that are more stringent than current
Internet privacy standard in the United States. In particular, companies with
offices located in EU countries will not be allowed to send personal information
to countries that do not maintain adequate standards of privacy. The directive
does not, however, define what standards of privacy are adequate. As a result,
the directive may adversely affect the Company's activities because the Company
engages in data collection from users in EU member countries.

Internet Taxation. A number of legislative proposals have been made at the
United States federal, state and local level, and by certain European
governments, that would impose additional taxes on the sale of goods and
services over the Internet and certain states have taken measures to tax
Internet-related activities. This legislation, or other attempts at regulating
commerce over the Internet, may substantially impede the growth of commerce on
the Internet and, as a result, materially adversely affect the Company's
opportunity to derive financial benefit from those activities.

Domain Names. Domain names are Internet "addresses." The current system for
registering, allocating and managing domain names has been the subject of
litigation, including trademark litigation, and of proposed regulatory reform.
The Company has registered several domain names. The Company may seek to
register additional domain names, although there is no assurance it will
successfully obtain the registrations, and third parties may bring claims for
infringement against the Company for the use of any of its domain names or other
trademarks. The Company's current domain names may lose their value, or the
Company may have to obtain entirely new domain names in addition to or in lieu
of its current domain names if reform efforts result in a restructuring in the
current system.

Jurisdictions. Due to the global nature of the Internet, it is possible that,
although the Company's transmissions over the Internet originate primarily in
the United States and the United Kingdom, the governments of other states and


                                       8

<PAGE>

countries might attempt to regulate the Company's transmissions or prosecute the
Company's for violations of their laws. These laws may be modified, or new laws
enacted, in the future. Any of these developments could have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, as the Company's service is available over the Internet in multiple
states and countries, these jurisdictions may claim that the Company is required
to qualify to do business as a foreign corporation in each of these states or
countries. The Company is qualified to do business only in certain states and
countries, and its failure to qualify as a foreign corporation in a jurisdiction
where it is required to do so could subject the Company to taxes and penalties
and could result in the Company's inability to enforce contracts in those
jurisdictions. Any new legislation or regulation, the application of laws and
regulations of jurisdictions whose laws do not currently apply to its business,
or the application of existing laws and regulations to the Internet and other
online services could have a material adverse effect on the Company's business,
results of operations and financial condition.

                                    EMPLOYEES

As of March 26, 2002, the Company had 18 full-time employees. None of the
Company's employees is a party to any collective bargaining agreements or a
member of a labor union. The Company has not experienced any work stoppages and
believes that its relations with its employees are good.

                                  RISK FACTORS

The following factors should be reviewed carefully, in conjunction with the
other information in this Form 10-KSB and our consolidated financial statements.
These factors could cause actual results to differ materially from those
currently anticipated and contained in forward-looking statements made in this
Form 10-KSB and presented elsewhere by our management from time to time. See
"Note Regarding Forward-Looking Statements."

COMPANY RISKS

We have incurred significant operating losses and we cannot predict whether we
will become profitable, and our auditors have raised substantial doubt about our
ability to continue as a going concern.

We have experienced significant losses since our inception. Our losses have
primarily resulted from overhead and other costs incurred in our development and
expansion. For the years ended December 31, 2001 and 2000, we incurred net
losses of approximately $1.9 million and $5.6 million, respectively. At December
31, 2001, we had an accumulated deficit of approximately $45.0 million. Our
revenues and market share may grow more slowly than we anticipate or may even
decrease in the future. In addition, our expenses may increase faster than we
expect. As a result, we may continue to generate substantial losses for the
foreseeable future, and the rate at which we incur these losses may increase
from current levels. We cannot predict the extent of future losses or whether we
will ever be able to achieve or sustain profitable operations. As of December
31, 2001, the Company had cash and cash equivalents of $0.3 million.

For the first three months of 2002, the Company has maintained approximately the
same amount of cash as at December 31, 2001. This has been accomplished
primarily by reducing expenses and raising additional equity. The Company's cash
flow, however, depends upon numerous factors beyond its control, including the
rates and volume of Internet advertising and the pay-for-play gaming market,
which have both declined recently. If our cash flows from Internet advertising
and/or the pay-for-play gaming market continue to decrease, the Company's future
liquidity will be adversely affected.

Although the Company continues to have cash and cash equivalents of
approximately $0.3 million, its auditors have raised substantial doubt about the
Company's ability to continue as a going concern. If the Company does not
generate sufficient revenues, it may have to raise additional capital, which
will result in substantial dilution to the Company's current shareholders.
Moreover, as a result of its low stock price and the listing of our common stock
on the OTC Bulletin Board (R), the Company may not be able to raise additional
capital or may be able to raise capital only on materially adverse terms.

We have derived a portion of our revenues from reciprocal advertising
agreements, or "barter," which do not generate cash revenue.


                                       9

<PAGE>

We have derived a portion of our revenues from reciprocal advertising
arrangements, or "barter," under which we exchange advertising space on our Web
sites, or provide game content or other services for third-party Web sites,
predominantly for advertising space on other Web sites rather than for cash
payments. We do not however expect that barter will continue to account for any
of our revenues in the foreseeable future. We derived 12% of our advertising
revenues from barter for the year ended December 31, 2001.

We may not be able to adjust our operating expenses in order to offset any
unexpected revenue shortfalls.

Our operating expenses are based on our expectations of our future revenues.
These expenses are relatively fixed, at least in the short term. We may be
unable to adjust spending quickly enough to offset any unexpected revenue
shortfall. If we fail to substantially increase our revenues, then our financial
condition and results of operations would be materially adversely affected.

We have evaluated the potential sale or acquisition of the company, which may
not occur at all or may occur at a low price or with adverse terms to
shareholders.

We have recently evaluated the potential acquisition or sale of the Company.
Although we currently anticipate that we will remain independent, there can be
no assurance that a sale or acquisition will not occur, or that if an
acquisition or sale of the Company does occur, that the sale price will be
favorable to investors. In addition to the possibility of a low sales price,
other terms of such acquisition or sale could be unfavorable to some or all of
the holders of the Company's stock.

We may fail to meet market expectations because of fluctuations in our quarterly
operating results, which would cause our stock price to decline.

Our quarterly operating results have fluctuated significantly in the past and
will likely fluctuate significantly in the future. Such fluctuations in
operating results may cause our stock price to fluctuate. These fluctuations in
operating results depend on a variety of factors, including:

.. Our ability to attract and retain advertisers;

.. Expiration or termination of our strategic relationships with Web sites and
Internet service providers, or ISPs, which can result from mergers or other
strategic combinations as Internet businesses continue to consolidate;

.. System outages, delays in obtaining new equipment or problems with planned
upgrades;

.. Disruption or impairment of the Internet;

.. Introduction of new or enhanced services by us or our competitors;

.. Seasonality in the demand for advertising, or changes in our own advertising
rates or advertising rates in general, both on and off the Internet;

.. Changes in government regulation of the Internet;

.. General economic and market conditions;

.. Demand for our products and the products of our competitors;

.. The level of usage of the Internet;

.. The size and rate of growth of the interactive entertainment software market;

.. Development and promotional expenses related to the introduction of new
products or enhancements;

.. Market acceptance for our new product introductions and enhancements;


                                       10

<PAGE>


.. Price competition;

.. Software defects and other quality problems; and

.. The length of product life cycles.

Our operating expenses are based to a significant degree on planned expenditures
and expectations regarding future sales. Failure to meet our sales expectations
could have a disproportionately adverse effect on our operating results in any
given quarter. As a result, you should not rely upon period-to-period
comparisons of our operating results as being indicative of our future results.

Our recent expense reductions have limited our ability to grow and develop new
products, and our revenues, and some of our costs, will be much less
predictable. This is likely to result in significant fluctuations in our
quarterly results. Because of our limited operating history and the emerging
nature of our industry, we anticipate that investors will have difficulty in
accurately forecasting our results. It is possible that our operating results in
some quarters will be below market expectations. In this event, the price of our
common stock is likely to decline.

We have significant capital requirements, and if we do not obtain sufficient
additional funds, our ability to grow may be limited.

Our capital requirements have been and will continue to be significant. To date,
our cash requirements have exceeded our cash flow from operations. Based on our
currently proposed plans and assumptions relating to operations, including
assumptions regarding the progress and timing of our new product development
efforts, net proceeds from private placements together with anticipated revenues
from operations, we anticipate to have sufficient funds on hand to finance
operations through 2002. However, our future cash requirements may vary
significantly from what we expect them to be based on factors such as:

.. Costs and timing of expansion of research and product development efforts and
the success of these efforts;

.. Costs and timing of expansion of sales and marketing activities;

.. Market acceptance of our existing and new products;

.. Competing technological and market developments;

.. Costs of maintaining and enforcing patent claims and other intellectual
property rights: and

.. Costs of defending and settling litigation and claims

We may not be able to obtain sufficient additional financing to satisfy cash
requirements, or we may be required to obtain financing on terms that are not
favorable to us and our shareholders - particularly in light of the limited
trading market for our common stock on the OTC Bulletin Board. If we are unable
to obtain additional financing when needed, we may be required to delay or scale
back operations in order to meet our short-term cash requirements, which could
have a material adverse effect on our business, financial condition and results
of operations.

Our subscription-based, multi-player interactive internet games products have a
lengthy development cycle, and we may not be able to timely introduce new
products.

Our success will depend in part on the timely introduction of successful new
products. The development of new interactive entertainment software products can
be lengthy, expensive and uncertain. The development of some of our products,
particularly our subscription-based multi-player games, require as much as 12 to
24 months to complete from the time a new concept is approved. Product
development of online products continues for the life of the product. The
development of new products is subject to a variety of risks, including:

.. Unanticipated delays;

.. Increased costs and expenses for product development; and


                                       11

<PAGE>


.. Technical problems or other difficulties prior to or after the introduction of
a new product.

We have, in the past, experienced significant delays in the introduction of
certain new products. It is possible that we will experience delays in
developing and introducing new products in the future. Many of our products are
developed for us by third parties. As a result, we cannot always control the
timing of their introduction. Delays in the work performed by third parties or
poor quality of such work may result in product delays. Unanticipated delays,
expenses, technical problems or difficulties could cause us to miss an important
selling season or result in abandonment or material change in product
commercialization. Additionally, our recent expense reductions have limited our
ability to grow and develop new products.

Our subscription-based, multi-player interactive internet games are complex and
may contain undetected errors when first introduced.

Despite extensive product testing, we have, in the past, released products with
defects and have discovered software errors in certain of our product offerings
after their introduction. In particular, the personal computer hardware
environment is characterized by a wide variety of non-standard peripherals (such
as sound cards and graphics cards) and configurations that make pre-release
testing for programming or compatibility errors very difficult and
time-consuming. Errors may be found in new products after their release.
Remedying such errors may:

.. Delay sales of our products;

.. Cause us to incur additional costs; and

.. Adversely affect our reputation.

Our subscription-based, multi-player interactive internet games business may be
adversely affected by changing consumer preferences and uncertainty of market
acceptance of our products.

The level of demand and market acceptance of our newly introduced products is
subject to a high degree of uncertainty. In recent years, the potential earnings
derived from software sales have decreased. This decrease is due to the
significant increases in:

.. Software acquisition and development costs;

.. Promotion and marketing expenses; and

.. Royalties and third-party participations payable to software developers,
creative personnel, musicians and others.

Our future operating results will depend on numerous factors beyond our control.
These factors include:

.. Popularity, price and timing of new entertainment software products being
released and distributed;

.. International, national, regional and local economic conditions (particularly
economic conditions affecting advertising rates);

.. Changes in consumer demographics;

.. Availability of other forms of entertainment; and

.. Critical reviews and public tastes and preferences.

Our ability to plan for product development and promotional activities for our
subscription-based, multi-player interactive internet games will be
significantly affected by our ability to anticipate and respond to relatively
rapid changes in consumer tastes and preferences, in particular, the tastes and
preferences of those consumers, primarily males over age 25 with annual
household incomes of $50,000 or more, who comprise our principal target market.
A decline in the popularity of software games or in the interactive
entertainment software industry generally or in particular market segments could
adversely affect our business and prospects.


                                       12

<PAGE>

The level of demand or the market acceptance for our Internet online game
products is uncertain.

The success of our strategy will depend in part upon market acceptance of online
games and a "pay-for-play" model. Online game play is a new and evolving
concept. Demand and market acceptance for recently introduced products and
services are subject to a high level of uncertainty and risk. We cannot predict
whether:

.. A viable market for online games will develop;

.. We will be able to attract and retain subscribers to our online game products;

.. We will be successful in developing additional products for online use; or

.. Our online game products will ever achieve widespread market acceptance.

Our products may become obsolete or unmarketable as a result of changes in
technology and industry standards.

The interactive entertainment software industry is undergoing rapid changes,
including:

.. Evolving industry standards;

.. Frequent new platform introductions; and

.. Changes in consumer requirements and preferences.

The introduction of new technologies, technologies that support multiplayer
games and new media formats such as online delivery and digital videodisks,
could render our previously released products obsolete or unmarketable. The
development cycle for products utilizing new operating systems, microprocessors
or formats may be significantly longer than the current development cycle for
our products. We may be required to invest resources in products that may not
become profitable. We cannot predict whether:

.. Our future product offerings will keep pace with technological changes; or

.. We will be successful in developing and marketing products for any future
operating system or format.

The overall market for the Internet is characterized by:

.. Rapidly changing technology;

.. Evolving industry standards;

.. Emerging competition; and

.. Frequent product and service introductions.

We may not successfully identify new product opportunities for Internet use and
develop and bring such new products to market in a timely manner.

Products or technologies developed by others could render our products or
technology obsolete. We are also at risk with respect to fundamental changes in
the way Internet connectivity services are delivered. Currently, Internet
services are accessed primarily by computers and are delivered by telephone
lines. We may have to develop new technology or modify our existing technology
if the Internet becomes:

.. Accessible by screen-based telephones, television or other consumer electronic
devices; or

.. Deliverable through other means such as coaxial cable or wireless
transmission.


                                       13

<PAGE>

Pursuit of such technological advances may require us to expend substantial time
and resources. We cannot predict whether we will succeed in adapting our
products to alternate access devices and conduits.

Our business may be adversely affected by our dependence on third-party software
developers.

We rely on third-party software developers to develop a number of our products.
Sales of products associated with such royalties may not be sufficient to cover
the amount of our prepayments. Moreover, independent developers are in high
demand. As a result, we cannot predict whether such developers, including those
that have developed products for us in the past, will be available to develop
products for us in the future. The failure to obtain or renew product
development agreements with such developers could materially adversely affect
our future operations. In addition, many independent developers have limited
financial resources. Therefore, we are subject to the risk that such developers
may go out of business prior to completing a project.

We are dependent upon third-party distribution channels to expand the
distribution of our online products.

We intend to expand the distribution of our online products by seeking out
additional relationships with third-party providers of online or Internet
services in the United States and abroad. We cannot predict whether we will be
able to successfully negotiate additional relationships with providers of online
or Internet services or, if completed, that such arrangements will generate
significant revenues. Further, we are subject to the risks that:

.. Costs of any proposed online or Internet distributor relationship will exceed
our expectations; or

.. We will incur significant costs in anticipation of an online or Internet
distributor arrangement and such arrangement is delayed or abandoned.

Our officers and directors exert significant influence over the Company.

As of March 26, 2002, our executive officers, directors and their affiliated
entities owned or controlled approximately 41% of our outstanding shares of
common stock. As a result, such persons are in the position to significantly
influence:

.. The election of our directors; and

.. The outcome of corporate actions or other matters requiring shareholder
approval.

This concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.

The loss of our key personnel may adversely affect our business.

Our success depends to a significant extent on the performance and continued
service of our senior management and certain key employees. The loss of services
of, or a material reduction in, the amount of time devoted to our business by
such individuals could adversely affect our operations and financial condition.
Competition for highly skilled employees with technical, management, marketing,
sales, product development and other specialized training is intense. We may not
be successful in attracting or retaining such qualified personnel. Specifically,
we may experience increased costs in order to attract and retain skilled
employees. Employees might compete against us if they resign. In addition, key
members of management have not entered into non-competition agreements with us.
Therefore, if their employment with us is terminated, they may work for
competing firms.

We do not intend to pay dividends to our shareholders.

We have not paid any cash dividends on our common stock and do not expect to do
so in the foreseeable future.

INDUSTRY RISKS

There are risks inherent in the portion of our business model devoted to
monitoring traffic through advertising revenue.


                                       14

<PAGE>

Many companies provide Web sites and online destinations targeted to audiences
seeking various forms of entertainment content. All of these companies compete
with us for visitor traffic, advertising dollars and electronic commerce sales.
This competition is intense and is expected to increase significantly in the
future as the number of entertainment-oriented Web sites continues to grow. Our
success will be largely dependent upon the perceived value of our content
relative to other available entertainment alternatives, both online and
elsewhere.

Increased competition could result in:

.. Lower advertising rates;

.. Lower profit margins;

.. Loss of visitors or visitors spending less time on our sites;

.. Reduced page views or advertising impressions; and

.. Loss of market share.

Any one of these could materially adversely affect our business, results of
operations and financial condition.

Many of our existing and potential competitors, in comparison to us, have:

.. Longer operating histories;

.. Greater name recognition in some markets;

.. Larger customer bases; and

.. Significantly greater financial, technical and marketing resources.

These competitors may also be able to undertake more extensive marketing
campaigns for their brands and services, adopt more aggressive advertising
pricing policies, use superior technology platforms to deliver their products
and services and make more attractive offers to potential employees,
distribution partners, product manufacturers, inventory suppliers, advertisers
and third-party content providers. Our competitors may develop content that is
better than ours or that achieves greater market acceptance. In addition, new
competitors may emerge and acquire significant market share.

We also compete with traditional forms of media, like newspapers, magazines,
radio and television for advertisers and advertising revenue. If advertisers
perceive the Internet or our Web sites to be a limited or an ineffective
advertising medium, they may be reluctant to devote a portion of their
advertising budgets to our Web sites.

Our advertising pricing model, which is based heavily on the number of
advertisements delivered to our users, may not be successful.

Different pricing models are used to sell advertising on the Internet and the
models we adopt may prove to not be the most profitable. Advertising based on
impressions, the number of times an advertisement is delivered to users, and
advertising based on clicks, the number of times users access an advertisement
for more detailed information, currently comprises a substantial portion of our
revenues. To the extent that we do not meet the minimum guaranteed impressions
that we are required to deliver to users under many of our advertising
contracts, we defer recognition of the corresponding revenues until we achieve
the guaranteed impression levels. To the extent that minimum guaranteed
impression levels are not achieved, we may be required to provide additional
impressions after the contract term, which would reduce our advertising
inventory. In addition, since advertising impressions may be delivered to a
user's Web browser without regard to user activity, advertisers may decide that
a pricing model based on tangible acquisitions is preferable. We cannot predict
which pricing model, if any, will emerge as the industry standard. As a result,
we cannot accurately project our future advertising rates and revenues. Our
advertising revenues could be adversely affected if we are unable to adapt to
new forms of Internet advertising or we do not adopt the most profitable form.


                                       15

<PAGE>

If we are unable to introduce new products and incorporate rapidly developing
technologies into our products our business may be adversely affected.

The market for multi-player, interactive internet games is characterized by
short product life cycles and frequent introduction of new products. Most of
these games do not achieve sustained market acceptance or ever generate a
sufficient level of sales to offset the costs associated with product
development. Our success will depend upon our ability to develop new,
commercially successful products and replace revenues from such products at the
later stages of their life cycles. We believe that competition in the
interactive entertainment market may require us to increase our development,
acquisition and marketing costs in order to:

.. Develop higher quality, distinctive products that incorporate increasingly
sophisticated effects; and

.. Support new product releases with increased marketing.

Our subscription-based, multi-player interactive internet games business may be
adversely affected by our dependence upon a small number of products.

We derive a significant portion of our revenues from this segment from a limited
number of online products. Many of these products have substantial development
or acquisition costs and marketing budgets. Due to our dependence on a limited
number of products, we may be adversely affected if one or more of our principal
products fail to achieve anticipated results. We cannot predict whether we will:

.. Continue to remain dependent upon non-recurring sales of a limited number of
products for a substantial portion of our revenues;

.. Introduce products that are commercially viable; or

.. Introduce products that have life cycles sufficient to permit us to recoup the
development, marketing and other costs associated with their development.

We are subject to the risks associated with the rapidly evolving interactive
entertainment software industry.

This industry is characterized by:

.. An increasing number of market entrants;

.. Intense competition;

.. Substantial capital requirements; and

.. A high failure rate.

Further, online game play is a new and evolving concept. We cannot assess or
predict the size of the market for online games or its prospects for growth.

The Internet may not continue as a viable market because of the following:

.. Lack of development of high-speed modems and communication lines;

.. Hardware restrictions, such as bandwidth (amount of data capable of
transmission at a single time) and latency (delays introduced by the network);
and

.. Inadequate development of the necessary infrastructure.

The Internet has experienced, and is expected to continue to experience
significant growth in the number of users and volume of traffic. Given this
growth, we cannot assure you that the Internet infrastructure will provide the


                                       16

<PAGE>

required support. The use of the Internet has the potential risk of security,
cost, quality of service, and ease of use. In addition to these risks, we
operate our own internal network that faces all of the same potential risks.

Our business may be adversely affected by risks related to online games.

Online games, and particularly multiplayer online games such as our WarBirds(TM)
product, have certain inherent risks. Such risks include:

.. Speed and reliability of the Internet and the fact that we do not control the
performance of a player's Internet service provider that impacts game
performance;

.. Unanticipated player conduct in multi-player games can significantly affect
the performance of those games and determine player satisfaction;

.. Uncertainty of whether subscription revenues will be sufficient to maintain
the significant support, service and product enhancement demands of online
users;

.. Our limited experience in pricing strategies for online games or in predicting
usage patterns of our customers; and

.. Our inability to predict the legal standards that may apply to online products
in the future.

.. Viability of our online game business, and our ability to compete in this
business, will depend significantly on these and other factors outside our
control.

Intense competition may adversely affect our operating results.

The interactive entertainment software industry is intensely and increasingly
competitive. Industry competition is based primarily upon:

.. Product quality and features;

.. Compatibility of products with popular platforms;

.. Access to distribution channels, including access to retail shelf space;

.. Marketing effectiveness;

.. Reliability and ease of use; and

.. Price and the quality of user support services.

STOCK AND MARKET RISKS

The value of our stock may be volatile due to market and industry related
factors and our presence on the OTC Bulletin Board(R).

The market price of our common stock has been, and could continue to be, subject
to wide fluctuations in response to the following:

  . Variations in quarterly operating results;

  . Announcements of new products by us or our competitors;

  . Failures to meet or exceed the expectations of securities analysts or
investors;

  . General economic conditions, including without limitation, conditions
related to the advertising market; and



                                       17

<PAGE>



.. Limited trading market for our common stock on the OTC Bulletin Board(R).

Furthermore, the stock market in general, the OTC Bulletin Board(R), and the
market for internet and technology companies' securities in particular, have
experienced significant price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of these companies.
These broad market and industry factors may reduce our stock price - regardless
of our operating performance. Additionally, the trading prices of many
technology companies' securities " have experienced adverse price fluctuations
as a result of general market declines in these sectors in recent years.

The OTC Bulletin Board(R), an electronic quotation service, quotes our shares.
The OTC Bulletin Board(R) does not impose listing standards or requirements,
does not provide automatic trade executions, and does not maintain relationships
with quoted issuers. Issuers whose securities are quoted on the OTC Bulletin
Board(R) may experience a loss of market makers, lack of readily available "bid"
and "asked" prices for their securities, a greater spread between the "bid" and
"asked" price of their securities, and a general loss of liquidity in their
securities. In addition, many investors have policies against purchasing or
holding OTC Bulletin Board(R) securities. Both the trading volume and the market
value of our Common Stock have been, and will continue to be, affected by
trading on the OTC Bulletin Board(R).

Future sales of our common stock in the public market could adversely affect our
stock price.

Sales of shares of our common stock by existing shareholders could have an
adverse effect on our stock price. As of March 26, 2002, we had 33,480,515
shares of common stock outstanding, substantially all of which are eligible for
resale either immediately or within the next few months. The possibility that a
substantial number of our securities may be sold in the public market may
adversely affect prevailing market prices for our common stock and could impair
our ability to raise capital through the sale of our equity securities.

Additional shares of our common stock may be issued if options or warrants are
exercised or our convertible securities are converted, causing dilution to our
shareholders.

As of December 31, 2001, we had outstanding:

   . Warrants to purchase an aggregate of approximately 1,131,905 shares of our
common stock;

As of December 31, 2001, we have authorized for issuance and outstanding the
following options:

   . 2,875,000 shares of our common stock in connection with our 1995 Incentive
Stock Option Plan, 780,612 of which are outstanding;

   . 2,300,000 shares of our common stock in connection with our 1998 Stock
Plan, under which options to purchase 1,729,083 shares are outstanding;

   . 500,000 shares of our common stock in connection with our 1998 Stock
Purchase Plan, none of which have been granted.

The existence of these securities may adversely affect us or our shareholders
for many reasons, including:

   . The market price of our stock may be adversely affected;

   . If any of these securities are exercised, the value of the stock held by
our shareholders will be diluted if the value of such stock immediately prior to
the exercise of such securities exceeds the exercise price;

   . Some of these securities give the holders the opportunity, at nominal cost,
to profit from a rise in the market price of our stock; and

   . The terms upon which we could issue additional common stock or obtain
additional financing may be adversely affected.

As a result of our common stock's delisting from The Nasdaq SmallCap Market(TM),
investor suitability requirements may adversely affect our stock's liquidity.


                                       18

<PAGE>

As a result of our common stock's delisting from The Nasdaq SmallCap Market(TM),
it could become subject to Rule 15g-9 under the Exchange Act, which imposes
additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and "accredited
investors" (generally, individuals with net worth in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses). For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, such rule may
adversely affect the ability of broker-dealers to sell our common stock and may
adversely affect the ability of shareholders to sell any of the shares of our
common stock in the secondary market.

As a result of our common stock's delisting from The Nasdaq SmallCap Market(TM),
it may be deemed a "penny stock" and thus require significant disclosure in
connection with stock trades, which may adversely affect our stock's liquidity.

Following our common stock's delisting from The Nasdaq SmallCap Market(TM), we
may be subject to the Securities and Exchange Commission's "penny stock" rules.
For any transaction involving a penny stock, unless exempt, the rules require:

    . Delivery, prior to any transaction in a penny stock, of a disclosure
schedule relating to the penny stock market;

    . Disclosure about commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities; and

    . Monthly statements to be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stocks.

Commission regulations, subject to certain exceptions, define a "penny stock" to
be any non-exchange listed equity security:

    . That has a market price of less than $5.00 per share; or

    . With an exercise price of less than $5.00 per share.

We cannot predict whether our common stock will qualify for exemption from these
restrictions. In any event, even if our stock was exempt from such restrictions,
it would remain subject to Section 15(b)(6) of the Exchange Act, which gives the
Commission the authority to prohibit any person that is engaged in unlawful
conduct while participating in a distribution of a penny stock from associating
with a broker-dealer or participating in a distribution of a penny stock, if the
Commission finds that such a restriction would be in the public interest. If our
stock were subject to the rules on penny stocks, the market liquidity for our
stock could be severely adversely affected.

LEGAL RISKS

We may be unable to protect our intellectual property rights and we may be
liable for infringing the intellectual property rights of others.

We rely on a combination of the following to establish and protect our
proprietary rights:

    . Trademark;

    . Trade secret;

    . Copyright;

    . Other proprietary rights laws;

    . License agreements; and




                                       19

<PAGE>


    . Employee and third-party nondisclosure agreements;

We are at risk that competitors may misappropriate our technology or
independently develop software products with features based upon, or otherwise
similar to, those of our products.

To license our products to end users, we primarily rely on end-user licenses
that are not signed by the end-user. As a result, such licenses may be
unenforceable under the laws of certain jurisdictions. In addition, effective
copyright and trade secret protection may be unavailable or limited in certain
foreign countries. The global nature of certain wide area networks, particularly
the Internet, makes it virtually impossible to control the ultimate destination
of our products. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. Unauthorized copying is
common within the software industry. A significant amount of unauthorized
copying of our products could adversely affect our business. As the number of
software products in the industry increases and the functionality of these
products further overlap, software developers may become increasingly subject to
infringement claims. Third parties may assert infringement claims against us in
the future with respect to current or future products. As is common in the
industry, from time to time, we receive notices from third parties claiming
infringement of intellectual property rights of such parties. We investigate
these claims and respond as we deem appropriate. Litigation may be necessary in
the future to:

    . Enforce our intellectual property rights;

    . Protect our trade secrets;

    . Determine the validity and scope of the proprietary rights of others; or

    . Defend against claims of infringement of invalidity.

Even if we win, any such litigation could result in substantial costs and
diversion of our resources.

Increases or changes in government regulation could adversely affect our
business.

There are currently few laws or regulations directly applicable to access to or
commerce on the Internet. Due to the increasing popularity and use of the
Internet, it is possible that laws and regulations may be adopted both in the
United States and abroad, covering issues such as:

    . User privacy;

    . Defamation;

    . Pricing;

    . Taxation;

    . Content regulation;

    . Quality of products and services; and

    . Intellectual property ownership and infringement.

Such legislation could:

    . Expose us to substantial liability;

    . Dampen the growth in use of the Internet;

    . Decrease the acceptance of the Internet as a communications and commercial
      medium; or

    . Require us to incur significant expense in complying with any new
      regulations.


                                       20

<PAGE>

Because the growing popularity and use of the Internet has burdened the existing
telecommunications infrastructure and many areas with high Internet use have
begun to experience interruptions in phone service, local telephone carriers
have petitioned for increased regulations and the imposition of access fees.
Increased regulation or the imposition of access fees could substantially
increase the costs of communicating on the Internet, potentially decreasing the
demand for our products. Also, a number of laws have recently been enacted in
the United States intended to:

    . Reduce the liability of online service providers for listing or linking to
third-party Web sites that include materials that infringe copyrights; and

    . Restrict the distribution of certain materials deemed harmful to children
and impose additional restrictions on the ability of online services to collect
user information from minors.

We are currently reviewing these pieces of legislation, and cannot currently
predict the effect, if any, that such legislation will have on our business. In
addition, a number of other countries have announced or are considering
additional regulations. Such laws and regulations could fundamentally impair our
ability to provide Internet navigation or other services, or substantially
increase the cost of doing so. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, copyright,
defamation, obscenity and personal privacy is uncertain. Any such new
legislation or regulation in the United States or abroad or the application of
existing laws and regulations to the Internet could have a material adverse
effect on our business, operating results, and financial condition.

Our business may be adversely affected by risks associated with foreign
operations.

We distribute our on-line products worldwide. International operations and sales
of our products are subject to inherent risks, including:

    . Fluctuations in exchange rates;

    . The impact of possible recessionary environments in economies outside the
      United States;

    . Unexpected changes in regulatory requirements;

    . Tariffs and other barriers;

    . Potential political and economic instability;

    . Linguistic and cultural differences;

    . Differing technology standards; and

    . Uncertain protection for intellectual property rights.

We have no control over many of these matters and any of them may adversely
affect our business, results of operations and financial condition.

Revenues from our foreign operations generally are denominated in local
currencies. As a result, exchange rate fluctuations between such local
currencies and the U.S. dollar will subject us to currency translation risk. We
cannot predict whether we will be able to maintain or increase international
market demand for our products.

Item 2. Description of Property

The Company leases approximately 4,000 square feet in an office park in Cary,
North Carolina. This lease is non-cancelable, expires in March 2004, and has
annual rental payments of approximately $51,000. All of the Company's operations
are conducted from this location. The Company believes that its Cary facilities
are suitable for its current and anticipated needs. The Company believes that,
if necessary, it can obtain additional leased space or renew its existing lease
at similar rates.


                                       21

<PAGE>

Item 3. Legal Proceedings

The Company is not currently involved in any material litigation.

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

None.

                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

The Company's common stock trades on the OTC Bulletin Board(R) under the symbol
"IENT."

The following table sets forth the quarterly high and low bid prices during each
of the eight quarters shown as reported by Nasdaq(R). These prices are based on
quotations between dealers, which do not reflect retail mark-up, markdown or
commissions and may not reflect actual transactions.

                                      PRICE

Quarter Ended                     High                Low
-------------                     ----                ---

March 31, 2000                    $6.69               $1.81
June 30, 2000                     $2.88               $1.00
September 30, 2000                $2.25               $1.03
December 31, 2000                 $1.60               $0.16
March 31, 2001                    $0.83               $0.13
June 30, 2001                     $0.29               $0.08
September 30, 2001                $0.11               $0.05
December 31, 2001                 $0.08               $0.01



On March 26, 2002, the closing price of the Company's common stock on the OTC
Bulletin Board(R) was $0.12 per share. The Company has approximately 161 holders
of record of its common stock and estimates that it has approximately 3,900
beneficial holders.

                                 DIVIDEND POLICY

The Company has never paid a cash dividend on its common stock. The Company does
not anticipate paying any cash dividends in the foreseeable future and intends
to retain future earnings, if any, for the development of its business.

                              CHANGES IN SECURITIES

The Company did not sell any equity securities during the year ended December
31, 2001 that were not registered under the Securities Act of 1933, as amended,
except that, in December 2001, the Company completed the following financing
transactions:

.. The Company and its then Chairman of the Board of Directors agreed to
  terminate the consulting agreement between the parties in exchange for newly
  issued shares of the Company's common stock. The




                                       22

<PAGE>

     Company was released from $46,875 of its debt under the consulting
     agreement in exchange for 937,500 shares of its common stock valued at
     $0.05 per share. The $46,875 balance of the liability is to be settled on
     the one year anniversary of the termination agreement through a further
     issuance of common stock. The number of shares to be issued will be
     determined according to the contract.

..    The Company issued 10,000,000 shares of common stock to J.W. Stealey, John
     Cay and Daniel Young under the terms of the Securities Purchase and
     Exchange Agreement dated December 18, 2001 in exchange for $300,000 in cash
     and cancellation of 3,910.844 shares of the Company's Series D Preferred
     Stock held by such purchasers.

..    The Company issued 2,980,518 shares if common stock to RGC International
     Investors, LDC under the terms of the Series D Preferred Stock Exchange
     Agreement in exchange for cancellation of the 1,000 remaining shares of its
     Series D Preferred Stock held by RGC International Investors, LDC .

The above transactions were private transactions not involving a public offering
and were exempt from the registration provisions of the Securities Act of 1933
under Section 3(a) (9), Section 4(2) or Regulation D of the Securities Act. The
sale of these securities was without the use of an underwriter, and the
certificates for the securities, with the exception of the shares issued to RGC
International Investors, LDC under Section 3(a) (9) of the Securities Act,
contain a restrictive legend permitting the transfer of such securities only
upon registration of the securities or in reliance upon an exemption under the
Securities Act.

Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations

OVERVIEW

The Company is a developer and publisher of Internet and online games, and an
operator of online game services. The Company develops and publishes proprietary
online multi-player games, and through its Internet distribution infrastructure
offers online gamers a variety of free, subscription and pay-per-play games and
services, including simulation, parlor, strategy, role playing and action games.

The percentages and dollar amounts in the following discussions have generally
been rounded to aid presentation. As a result, all such figures are
approximations.

RESULTS OF OPERATIONS

Fiscal Year Ended December 31, 2001 Compared To Fiscal Year Ended December 31,
2000

Net revenues. During 2000, the Company completed a shift in its focus to an
Internet only strategy, with the result being substantial growth in our
advertising revenue. The advertising revenue is generally based on:

(1) the revenue we received from the number of times an advertisement is
displayed on our site, commonly referred to as "cost per thousand impressions,"
or "CPMs"; and

(2) the number of times users click on an advertisement displayed on our sites,
commonly referred to as "cost per click," or "CPCs."

CPM advertising revenue is recognized during the period that the campaign runs,
as is CPC revenue, which is recognized as users click on the ads.

The Company recognizes Internet advertising revenue generated through
third-party agency representation on a net basis, after deduction of agency
commission expense. The recognition of revenue in this manner is consistent with
the actual cash received. In 2001, the Company derived 12% of its advertising
revenue from reciprocal advertising arrangements, or "barter." However, the
Company does not expect that barter will account for any significant portion of
its revenues in the foreseeable future.


                                       23

<PAGE>

The online revenues are generated primarily from pay for play usage for
WarBirds(TM), the Company's award winning World War II air combat simulation
game.

Net revenues decreased by $5.3 million, or 77%, from $6.9 million in 2000 to
$1.6 million in 2001. The decrease in revenue was primarily due to decreased
advertising and other revenue related to the Company's Internet and online games
and services which decreased by $4.6 million, or 88% from $5.2 million in 2000
to $0.6 million in 2001. This decrease in advertising and other revenue was
primarily due to the softening in advertising rates for all media and
substantial decrease in user traffic on our websites. Pay-for-Play revenue
decreased $0.4 million, or 33%, from $1.4 million in 2000 to $1.0 million in
2001, primarily due to changes in the pricing model that management implemented
in an effort to stimulate user growth and increase revenues. During the fourth
quarter of fiscal 2000, the Company introduced a flat fee, unlimited play option
into its pricing matrix. Previously, players paid for each hour played. The new
plan drew a significant portion of existing players, but failed to attract a
sufficient numbers of new players to offset the loss of revenues generated by
high usage players. The Company currently implements a two-tier pricing model
that charges a relatively modest subscription fee to play the basic version of
its online games and a larger monthly subscription fee for the full-featured
versions of these games.

The following table summarizes the changes in revenue from 2000 to 2001:

                                                      Year ended December 31
                                                      ----------------------
                                                             ($000)

Revenue for 2000                                            $ 6,911
Decrease in CD-ROM revenue                                    ( 110)
Decrease in Pay for Play revenue                              ( 473)
Decrease in Royalty & Licensing                               (  54)
Decrease in Advertising & Other                              (4,650)
                                                            -------
Revenue for 2001                                            $ 1,624


Cost of revenues. Cost of revenues consists of costs of products sold (including
cost of Internet access) and royalties and amortization of software development
costs. Cost of revenues in 2001 decreased by $0.2 million, or 23%, from $0.6
million in 2000 to $0.4 million in 2001. The decrease reflects the virtual
elimination in 2001 of royalties paid to third party developers for game
content. Royalties in 2001 decreased by $0.4 million, or 100%, from $0.4 million
in 2000 to $0.0 million in 2001. This decrease in Royalty expense was offset by
an increase in amortized software costs as the Company released WarBirdsIII into
paid production. Amortized software costs in 2001 increased by $0.2 million, or
100%, from $0.0 million in 2000 to $0.2 million in 2001.

Operating Expenses. Operating expenses decreased $8.8 million, or 75%, from
$11.7 million in 2000 to $2.9 million in 2001. Exclusive of goodwill
amortization and write off of impaired long-lived assets, primarily the goodwill
from the Company's 1999 acquisitions, the decline was due primarily to reduced
personnel costs which occurred because of the contraction in the business
necessitated by plummeting revenues from sales of advertisements and the
decreased sales and marketing expenses related to changes in the fulfillment of
obligations under the Company's prize point program.

The following table summarizes the changes in operating expenses from 2000 to
2001:



                                       24

<PAGE>

                                                         Year ended December 31
                                                         ----------------------
                                                                ($000)

Operating Expenses for 2000                                   $ 11,669
Decrease in Sales and Marketing                                ( 4,310)
Decrease in Product Development                                (   448)
Decrease in General and Administrative                         (   639)
Decrease in Goodwill Amortization                              ( 1,602)
Decrease in Impairment of long-lived assets                    ( 1,787)
                                                               -------
Operating Expenses for 2001                                    $ 2,883


Sales and Marketing. Sales and marketing expenses decreased $4.3 million, or
88%, from $4.9 million in 2000 to $0.6 million in 2001. In 2001, the Company
revised its prize point redemption policy such that prize points were no longer
directly redeemable for cash or merchandise. Prize points were converted to
chance points and were used by customers to enter prize drawings. Prize point
obligations of $0.5 million were reversed and were netted against sales and
marketing expenses. Additionally, prize point expenses decreased $2.0 million as
the Company placed tighter controls on the amount of prizes awarded.
Additionally the Company effected significant decreases in personnel costs and
advertising expense associated with barter advertising revenues in 2001.

Product Development. Product development expenses decreased by $0.4 million, or
24%, from $1.8 million in 2000 to $1.4 million in 2001, primarily due to staff
reductions necessitated by decreasing revenues. During 2001 the Company
virtually ceased development of new "play-for-free" game content. The savings in
personnel costs were somewhat offset by a reduction in the net amount of product
development expenses capitalized on the balance sheet under FAS 86.

General and Administrative. General and administrative expenses decreased by
$0.6 million, or 43%, from $1.5 million in 2000 to $0.9 million in 2001,
primarily due to the savings recognized from the general contraction of
operations. The average number of administrative personnel dropped 70% from 2000
to 2001. In addition, decreases in capital raising activities by the Company led
to significant savings in legal, accounting and other costs related to raising
capital.

Goodwill Amortization. Goodwill and amortization decreased $1.6 million from
$1.6 million in 2000 to $0.0 million in 2001. This decrease resulted from the
Company determination in 2000, based on an analysis of the estimated
undiscounted future cash flows of related operations, that unamortized goodwill
related to both the MPG-Net and The Gamers Net acquisitions had become fully and
permanently impaired. Accordingly, an impairment loss was recorded in 2000 to
write off the remaining unamortized goodwill balance.

Impairment of Long-Lived Assets. During 2000, the Company determined, based on
an analysis of the estimated undiscounted future cash flows of related
operations, that unamortized goodwill related to both the MPG-Net and The Gamers
Net acquisitions had become fully and permanently impaired. Accordingly, an
impairment loss of $1.7 million was recorded in 2000 to write off the remaining
unamortized goodwill balance. The Company also recorded a $0.1 million
impairment loss in 2000 related to certain excess equipment, furniture and
fixtures.

Income Tax Expense. The Company recorded a $41,000 income tax benefit in 2001,
compared to a $16,000 expense for the same period in 2000. The entire tax
expense in each period was attributable to earnings in Europe.

                         LIQUIDITY AND CAPITAL RESOURCES

The Company's capital requirements have been, and will continue to be,
significant. To date, its cash requirements have exceeded its cash flow from
operations. The Company historically has satisfied cash requirements through
borrowings, the private sale of equity securities, and its initial public
offering. As of December 31, 2001, the Company had cash and cash equivalents of
$0.3 million.

For the first three months of 2002, the Company has maintained approximately the
same amount of cash as at December 31, 2001. This has been accomplished
primarily by reducing expenses and raising additional equity. The Company's cash
flow, however, depends upon numerous factors beyond its control, including the
rates and volume of Internet advertising and the pay-for-play gaming market,
which have both declined recently. If our cash flows from Internet advertising
and/or the pay-for-play gaming market continue to decrease, the Company's future
liquidity will be adversely affected.


                                       25

<PAGE>

Although the Company continues to have cash and cash equivalents of
approximately $0.3 million, its auditors have raised substantial doubt about the
Company's ability to continue as a going concern. If the Company does not
generate sufficient revenues, it may have to raise additional capital, which
will result in substantial dilution to the Company's current shareholders.
Moreover, as a result of its low stock price and the listing of our common stock
on the OTC Bulletin Board (R), the Company may not be able to raise additional
capital or may be able to raise capital only on materially adverse terms.

The following is a condensed table of cash on hand and major cash flow items:

                                     ($000)

Cash on hand, December 31, 2000                                       $   437
Net loss                                                               (1,605)
Add:  non-cash charges and expenses                                       844
Changes in working capital                                                607
                                                                      -------
         Net Cash Used in Operations                                     (154)
Net software development costs                                           (167)
Net proceeds from issuing common stock                                    270
Other investing and financing activities                                 (129)
Effect of exchange rates on cash and cash equivalents
                                                                            2

                                                                      --------
Net change in cash                                                     (  178)
                                                                      --------
Cash on hand, December 31, 2001                                       $   259



Net cash used in operating activities totaled $0.2 million during 2001, compared
to $2.4 million during 2000. This decrease was primarily due to the contraction
of the business following the collapse in the advertising market, resulting in
reduced operating cash requirements.

Net cash used in investing activities totaled $0.3 million during 2001 compared
to $1.0 million during 2000. This decrease was primarily due to reduced software
development costs related to WarBirds III(TM) as the product was placed into
paid production and to reduced expenditures on network hardware.

Net cash provided by financing activities totaled $0.3 million during 2001
compared to $0.7 million during 2000. This decrease was primarily due to smaller
proceeds from the issuance of common stock.

                        RECENT ACCOUNTING PRONOUNCEMENTS

iEntertainment Network recognizes Internet advertising revenue generated through
third-party agency representation on a net basis, after deduction of agency
commission expense in accordance with Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, issued in December 1999. The recognition of
revenue in this manner is consistent with the actual cash expected to be
received. This reporting approach, although it does reduce the Company's
reported revenues by the amount of the agency commission, has zero impact on
cash or earnings. In those instances where the Company's own internal sales
personnel sell advertising direct to the advertiser, there is no outside sales
commission; therefore, revenues are recognized on a gross basis that is also
consistent with the cash expected to be received.


                                       26

<PAGE>

                          CRITICAL ACCOUNTING POLICIES

Revenue Recognition

Revenue from pay-for-play online sales is recognized monthly as earned. Payments
are received in advance and entitle users unlimited play for thirty days. We
record advertising revenues in the period the advertising impressions are
delivered to customers. We record advertising revenues net of related
administrative fees as reported by its outside advertising vendors. We recorded
barter revenue and expense under the criteria established by the Emerging Issues
Task Force Issue No. 99-17 "Accounting for Advertising Barter Transactions."

Revenue from CD-ROM product sales was recognized at the time of product
shipment. Revenue from royalties and licenses was recognized when earned under
the terms of the relevant agreements with original equipment manufacturers
("OEMs"), international distributors and other third parties. With respect to
license agreements that provide customers the right to multiple copies in
exchange for guaranteed amounts, net revenue was recognized upon delivery of the
product master or the first copy provided collectibility was probable. Per copy
royalties on sales that exceed the guarantee are recognized as earned. The
Company accepted product returns and provided price protection on certain unsold
merchandise. Revenue was recorded net of an allowance for estimated future
returns, markdowns, price protection and warranty costs. Such reserves were
based upon management's evaluation of historical experience, current industry
trends and estimated costs.

 Software Development Costs

We capitalize costs incurred in the development of its gaming software.
Capitalization of such costs is discontinued when a product is available for
general release to customers. Capitalized software development costs are
capitalized at the lower of cost or net realizable value and amortized using the
straight-line method over the estimated economic life of the related product.
Amortization begins when a product is ready for general release to customers.

Item 7. Financial Statements

The response to this item is included in a separate section of this report. See
the Consolidated Financial Statements of the Company attached hereto beginning
on page F-1.

Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure

None.



                                    PART III

Item 9: Directors and Executive Officers; Compliance with Section 16(a) of the
Exchange Act.

Listed below is information on the Board of Directors and Executive Officers of
the Company as of March 26, 2002 with information showing the business
experience and current public directorships, if any, of each, the age of each
and the year each was first elected a director of the Company, where applicable.


                                       27

<PAGE>



                                   Year First Elected As
          Name                            Director          Term Expires   Age
          ----------------------- ----------------------- --------------- -----
          J. W. Stealey                     1995                2002       54
          ----------------------- ----------------------- --------------- -----
          W. Joseph McClelland              1997                2002       55
          ----------------------- ----------------------- --------------- -----
          David H. Kestel                   1997                2002       68
          ----------------------- ----------------------- --------------- -----
          Daniel R. Young                   2001                2002       65
          ----------------------- ----------------------- --------------- -----


Biographies of the Directors and Executive Officers

J. W. Stealey was re-appointed Chairman of the Board of Directors and Chief
Executive Officer of the Company in December 2001. Mr. Stealey served as
Chairman of the Board of Directors and Chief Executive Officer of the Company
from January 1995 until August 1999. Mr. Stealey remained a director of the
Company until his resignation in April 2001. Immediately before rejoining the
Company Mr. Stealey was Chief Executive Officer of IamGame, Inc. Previously, he
was founder, Chairman and Chief Executive Officer of MicroProse, Inc., a
developer and publisher of flight simulation and strategy software titles from
1982 to 1993. Prior to 1982, Mr. Stealey was Group Director of Business
Development of General Instruments. Prior to joining General Instruments
Corporation, Mr. Stealey held management consulting positions with Cresap,
McCormick and Paget and McKinsey & Co. in New York, New York. Mr. Stealey earned
a B.S. degree in Aeronautical Engineering from the United States Air Force
Academy. After graduation from the Academy, Mr. Stealey spent six years as an
operational pilot in the United States Air Force. Mr. Stealey also received an
M.B.A. in finance and strategic management from the Wharton School of Business
of the University of Pennsylvania.

David H. Kestel, CLU, served as a Director of the Company from February 1997 to
December 1999 and was re-appointed in December 2001. Since 1992, Mr. Kestel has
served as President of The Kestel Group, Inc., an estate planning, executive
compensation and employee benefits company based in Potomac, Maryland. From 1978
to 1992, he worked at Blue Cross and Blue Shield of the National Capital Area,
most recently as Senior Vice President, Marketing, and served as President of
two domestic life insurance companies and two offshore reinsurance companies.
Mr. Kestel received a B.B.A. and an M.B.A. from the University of Michigan. Mr.
Kestel is a Member, Chartered Life Underwriter.

W. Joseph McClelland served as a Director of the Company from February 1997 to
June 2001 and was re-appointed in December 2001. Since late 2001 Mr. McClelland
has been Technical Director with the Anton Corporation. During 2000-2001 he
served as President of DefenseHomepage.com and VP Marketing for
GlobalSecurityNews.com. From 1990 through 1999, Mr. McClelland was Vice
President and a Member of the Board of GEC-Marconi Defense Systems Inc., an
Arlington, Virginia-based subsidiary of GEC-Marconi Ltd., which produces and
sells electronic warfare equipment to government customers. From 1988 to 1990,
he was Director, Avionics, Armament and Electronic Combat, at the HQ United
States Air Force Systems Command at Andrews Air Force Base in Maryland, where he
supervised headquarters staff and provided corporate oversight of advanced
programs. From 1986 to 1988, he was Director, United States Air Force Research
and Development Liaison Office in London, England, where he initiated and
managed U.S./U.K. cooperative research and development programs. Mr. McClelland
received a B.S. in Engineering Mechanics and Mathematics from the United States
Air Force Academy. He received an M.S. in Applied Mechanics from the University
of Utah. Mr. McClelland is a graduate of the United States Air Force Test Pilot
School.

Daniel R. Young joined the Board of Directors in December 2001. Mr. Young,
former Vice Chairman and Chief Executive Officer of Federal Data Corporation
(FDC), retired recently after having served the company in various executive
capacities for more that two decades. He joined FDC in 1976 as the Executive
Vice President, and in 1985, was elected President and Chief Operating Officer.
Following the acquisition in 1995 of FDC by The Carlyle Group, Mr. Young assumed
the position of President and Chief Executive Officer. In 1998, he was elected
Vice Chairman of the Board of Directors. Mr. Young was the industry recipient of
the 1998 Federal Computer Week Eagle Award in recognition of his outstanding
contributions to the federal information technology community. In addition, he
twice received the Federal Computer Week Federal 100 Award. This award, given by
a group of one's peers., goes to a select group of executives from government,
industry and academia. He later served as a Judge for the Eagle Award in 1995
and 1997. Mr. Young is a graduate of the University of Texas where he earned a
B.S. degree in engineering and a J.D. from the University of Texas School of
Law. He also served in the U.S. Navy as a sea officer. Mr. Young also serves on
the Boards of GTSI Corp., Halifax Corporation, Andrulis Corporation, Entrust
Technologies, Webmethods Corporation and EG&G.


                                       28

<PAGE>


Compliance with Section 16(a) of the Exchange Act

Pursuant to Section 16(a) of the Exchange Act, directors and executive officers
of the Company are required to file reports with the Securities and Exchange
Commission indicating their holdings of and transactions in the Company's equity
securities and to provide the Company with copies of these reports. To the
Company's knowledge, based solely on a review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, except as described below, there were no reports required under
Section 16(a) of the Exchange Act that were not timely filed during the fiscal
year ended December 31, 2001.

..        Forms 3 to report the ownership of Daniel R. Young, W. Joseph
         McClelland and David H. Kestel, following their appointment to the
         Board on December 18, 2001, were due on December 28, 2001. These
         reports were filed by January 18, 2002.

Item 10. Executive Compensation

The following table sets forth all compensation paid by the Company for services
rendered to it in all capacities for the last three (3) fiscal years ended
December 31, 1999, December 31, 2000 and December 31, 2001 to the Company's
Chief Executive Officer, the Company's other highest-paid executive officers who
earned at least $100,000 in the respective fiscal year or who otherwise would
have been includable in such table on the basis of their 2001 (year)
compensation but for the fact that they were no longer executive officers of the
Company at the end of 2001 (collectively, the "Named Officers").

Summary Compensation Table

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                            Annual Compensation                         Long Term Compensation
-------------------------------------------------------------------------------------------------------------------------
                                                                                           Securities
                                                          Other Annual     Restricted      Underlying      All Other
 Name and Principal Position  Year    Salary     Bonus    Compensation    Stock Awards    Options/SARs    Compensation
-------------------------------------------------------------------------------------------------------------------------
<S>                           <C>    <C>       <C>        <C>             <C>             <C>             <C>
 J. W. Stealey,               2001       -         -           -               -                -               -
-------------------------------------------------------------------------------------------------------------------------
 Chief Executive Officer (1)  2000       -         -           -               -                -               -
-------------------------------------------------------------------------------------------------------------------------
                              1999  $ 150,000  $ 25,000   $ 263,125            -              25,000            -
-------------------------------------------------------------------------------------------------------------------------
 Michael Pearce,              2001  $ 156,946      -      $  16,400            -                -               -
-------------------------------------------------------------------------------------------------------------------------
 Chief Executive Officer (2)  2000  $ 132,000  $ 25,000        -               -                -               -
-------------------------------------------------------------------------------------------------------------------------
                              1999  $       1      -           -               -             800,000            -
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Mr. Stealey resigned as Chairman and Chief Executive Officer in August 1999.
He remained on the Company's Board of Directors until he resigned as a Director
of the Company on April 20, 2001. Mr. Stealey was re-appointed as Chairman and
Chief Executive Officer in December 2001.

(2) Upon joining the Company as CEO in November 1999, Mr. Pearce received an
annual salary of $1.00. The Board of Directors granted Pearce an annual salary
of $144,000, which began in February 2000, as recognition of the company's
operating progress and perceived ongoing prospects. Mr. Pearce resigned as Chief
Executive Officer in December 2001.


No options were exercised by and no compensatory options were granted to the
Named Officers during the year ended December 31, 2001.


                                       29

<PAGE>


The following table sets forth certain information concerning the number and
value of exercised and unexercised options held by the Named Officers as of
December 31, 2001:

<TABLE>
<CAPTION>

             Aggregated Option/SAR Exercises in Last Fiscal Year and
                        Fiscal Year End Option Values


                                Number of Securities Underlying Unexercised      Value of Unexercised In-The-Money
                                  Options/SARs at Fiscal Year End (#)        Options(1)/SARs at Fiscal Year End ($)
 Name                              Exercisable        Unexercisable            Exercisable         Unexercisable
<S>                             <C>                 <C>                      <C>                <C>

 J. W. Stealey                       125,000            125,000                   3,750                3,750

 Michael Pearce                      533,334               -                        -                    -
</TABLE>



(1) Options are considered "in-the-money" if the market value of shares covered
thereby is greater than the option exercise price. Value is calculated based on
the difference between the fair market value of the shares of Common Stock at
December 31, 2001 ($0.08), as quoted on The OTC Bulletin Board, and the exercise
price of the options. The Company made no long-term incentive plan awards during
the fiscal year ended December 31, 2001.

Director Compensation

In December 2001, the Company granted to each of Mr. Stealey and the other three
newly-appointed members of the Board of Directors 250,000 options to purchase
common stock at $0.05 per share, such options vesting 50% at the time of grant
and 50% on the one year anniversary of the grant date, subject to continued
service as an employee or member of the Board of Directors. The options were
granted under the Company's 1998 Stock Plan.

Item 11. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information as of March 26, 2002
regarding shares of our common stock beneficially owned by each: (i) each
director; (ii) director nominee; (iii) executive officer named in the Summary
Compensation Table in this Proxy Statement; and (iv) all directors and officers
as a group. Except as otherwise indicated, the persons listed below have sole
voting and investment power with respect to all shares of common stock owned by
them, except to the extent that such power may be shared with a spouse.
Fractional share amounts are rounded off to the nearest whole number.

    Name of
Beneficial Owner                     Shares Owned(1)      Percent of Class(1)
----------------                     --------------       -------------------

J.W. Stealey (2)                      12,199,617(2)                 36%
W. Joseph McClelland                     151,500(3)                  *
Daniel R. Young                        1,125,000(4)                  3%
David H Kestel                           138,500(5)                  *
Michael Pearce                           533,334(5)                  2%
All directors and executive
  officers as a group(6)              14,147,951                    41%
(7 persons)



                                       30

<PAGE>


* owns less than 1%

(1) Based upon 33,480,515 shares of common stock outstanding on March 26, 2002.
The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission. Accordingly, they may
include securities owned by or for, among others, the spouse and/or minor
children of the individual and any other relative who resides in the home of
such individual, as well as other securities as to which the individual has or
shares voting or investment power or has the right to acquire under outstanding
stock options within sixty (60) days. Beneficial ownership may be disclaimed as
to certain of the securities.

(2) Includes 125,000 shares subject to options exercisable within sixty (60)
days and 236,389 shares subject to warrants exercisable within sixty (60) days.
Excludes 125,000 shares owned by wife, Denise Stealey. Excludes 600,000 shares
held in trusts for Mr. Stealey's children. Mr. Stealey has neither voting power
nor dispositive power over the shares held in the trusts. Mr. Stealey disclaims
beneficial ownership of the shares owned by his wife and held in trust for his
children.

(3) Includes 138,500 shares subject to warrants or options exercisable within
sixty (60) days.

(4) Includes 125,000 shares subject to warrants or options exercisable within
sixty (60) days.

(5) Consists of shares subject to warrants or options exercisable within sixty
(60) days.

(6) Includes the shares discussed in the footnotes above.

The following table sets forth certain information as of March 26, 2002
regarding the only shareholders known to us to be the beneficial owners of more
than five percent (5%) of our common stock.

<TABLE>
<CAPTION>

   Name and Address of                          Amount and Nature of
    Beneficial Owner                            Beneficial Ownership       Percent of Class
   -------------------                          --------------------       ----------------
<S>                                             <C>                        <C>
Vertical Financial Holdings                         4,283,549(1)                  12.8%
        c/o Orida Capital USA, Inc.
        70 East 55th Street, 24th Floor
        New York, New York  10022
RGC International Investors, LDC                    3,344,704                      9.9%
        c/o Rose Glen Capital Management, LP
        Three Bala Plaza East, Suite 200
        251 St. Asaphs Road
        Bala Cynwyd, Pennsylvania  19004
</TABLE>
-------------------------------
(1)      Includes 1,698,171 shares owned by entities beneficially owned by
         Vertical Financial Holdings and 1,220,084 shares owned by other
         entities over which Vertical Financial Holdings has voting power
         pursuant to a proxy agreement.


                                       31

<PAGE>

Item 12. Certain Relationships and Related Transactions

On June 30, 2000, the Company and Vertical Financial Holdings entered into a
Stock Purchase Agreement. Vertical Financial Holdings purchased 600,000 shares
of the Company's Common Stock for a purchase price of $600,000.

In December 2001, the Company completed the following transactions:

         1. The Company issued and sold 10,000,000 shares of common stock to
J.W. Stealey, John Cay and Daniel Young under the terms of the Securities
Purchase and Exchange Agreement dated December 18, 2001 in exchange for $300,000
in cash the cancellation of 3,910.844 shares of the Company's Series D Preferred
Stock held by such purchasers. Mr. Stealey was and is the Company's largest
stockholder. As a condition to and immediately following the closing of this
financing, Mr. Stealey was appointed Chief Executive Officer and Chairman of the
Board of Directors of the Company and Mr. Young was appointed to the Board of
Directors of the Company. The Company agreed to register the shares issued in
the financing upon request by the investors.

         2. The Company issued and sold 2,980,518 shares of common stock to RGC
International Investors, LDC under the terms of the Series D Preferred Stock
Exchange Agreement dated December 18, 2001 in exchange for the cancellation of
the 1,000 remaining shares of the Company's Series D Preferred Stock held by
RGC. Following the completion of this financing, RGC beneficially owned
approximately 9.9% of the Company's common stock, and the Company agreed to
issue additional shares of common stock to RGC sufficient to maintain RGC's
percentage interest in the Company with respect to any future capital raising
transactions providing proceeds to the Company up to $203,125. Pursuant to this
anti-dilution obligation, the Company has issued to RGC a total of 364,186
additional shares of common stock during the first quarter of 2002.

         3. The Company and Jacob Agam, its Chairman of the Board at that time,
agreed to terminate the consulting agreement between the parties. The Company
satisfied its obligations to Mr. Agam under the consulting agreement by issuing
to him 937,500 shares of common stock valued at $0.05 per share and by agreeing
to issue him an additional $46,875 of common stock in December 2002.

In January 2002, the Company entered into a licensing arrangement with IamGame,
Inc. (the "related entity"), a company beneficially owned by J.W. Stealey, the
Chief Executive Officer of the Company, for the right to utilize a gaming system
developed by that related entity on all websites managed by the Company. Under
the terms of the arrangement, the Company has the right to manage the related
entity's gaming website. The revenues generated by that website benefit the
Company and all costs associated with operating the website are the
responsibility of the Company. The Company, further, has agreed to pay a set-up
fee of $20,000 and monthly royalties to the related entity. Royalties are
payable on advertising revenues generated on the related entity's website and on
subscription revenues generated through use of the licensed gaming system on all
websites managed by the Company. Royalty rates range from 50% to 15% of covered
revenues. The Company does not have the right to transfer the license, but it
can terminate the arrangement at any time without penalty. The arrangement is
subject to approval of the Board of Directors.

Item 13. Exhibits and Reports on Form 8-K

(a) Listed below are all the Exhibits filed as part of this report. Certain
Exhibits are incorporated by reference from documents previously filed by the
Company with the SEC pursuant to Rule 12b-32 under the Securities Exchange Act
of 1934, as amended.

                Exhibit

                3.01            Amended and Restated Articles of Incorporation
                                (incorporated by reference as Exhibit 3.01 to
                                the Registrant's Registration Statement on Form
                                SB-2 as filed on May 28, 1998)


                                       32

<PAGE>

                3.01(a)         Articles of Amendment establishing the Series D
                                Preferred Stock of Interactive Magic, Inc.
                                (incorporated by reference as Exhibit 3.01(a) to
                                the Registrant's Proxy Statement on Form 14A as
                                filed on December 9, 1999)

                3.01(b)         Articles of Amendment changing the name of the
                                Company to iEntertainment Network, Inc.
                                (incorporated by reference as Exhibit 3.01(b) to
                                the Registrant's Annual Report on Form 10-KSB as
                                filed on March 24, 2000)

                3.02            Bylaws (incorporated by reference as Exhibit
                                3.02 to the Registrant's Registration Statement
                                on Form SB-2 as filed on May 28, 1998)

                4.05            Registration Rights Agreement dated August 16,
                                1999 between Registrant and John W. Stealey
                                (incorporated by reference as Exhibit 4.05 to
                                the Registrant's Current Report on Form 8-K as
                                filed on August 25, 1999)

                10.01           Stock Purchase Agreement, dated February 4,
                                1998, by and between the Company and Vertical
                                Financial Holdings (incorporated by reference as
                                Exhibit 10.01 to the Registrant's Registration
                                Statement on Form SB-2 as filed on May 28, 1998)

                10.02           Investor's Rights Agreement, dated February 4,
                                1998, by and between the Company and Vertical
                                Financial Holdings (incorporated by reference as
                                Exhibit 10.02 to the Registrant's Registration
                                Statement on Form SB-2 as filed on May 28, 1998)

                10.06           Form of Stock Purchase Warrant issued to each of
                                J.W. Stealey, Robert L. Pickens, Laura Stealey,
                                David H. Kestrel, J. Nicholas England, W. Joseph
                                McClelland, Avi Suriel, Marion Bass and
                                Oppenheimer (incorporated by reference as
                                Exhibit 10.06 to the Registrant's Registration
                                Statement on Form SB-2 as filed on May 28, 1998)



                                       33

<PAGE>


                10.16           Employment Agreement, dated January 3, 1995,
                                between the Company and J.W. Stealey, as amended
                                (incorporated by reference as Exhibit 10.16 to
                                the Registrant's Registration Statement on Form
                                SB-2 as filed on May 28, 1998)

                10.22           1995 Incentive Stock Option Plan (incorporated
                                by reference as Exhibit 10.22 to the
                                Registrant's Registration Statement on Form SB-2
                                as filed on May 28, 1998)

                10.23           ICI Stock Option Plan (incorporated by reference
                                as Exhibit 10.23 to the Registrant's
                                Registration Statement on Form SB-2 as filed on
                                May 28, 1998)

                10.24           1998 Stock Plan (incorporated by reference as
                                Exhibit 10.24 the Registrant's Registration
                                Statement on Form SB-2 as filed on May 28, 1998)

                10.25           1998 Employee Stock Purchase Plan (incorporated
                                by reference as Exhibit 10.25 to the
                                Registrant's Registration Statement on Form SB-2
                                as filed on May 28, 1998)

                10.36           Agreement Regarding Assignment of Contracts
                                dated as of May 25, 1999, between Registrant and
                                Ubi Soft Entertainment S.A. (incorporated by
                                reference as Exhibit 10.36 to the Registrant's
                                Current Report on Form 8-K as filed on July 15,
                                1999)

                10.37           Online Rights License Agreement dated effective
                                June 28, 1999 between the Registrant and Ubi
                                Soft Entertainment S.A. (incorporated by
                                reference as Exhibit 10.37 to the Registrant's
                                Current Report on Form 8-K as filed on July 15,
                                1999)

                10.37(a)        Securities Purchase and Exchange Agreement dated
                                November 8, 1999 between Interactive Magic, Inc.
                                and RGC International Investors, LDC
                                (incorporated by reference as Exhibit 10.37(a)
                                to the Registrant's Proxy Statement on Form 14A
                                as filed on December 9, 1999)


                                       34

<PAGE>

                10.38           Registration Rights Agreement dated November 11,
                                1999 by and among Interactive Magic, Inc.,
                                Vertical Financial Holdings, J.W. Stealey and
                                Value Management & Research AG (incorporated by
                                reference as Exhibit 10.38 to the Registrant's
                                Proxy Statement on Form 14A as filed on December
                                9, 1999)

                10.39           Employment Agreement, dated October 27, 1999,
                                between the Company and Michael Pearce
                                (incorporated by reference as Exhibit 10.39 to
                                the Registrant's Proxy Statement on Form 14A as
                                filed on December 9, 1999)

                10.40           Memo of Understanding with Joseph F. Rutledge
                                (incorporated by reference as Exhibit 10.40 to
                                the Registrant's Proxy Statement on Form 14A as
                                filed on December 9, 1999)

                10.41           Independent Contractor Agreement with Joseph F.
                                Rutledge (incorporated by reference as Exhibit
                                10.41 to the Registrant's Proxy Statement on
                                Form 14A as filed on December 9, 1999)

                10.42           Memo of Understanding with Raymond E. Rutledge
                                (incorporated by reference as Exhibit 10.42 to
                                the Registrant's Proxy Statement on Form 14A as
                                filed on December 9, 1999)

                10.43           Independent Contractor Agreement with Raymond E.
                                Rutledge (incorporated by reference as Exhibit
                                10.43 to the Registrant's Proxy Statement on
                                Form 14A as filed on December 9, 1999)

                21.1            Subsidiaries of the Company (incorporated by
                                reference as 21.1 to the Registrant's Form
                                10-KSB as filed on April 2, 2001)

                23.1            Consent of Independent Auditors (incorporated by
                                reference as 23.1 to the Registrant's Form
                                10-KSB as filed on April 1, 2002)


(c)      Reports on Form 8-K

                99.1            Securities Purchase and Exchange Agreement dated
                                December 18, 2001 between the Registrant, J.W.
                                Stealey, John Cay and Dan Young.


                                       35

<PAGE>

                99.2            Series D Preferred Stock Purchase Agreement
                                dated December 18, 2001 by and among RGC
                                International Investors, LDC, J.W. Stealey, John
                                Cay and Dan Young.


During the quarter ended December 31, 2001, the Registrant filed a current
report on Form 8-K under Items 1 and 7 on December 21, 2001 to report it's
change of control financing transaction.


                                       36

<PAGE>

                          iEntertainment Network, Inc.

                        Consolidated Financial Statements

                     Years ended December 31, 2001 and 2000

                                    Contents

Report of Independent Auditors                                          F-1

Consolidated Financial Statements

Consolidated Balance Sheets                                             F-2
Consolidated Statements of Operations                                   F-3
Consolidated Statements of Stockholders' Equity                         F-4
Consolidated Statements of Cash Flows                                   F-5
Notes to Consolidated Financial Statements                              F-7



                                       37

<PAGE>




                         Report of Independent Auditors

The Board of Directors and Stockholders
iEntertainment Network, Inc.

We have audited the accompanying consolidated balance sheets of iEntertainment
Network, Inc. as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' 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 audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
iEntertainment Network, Inc. at December 31, 2001 and 2000, and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared assuming
that iEntertainment Network, Inc. will continue as a going concern. As more
fully described in Note 1, the Company has incurred significant operating losses
and requires additional capital to continue operations. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans as to these matters are also described in Note 1. The
consolidated 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 outcome
of this uncertainty.

                                             /s/  Ernst & Young

Raleigh, North Carolina
March 8, 2002


                                       F-1

<PAGE>

                          iEntertainment Network, Inc.

                           Consolidated Balance Sheets
                        (In thousands, except share data)
<TABLE>
<CAPTION>
                                                                                                December 31
                                                                                           2001              2000
                                                                                    -------------------------------------
<S>                                                                                    <C>                <C>
Assets
Current assets:

   Cash and cash equivalents                                                           $       259        $        437
   Trade receivables, net of allowances of $82 and $80 at December 31, 2001
      and 2000, respectively                                                                   148                 814
   Prepaid expenses and other                                                                  114                 169
                                                                                    -------------------------------------
Total current assets                                                                           521               1,420

Property and equipment, net                                                                    428                 914

 Software development costs, net                                                               607                 658
Other assets                                                                                    17                  18
                                                                                    -------------------------------------
Total assets                                                                           $     1,573        $      3,010
                                                                                    =====================================

Liabilities and stockholders' equity Current liabilities:

   Accounts payable and accrued expenses                                               $     1,032        $      1,181
   Current portion of capital lease obligations                                                 32                  36
   Unearned revenue                                                                             35                   -
                                                                                    -------------------------------------
Total current liabilities                                                                    1,099               1,217

Capital lease obligations, less current portion                                                 10                  43

Stockholders' equity:
   Series D Convertible Preferred Stock $.10 par value; liquidation and stated
      value of $1,000 per share, plus accumulated accretion; 0 and 4,911 shares
      authorized, issued and outstanding at December 31, 2001 and 2000,
      respectively                                                                               -               5,246
   Common stock, $.10 par value; 50,000,000 shares authorized; 29,832,329 and
      15,914,311 shares issued and outstanding at December 31, 2001 and 2000,
      respectively                                                                           2,983               1,591
   Additional paid-in capital                                                               42,612              38,157
   Accumulated deficit                                                                     (45,077)            (43,188)
   Accumulated other comprehensive loss                                                        (54)                (56)
                                                                                    --------------------------------------
   Total stockholders' equity                                                                  464               1,750
                                                                                    -------------------------------------
   Total liabilities and stockholders' equity                                          $     1,573        $      3,010
                                                                                    =====================================

</TABLE>

See accompanying notes.


                                       F-2

<PAGE>

                          iEntertainment Network, Inc.

                      Consolidated Statements of Operations

                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                           Year ended December 31
                                                                                            2001             2000
                                                                                  -----------------------------------
<S>                                                                               <C>                  <C>
Net revenues:
   Online sales                                                                       $       953      $     1,426
   Advertising and contract revenue                                                           602            5,252
   Royalties and licenses                                                                      68              122
   CD-ROM product sales                                                                         1              111
                                                                                  -----------------------------------
Total net revenues                                                                          1,624            6,911

Cost of revenues:
   Cost of products and services                                                              203              128
   Royalties and amortized software costs                                                     219              423
                                                                                  -----------------------------------
Total cost of revenues                                                                        422              551
                                                                                  -----------------------------------
Gross profit                                                                                1,202            6,360

Operating expenses:
   Sales and marketing                                                                        613            4,923
   Product development                                                                      1,408            1,856
   General and administrative                                                                 862            1,501
   Goodwill amortization                                                                        -            1,602
   Impairment of long-lived assets                                                              -            1,787
                                                                                  -----------------------------------
Total operating expenses                                                                    2,883           11,669
                                                                                  -----------------------------------
Operating loss                                                                             (1,681)          (5,309)

Other income (expense):
   Interest income (expense)                                                                   (4)              49
   Other                                                                                       39              (52)
                                                                                  -----------------------------------
Total other income (expense)                                                                   35               (3)
                                                                                  -----------------------------------
Loss before income tax benefit (expense)                                                   (1,646)          (5,312)
Income tax benefit (expense)                                                                   41              (16)
                                                                                  -----------------------------------
Net loss                                                                                   (1,605)          (5,328)
Accretion of Series D preferred stock                                                        (284)            (295)
                                                                                  -----------------------------------
Net loss available to common stockholders                                            $     (1,889)    $     (5,623)
                                                                                  ===================================

Basic and diluted loss per share:

   Net loss per share                                                                $     (0.12)     $     (0.37)
                                                                                  ===================================
Weighted average shares used in computing basic and diluted loss per
    share                                                                              16,410,021       15,399,036
                                                                                  ===================================
</TABLE>

See accompanying notes.



                                       F-3

<PAGE>

                          iEntertainment Network, Inc.

                 Consolidated Statements of Stockholders' Equity

                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                                         Accumulated
                                                             Series D                         Additional  Other    Accumu-
                                                          Preferred Stock      Common Stock    Paid-In  Comprehen-  lated
                                                          Shares    Amount   Shares    Amount  Capital  sive loss  Deficit  Total
                                                          --------------------------------------------------------------------------
<S>                                                       <C>     <C>      <C>         <C>      <C>      <C>     <C>        <C>
Balance at December 31, 1999                                 -    $    -   14,722,203  $1,472   $36,672  $(116)  $(37,565)  $   463
  Exercise of stock options and issuance of shares           -         -      514,688      51       599      -          -       650
    for services

  Issuance of common stock                                   -         -      600,000      60       488      -          -       548
  Issuance of warrants                                       -         -            -       -        38      -          -        38
  Issuance of shares for services and settlement of          -         -       77,420       8       292      -          -       300
   indebtedness

  Compensation related to modification of options on         -         -            -       -        68      -          -        68
   termination

  Reclassification of Series D preferred stock into
   equity                                                4,911     4,951            -       -         -      -          -     4,951
  Accretion of Series D preferred stock                      -       295            -       -         -      -       (295)        -
  Comprehensive loss:                                                               -
    Net loss                                                 -         -            -       -         -      -     (5,328)   (5,328)
    Cumulative translation adjustment                        -         -            -       -         -     60          -        60
                                                                                                                             -------
  Total comprehensive loss                                   -         -            -       -         -      -          -    (5,268)
                                                       -----------------------------------------------------------------------------
  Balance at December 31, 2000                           4,911     5,246   15,914,311   1,591    38,157    (56)   (43,188)    1,750
   Issuance of shares for services and settlement of         -         -      937,500      94       (47)     -          -        47
     indebtedness

   Issuance of common stock                                  -         -    6,000,000     600      (300)     -          -       300
   Stock issuance costs                                      -         -            -       -       (30)     -          -       (30)
   Exchange of preferred stock for common stock         (3,911)   (4,404)   4,000,000     400     4,004      -          -         -
   Exchange of preferred stock for common stock         (1,000)   (1,126)   2,980,518     298       828      -          -         -
   Accretion of Series D preferred stock                     -       284            -       -         -      -       (284)        -
   Comprehensive loss:                                       -         -            -       -         -      -          -         -
     Net loss                                                -         -            -       -         -      -     (1,605)   (1,605)
     Cumulative translation adjustment                       -         -            -       -         -      2          -         2
                                                                                                                             -------
   Total comprehensive loss                                  -         -            -       -         -      -          -    (1,603)
                                                        ----------------------------------------------------------------------------
  Balance at December 31, 2001                               -    $    -   29,832,329  $2,983  $ 42,612  $ (54)  $(45,077)  $   464
                                                        ============================================================================
</TABLE>

   See accompanying notes.


                                       F-4

<PAGE>

                          iEntertainment Network, Inc.

                      Consolidated Statements of Cash Flows
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                                      Year ended December 31
                                                                                      2001              2000
                                                                                ----------------------------------
<S>                                                                             <C>                   <C>
Operating activities

Net loss                                                                          $     (1,605)        $ (5,328)
Adjustments to reconcile net loss to net cash used in operating
   activities:
     Noncash compensation expense                                                            -               79
     Issuance of common stock for services                                                  47              215
     Depreciation and amortization                                                         573              274
     Goodwill amortization                                                                   -            1,602
     Impairment of long-lived assets                                                         -            1,787
     Loss on disposal of equipment                                                           6                -
     Amortization of capitalized software development costs                                218                -
   Changes in operating assets and liabilities:

       Trade receivable, net                                                               666             (313)
       Advance royalties                                                                     -               44
       Prepaid expenses and other current and noncurrent assets                             55              (83)
       Accounts payable and accrued expenses                                              (149)            (550)
       Deferred revenue                                                                     35                -
       Royalties and commissions payable                                                     -             (120)
                                                                                ------------------------------------
Net cash used in operating activities                                                     (154)          (2,393)

Investing activities

Purchase of property and equipment                                                        (149)            (476)
Proceeds from equipment sales                                                               57                -
Software development costs                                                                (167)            (566)
                                                                                ------------------------------------
Net cash used in investing activities                                                     (259)          (1,042)

Financing activities

Proceeds from issuance of common stock, net of issuance costs                              270              783
Payments on capital lease obligations                                                      (37)             (63)
                                                                                ------------------------------------
Net cash provided by financing activities                                                  233              720
Effect of currency exchange rate changes on cash and cash equivalents                        2               60
                                                                                ------------------------------------
Net decrease in cash and cash equivalents                                                 (178)          (2,655)
Cash and cash equivalents at beginning of year                                             437            3,092
                                                                                ------------------------------------
Cash and cash equivalents at end of year                                            $      259       $      437
                                                                                ====================================

Supplemental disclosure of cash flow information

Cash paid for interest                                                              $      12        $      58
                                                                                ====================================

Noncash investing and financing activities

Issuance of common stock in settlement of liabilities                              $       47       $      527
                                                                                ====================================
Fixed asset acquired under capital lease                                           $        -       $       58
                                                                                ====================================

</TABLE>

See accompanying notes.


                                       F-5

<PAGE>


                          iEntertainment Network, Inc.

                   Notes to Consolidated Financial Statements

                                December 31, 2001

1. Description of Business and Significant Accounting Policies

Description of Business

iEntertainment Network, Inc. (the "Company") is a developer and publisher of
Internet games and an operator of online game services. The Company develops and
publishes proprietary online multi-player games and has built an Internet
distribution infrastructure which offers online gamers a variety of free,
subscription and pay-for-play games and services, including simulation, parlor,
strategy, role playing and action games.

Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, iMagicOnline Corporation, Interactive Magic Ltd.
and Interactive Magic GmbH. All significant intercompany accounts and
transactions have been eliminated in consolidation.

Basis of Presentation

The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company incurred net losses
available to common stockholders of $1.9 million in 2001 and $5.6 million in
2000, had a limited amount of cash as of December 31, 2001, and has been unable
to consistently generate positive cash flows in recent years. These factors
indicate that the Company's continuation as a going concern is dependent upon
its ability to obtain adequate financing necessary to continue development and
growth of its products and services and to satisfy its obligations and
ultimately to achieve profitable operations. In this regard, management will be
required to raise additional financing in the near future. However, there can be
no assurances that management will be successful in executing its plans to fund
operations.


                                       F-6

<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

1. Description of Business and Significant Accounting Policies (continued)

Disposition of CD-ROM Assets

In 1999, the Company sold its rights under certain development contracts for
CD-ROM products between the Company and third-party developers thereby exiting
the CD-ROM gaming business. In connection with the disposition of its CD-ROM
assets, the Company decided to terminate certain CD-ROM distribution agreements
and began negotiations to mutually release each partner from any obligation
under the terms of these agreements. In the second quarter of 1999, the Company
estimated a liability of $850,000 for potential settlements upon termination of
these agreements. The balance of this liability at December 31, 2001 and 2000
was $124,000 and $195,000, respectively, and is reflected in accounts payable
and accrued expenses in the consolidated balance sheets. In the first quarter of
2000, the Company settled outstanding liabilities with its two largest CD-ROM
distributors by paying $250,000 in cash and issuing common stock valued at
$300,000. In the first quarter of 2001, the Company settled outstanding
liabilities with the two largest remaining CD-ROM distributors by paying $10,000
in cash. The Company recognized gains of $72,000 and $265,000 related to these
settlements, which are included in general and administrative expense in the
December 31, 2001 and 2000 consolidated statements of operations, respectively.

Cash and Cash Equivalents

Cash and cash equivalents include amounts in demand deposit accounts and
investments with an original maturity date of three months or less when
purchased. The Company maintains deposits in financial institutions in excess of
federally insured limits.

Allowance for Doubtful Accounts

The accounts receivable allowances at December 31, 2001 and 2000 include a
reserve for doubtful accounts, which management records based on historical
experience and current evaluation of potential collectibility issues. The
Company does not require collateral for unpaid balances. Credit losses have
historically been within management's expectations.


                                       F-7

<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

1. Description of Business and Significant Accounting Policies (continued)

Property and Equipment

Property and equipment are stated at cost. Depreciation for equipment, furniture
and fixtures and purchased software is computed using the straight-line method
over the estimated useful lives of the assets, ranging from three to seven
years. Leasehold improvements are amortized on a straight-line basis over the
estimated useful life of the asset or the remaining lease term, whichever is
less.

Goodwill

The Company had classified as goodwill the cost in excess of fair value of net
assets acquired in purchase transactions. Goodwill was being amortized on a
straight-line basis over two to three years. The Company assessed the
recoverability of its goodwill by determining its ability to generate future
cash flows sufficient to recover the unamortized balance over the remaining
useful life. During fiscal year 2000, the Company determined goodwill to be
unrecoverable based on undiscounted future cash flows and unamortized balances
were deemed impaired and written-off.

Software Development Costs

The Company capitalizes costs incurred in the development of its gaming
software. Capitalization of such costs is discontinued when a product is
available for general release to customers. Capitalized software development
costs are capitalized at the lower of cost or net realizable value and amortized
using the greater of the revenue curve method or the straight-line method over
the estimated economic life of the related product. Amortization begins when a
product is ready for general release to customers.

Fair Value of Financial Instruments

The carrying values of trade receivables, accounts payable and accrued expenses,
and redeemable convertible preferred stock approximate fair values at December
31, 2001 and 2000.


                                       F-8

<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

1. Description of Business and Significant Accounting Policies (continued)

Revenue Recognition

Revenue from pay-for-play online sales is recognized monthly as earned. Payments
are received in advance and entitle users unlimited play for thirty days. The
Company records advertising revenues in the period the advertising impressions
are delivered to customers. The Company records advertising revenues net of
related administrative fees as reported by its outside advertising vendors. The
Company recorded barter revenue and expense under the criteria established by
the Emerging Issues Task Force Issue No. 99-17 "Accounting for Advertising
Barter Transaction" of $75,000 and $588,000 for the years ended December 31,
2001 and 2000, respectively. Barter expense is included in sales and marketing
expenses in the consolidated statements of operations. The Company's advertising
contracts do not guarantee a minimum number of impressions to be delivered.

Revenue from CD-ROM product sales was recognized at the time of product
shipment. Revenue from royalties and licenses was recognized when earned under
the terms of the relevant agreements with original equipment manufacturers
("OEMs"), international distributors and other third parties. With respect to
license agreements that provide customers the right to multiple copies in
exchange for guaranteed amounts, net revenue was recognized upon delivery of the
product master or the first copy provided collectibility was probable. Per copy
royalties on sales that exceed the guarantee are recognized as earned. The
Company accepted product returns and provided price protection on certain unsold
merchandise. Revenue was recorded net of an allowance for estimated future
returns, markdowns, price protection and warranty costs. Such reserves were
based upon management's evaluation of historical experience, current industry
trends and estimated costs.

Product Development

Product development expenses (excluding capitalized software development costs)
are charged to operations in the period incurred and consist primarily of
payroll and payroll related costs.


                                       F-9

<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

1. Description of Business and Significant Accounting Policies (continued)

Advertising

The Company expenses advertising costs as incurred. Advertising expense was
approximately $183,000 and $2,624,000 for the years ended December 31, 2001 and
2000, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include provisions for doubtful accounts
and estimates regarding the recoverability of prepaid and long-lived assets.
Actual results could differ from those estimates.

Foreign Currency Translation

The Company follows the principles of the Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
Currency Translation," using the local currency of its operating subsidiaries as
the functional currency. Accordingly, all assets and liabilities outside the
United States are translated into U.S. dollars at the rate of exchange in effect
at the balance sheet date. Income and expense items are translated at the
weighted average exchange rate prevailing during the period. Adjustments
resulting from translation of financial statements are reflected as a component
of accumulated other comprehensive loss.

Employee Stock Compensation

The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations in accounting for its employee stock options as
permitted by SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123")
and make the required pro forma disclosures required by SFAS 123. Under APB 25,
if the exercise price of the Company's employee stock options is not less than
the estimated fair value of the underlying stock on the date of grant, no
compensation expense is recognized.


                                       F-10

<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

1. Description of Business and Significant Accounting Policies (continued)

Income Taxes

The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, the liability method is used
in accounting for income taxes and deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities.

Reclassification

Certain amounts in the 2000 financial statements have been reclassified to
conform with 2001 classifications. These reclassifications did not result in any
changes to operations or equity as previously reported.

Basic Net Loss Per Share

Basic net loss per share has been calculated in accordance with SFAS No. 128,
"Earnings Per Share". Basic net loss per share is calculated by dividing net
loss available to common stockholders by the weighted average shares of common
stock outstanding during the period.

Had the Company been in a net income position, diluted earnings per share would
have been presented and would have included potential common shares related to
outstanding options and warrants. The diluted earnings per share computation is
not included, as all potential common shares are antidilutive.


                                       F-11

<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

1. Description of Business and Significant Accounting Policies (continued)

Impact of Recently Issued Accounting Pronouncements

On June 29, 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS
141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 eliminates the pooling-of-interests method of accounting for business
combinations, except for qualifying business combinations that were initiated
prior to July 1, 2001. SFAS 141 also includes new criteria to recognize
intangible assets separately from goodwill. The requirements of SFAS 141 are
effective for any business combination accounted for by the purchase method that
is completed after June 30, 2001. Under SFAS 142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed annually, or more
frequently if impairment indicators arise, for impairment. Separable intangible
assets that are not deemed to have an indefinite life will continue to be
amortized over their useful lives. The provisions of SFAS 142 requiring
non-amortization of goodwill and indefinite-lived intangible assets apply to
goodwill and indefinite-lived intangible assets acquired after June 30, 2001.
With respect to goodwill and intangible assets acquired prior to July 1, 2001,
the Company is required to adopt SFAS 142 on January 1, 2002; however, the
adoption of SFAS 141 and SFAS 142 is not expected to have an impact on the
Company's operating results or stockholders' equity for the periods presented.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 requires an entity to record a liability for
an obligation associated with the retirement of an asset at the time that the
liability is incurred by capitalizing the cost as part of the carrying value of
the related asset and depreciating it over the remaining useful life of that
asset. The standard is effective for the Company beginning January 1, 2003, and
its adoption is not expected to have an impact on the Company's operating
results or stockholders' equity.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 144").
SFAS 144 addresses how and when to measure impairment on long-lived assets and
how to account for long-lived assets that an entity plans to dispose of either
through sale, abandonment, exchange, or distribution to owners. The new
provisions supersede SFAS 121, which addressed asset impairment, and certain
provisions of APB Opinion 30 related to reporting the effects of the disposal of
a business segment and requires expected future operating losses from
discontinued operations to be recorded in the period in which the losses are
incurred rather than the measurement date. Under SFAS 144, more dispositions may
qualify for discontinued operations treatment in the income statement. The
provisions of SFAS 144 became effective for the Company January 1, 2002 and are
not expected to have an impact on the Company's operating results or
stockholders' equity.


                                       F-12

<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

2. Business Combinations

On February 12, 1999, the Company completed the acquisition of MPG-Net, Inc.
("MPG-Net") by exchanging 600,000 shares of its common stock valued at
approximately $3.1 million for all of the outstanding common stock of MPG-Net
and issuing 150,000 shares of its common stock valued at approximately $800,000
in full settlement of certain debt obligations of MPG-Net. MPG-Net was primarily
in the business of developing, publishing and distributing interactive, real
time 3-D entertainment for multi-user online/Internet play, as well as creating
entertainment platforms on the Internet such as online game channels, game hubs
and websites. The acquisition was accounted for as a purchase in accordance with
APB No. 16, "Business Combinations" ("APB 16") and, accordingly, the operating
results of MPG-Net were included in the Company's consolidated financial
statements from the date of acquisition. The excess of the aggregate purchase
price over the fair market value of the net assets acquired of approximately
$4.3 million was amortized on a straight-line basis until December 31, 2000,
when it was deemed impaired and written-off.

On August 27, 1999, the Company acquired the right, title and interest in and to
all of the tangible and intangible assets of Virtual Business Designs, Inc.,
doing business as The Gamers Net ("The Gamers Net"), for 107,143 shares of its
common stock valued at approximately $288,000. The acquisition was accounted for
as a purchase in accordance with APB 16 and, accordingly, the operating results
of The Gamers Net were included in the Company's consolidated financial
statements from the date of acquisition. The excess of the aggregate purchase
price over the fair value of the net assets acquired was amortized on a
straight-line basis until December 31, 2000, when it was deemed impaired and
written-off.


                                       F-13

<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

3. Property and Equipment

Property and equipment consists of the following (in thousands):

                                                            December 31
                                                         2001         2000
                                                     -----------------------

    Equipment                                        $     737    $     842
    Furniture and fixtures                                  46          128
    Software                                               477          914
    Leasehold improvements                                   -            5
                                                     -----------------------
                                                         1,260        1,889
    Less accumulated depreciation and amortization        (832)        (975)
                                                     -----------------------
                                                     $     428    $     914
                                                     =======================

Depreciation expense for the years ended December 31, 2001 and 2000,
respectively, was $573,000 and $274,000, including amortization of equipment
leased under capital leases of $44,000 and $62,000, respectively. During 2001,
certain property and equipment with a net book value of $63,000 was disposed of
in connection with the Company's relocation. The Company recorded a loss on the
disposal of approximately $6,000, which is included in other expense on the
Statement of Operations. During the fourth quarter of 2000, the Company
significantly reduced its workforce, determined certain property and equipment
was unnecessary for ongoing operations and evaluated these assets for
impairment. Property and equipment with a net book value of $60,000 was deemed
impaired and written off as of December 31, 2000.


                                       F-14

<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

4. Impairment of Long-Lived Assets

During the second half of fiscal 2000, the Company experienced a significant
revenue stream reduction as a result of a downturn in the online advertising
market, which indicated potential impairment of its recorded goodwill values.
The Company determined that unamortized goodwill relating to both MPG-Net and
The Gamers Net had become fully and permanently impaired. This decision was
based on an analysis of the estimated undiscounted future cash flows of the
associated operations. Accordingly, an impairment loss of $1,727,000 was
recorded and is included in the consolidated statements of operations as
impairment of long-lived assets. Goodwill and the associated accumulated
amortization were written off in conjunction with the impairment.

During the fourth quarter of 2000, the Company also significantly decreased its
workforce and re-evaluated the amount of property and equipment required to
sustain its ongoing operations. The Company determined certain excess equipment;
furniture and fixtures had become permanently impaired. This evaluation was
based on an analysis of the estimated future cash flows related to these assets.
Accordingly, an impairment loss of $60,000 was recorded. The historical costs
and depreciation for these assets were properly written-off.

5. Capitalized Software Development Costs

Information related to net capitalized software development costs is as follows
at December 31 (in thousands):


                                            2001             2000
                                        ---------------------------------
   Balance at beginning of year         $     658         $      92
   Capitalized                                167               658
   Amortized                                 (218)              (92)
                                        ---------------------------------
   Balance at end of year               $     607         $     658
                                        =================================


                                       F-15

<PAGE>



                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

6. Accrued Liability for Prize Points

The Company has operated a prize point system for the users of its online games.
In 2000, prize points were redeemable for cash and other prizes. The Company
recorded an accrued liability of $343,000 in accounts payable and accrued
expenses on its December 31, 2000 balance sheet based on management's best
estimate of prize points that have not been redeemed. At December 31, 2000, the
Company also recorded a liability in accounts payable for redeemed but unpaid
prize points of $112,000. In 2001, the Company revised its prize point
redemption policy such that prize points were no longer directly redeemable for
cash or merchandise. Prize points were converted to chance points and were used
by customers to enter prize drawings. Due to the change in its prize point
system, management determined that the Company no longer had prize point
obligations as previously recorded in the December 31, 2000 balance sheet.
Accordingly, the accrued liability of $343,000 and the payable of $112,000 were
reversed and were netted against operating expenses in the consolidated
statements of operations for the year ending December 31, 2001.

Following the Company's restructuring of its prize point system in early 2001,
three individuals filed complaints with the Consumer Protection Division of the
Office of the Attorney General for the State of North Carolina with respect to
prize points that they intended to redeem for cash prizes. The Attorney
General's office also has asserted that the Company's operation of the game of
"Bingo," which the Company allows users to play for free, violates North
Carolina's gambling statutes. Management, after consultation with counsel, does
not believe that the Company has violated such statutes, which, as interpreted
by North Carolina's Attorney General's office, would cause free Bingo games
operated by many companies to be in violation. In order to avoid costly
litigation, however, the Company negotiated and paid a settlement in the amount
of $25,000 regarding these claims. This settlement does not bar individual
consumer claims or claims of violations of other states' gaming regulations.
Consequently, there can be no assurance that future claims will not be made
against the Company.

In order to aide in the resolution of its dispute with the Office of the
Attorney General of North Carolina, the Company changed the operations of its
"Bingo" game to again allow prize points to be directly redeemable for cash. The
total value of any single award is statutorily limited. Players are notified of
their eligibility to redeem accumulated prize points for cash awards. Unredeemed
awards are expired after one month. The Company recorded an accrued liability of
$7,000 in accounts payable and accrued expenses on its December 31, 2001 balance
sheet based on management's best estimate of prize points that have not been
redeemed.


                                       F-16

<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

7. Leases

The Company rents its facilities and certain office equipment under
noncancelable operating leases which expire at various times through 2004. The
monthly rent under certain facility leases are periodically adjusted based on
changes in the Consumer Price Index.

Property and equipment includes the following amounts for capital leases (in
thousands):

                                                December 31
                                           2001              2000
                                       -------------------------------

   Leased equipment                    $    188          $    221
   Leased furniture and fixtures              -                53
                                       -------------------------------
                                            188               274
   Less:  accumulated amortization         (139)             (168)
                                       -------------------------------
                                       $     49          $    106
                                       ===============================

The following is a schedule of future minimum lease payments for capital and
operating leases for the years ending December 31 (in thousands):

                                                       Capital  Operating
                                                       Leases     Leases

                                                      --------------------

     2002                                             $    35    $    51
     2003                                                  11         51
     2004                                                   -         13
                                                      --------------------
     Total future minimum lease payments                   46    $   115
                                                                ==========
     Less: amounts representing interest                   (4)
                                                      ----------
     Present value of future minimum lease payments        42
     Less: current portion                                (32)
                                                      ----------
                                                      $    10
                                                      ==========

Total rent expense incurred was approximately $77,000 and $255,000 for the years
ended December 31, 2001 and 2000, respectively.


                                       F-17

<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

8. Stockholders' Equity and Redeemable Convertible Preferred Stock

Recapitalization - 2001

During December 2001, the Company completed several financing transactions to
eliminate certain obligations and improve its financial position:

..        The Company and its then Chairman of the Board of Directors agreed to
         terminate the consulting agreement between the parties in exchange for
         newly issued shares of the Company's common stock. The Company was
         released from $46,875 of its debt under the consulting agreement in
         exchange for 937,500 shares of its common stock. The $46,875 balance of
         the liability is to be settled on the one-year anniversary of the
         termination agreement through a further issuance of common stock. The
         number of shares to be issued will be determined according to the
         agreement.

..        The Company issued 10,000,000 shares of common stock to certain
         stockholders under the terms of the Securities Purchase and Exchange
         Agreement in exchange for $300,000 in cash and 3,910.844 shares of the
         Company's Series D Preferred Stock. The Series D Preferred Stock
         repurchased was retired.

..        The Company issued 2,980,518 shares of common stock to certain
         stockholders under the terms of the Series D Preferred Stock Exchange
         Agreement in exchange for 1,000 shares outstanding of its Series D
         Preferred Stock. The Series D Preferred Stock was retired. The
         agreement contains certain anti-dilution repurchased rights for the
         shareholders in the repurchase transaction. Terms of the antidilution
         provision include rights related to the issuance of the first $203,125
         of common stock following the execution of the Stock Exchange
         Agreement.

  The Company incurred approximately $30,000 of legal fees related to these
  transactions. These fees were recorded as a reduction to additional paid-in
  capital.


                                       F-18

<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

8. Stockholders' Equity and Redeemable Convertible Preferred Stock (continued)

Series D Convertible Preferred Stock

The following is a summary of the terms of the Series D Preferred Stock:

Dividends

There were no dividends automatically payable on the Series D Preferred. No
dividends may be paid to the common stockholders while any Series D shares are
outstanding.

Liquidation Preferences

Upon any liquidation, dissolution or winding up of the Company, before anything
can be paid to the holders of common stock, the holders of the Series D
Preferred will be entitled to receive $1,000 per share, plus an amount equal to
a 6% annual return on that amount since the November 1999 issuance date and any
penalty amounts due thereunder.

The Series D preferred stockholders are entitled to a 6% annual return on the
stated value of the preferred stock, upon liquidation, conversion, and
redemption within control of the Company. Accordingly, the Company has recorded
this return as accretion to the stated value of the preferred stock and a charge
to accumulated deficit. For the years ended December 31, 2001 and 2000, the
recorded accretion was $284,000 and $295,000, respectively.

Conversion

Series D Preferred shares were convertible at $1 per share to common stock. Each
share of Series D Preferred was initially convertible into 1,000 shares of
common stock. The number of shares of common stock issuable upon conversion of a
share of Series D Preferred increased over time to provide the holder additional
common stock equal to a 6% annual return since November 1999 and any penalty
amounts otherwise due thereunder.


                                       F-19

<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

8. Stockholders' Equity and Redeemable Convertible Preferred Stock (continued)

Voting

The Series D Preferred had no voting rights other than as provided by law and
except that the approval of the holders of a majority of the outstanding Series
D Preferred was required for: (1) any adverse change to the rights of the Series
D Preferred; (2) the creation of additional securities having senior or equal
rights; (3) an increase in the authorized number of shares of Series D
Preferred; (4) an increase in the par value of the common stock; or (5) any
action that would result in certain taxes being imposed on the Series D
Preferred.

9. Stock Options, Stock Plans and Warrants

Employee Stock Options and Stock Plans

Effective January 2, 1995, the Company adopted two employee incentive stock
option plans (the "1995 Plans"). One plan provided for the granting of options
to purchase Class A Common Stock which was voting stock, and one plan provided
for the granting of options to purchase Class B Common Stock which was
non-voting. The 1995 Plans are intended as incentives to induce key employees of
the Company to remain in the employ of the Company and to encourage such
employees to own stock in the Company. This purpose is carried out by granting
options to purchase shares of Common Stock. The Company may grant incentive
stock options ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended to eligible participants under the 1995 Plans. The
exercise price of an ISO may not be less than 100% of the fair market value of
the underlying shares at the time the ISO is granted.

The 1995 Plans are administered by the Board of Directors. The Board has the
authority to administer the 1995 Plans and determine, among other things, the
interpretation of any provisions of the 1995 Plans, the eligible employees who
are to be granted stock options, the number of shares which may be issued and
the option exercise price.


                                       F-20

<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

9. Stock Options, Stock Plans and Warrants (continued)

The Company's incentive stock options vest over time with 20% vesting during the
second year after the date of grant with an additional 5% vesting each calendar
quarter thereafter. Incentive stock options generally may only be exercised if
the participant has been employed by the Company continuously for at least one
year as of the last day of the first twelve-month period following the date of
option grant. The option is only exercisable if the participant is employed by
the Company and for limited periods of time after the participant's termination
of employment. If the participant ceases to be employed on account of
termination by the Company for cause or resignation (other than retirement as
defined in the option agreement), the right to exercise any unexercised portion
of the option terminates. If the participant is terminated by the Company
without cause, the participant shall be entitled to purchase, within three
months, option shares equal to an additional 25% of the participant's option
shares that were not exercisable as of the termination date. The option becomes
immediately and fully exercisable in the event of a change in control as defined
in the option agreement.

Performance options vest upon the earlier of the Company's achievement of
certain performance standards or seven years from the date of grant. The number
and exercise price of the options are fixed at the date of grant. Options are
exercisable only in the event the participant is employed by the Company and for
limited periods of time after the participant's termination of employment. If
the participant ceases to be an employee on account of resignation (other than
retirement as defined in the option agreement) or termination for cause, the
right to exercise any unexercised portion of the option shall terminate. The
option becomes immediately and fully exercisable as of a change in control as
defined in the agreement.

As the exercise price of the options was not less than the fair value of the
stock on the date of grant, no compensation expense was recorded related to
these options.


                                       F-21

<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

9. Stock Options, Stock Plans and Warrants (continued)

During May 1998, the Company's 1998 Stock Plan (the "Plan") was adopted by the
Board of Directors and approved by the shareholders of the Company. A total of
2,300,000 shares of Common Stock have been reserved for issuance under the Plan.
The Plan provides for grants to employees of incentive stock options. In
addition, the Plan provides for grants of nonqualified stock options and stock
purchase rights to employees, directors and consultants of the Company.

The Plan is administered by the Board of Directors or by a Committee appointed
by the Board. The administrator determines the terms of options and stock
purchase rights granted, including the exercise price and the number of shares
subject to option or stock purchase right. The exercise price of incentive stock
options granted under the Plan must be at least equal to the fair market value
of the Company's Common Stock on the date of the grant. The maximum term of
options granted under the plan is 10 years.

During May 1998, the Company's 1998 Employee Stock Purchase Plan (the "Purchase
Plan") was adopted by the Company's Board of Directors and approved by the
Company's shareholders. The Purchase Plan is intended to qualify under Section
423 of the Internal Revenue Code of 1986, as amended. The Company has reserved
500,000 shares of Common Stock for issuance under the Purchase Plan. No shares
have been issued at December 31, 2001. Under the Purchase Plan, an eligible
employee may purchase shares of Common Stock from the Company through payroll
deductions of up to 10% of his or her base compensation, not to exceed $25,000
per year, at a price per share equal to 85% of the fair market value of a share
of the Company's Common Stock on the last day of the offering period. The
maximum number of shares that an employee may purchase in any offering period is
2,500 shares. Any employee who is customarily employed for at least 20 hours per
week, and more than five months per calendar year and who is employed on or
before the commencement date of an offering period is eligible to participate in
the Purchase Plan.


                                       F-22

<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

9. Stock Options, Stock Plans and Warrants (continued)

The following table summarizes the ISO and PSO activity under the Company's 1995
and 1998 Stock Plans:

<TABLE>
<CAPTION>
                                                                                                         Weighted-Average
                                                               Shares          Shares                        Exercise
                                                              Available       Available                      Price Per
                                                             for Grant -     for Grant -       Options         Share
                                                             1995 Plans      1998 Plans      Outstanding
                                                           --------------------------------------------------------------
<S>                                                        <C>              <C>            <C>            <C>
Balances at December 31, 1999                                   232,416         80,420       3,753,794        $  1.95
   Options authorized for grant                                       -        500,000               -              -
   Options granted                                             (338,132)      (555,955)        894,087           1.76
   Options exercised                                                  -              -        (514,688)          1.28
   Options canceled                                             437,701        285,350        (723,051)          3.32
                                                           --------------------------------------------------------------
Balances at December 31, 2000                                   331,985        309,815       3,410,142           1.82
   Options granted                                              (90,000)    (1,000,000)      1,090,000           0.07
   Options canceled                                           1,054,013        936,434      (1,990,447)          2.06
                                                           --------------------------------------------------------------
Balances at December 31, 2001                                 1,295,998        246,249       2,509,695        $  0.89
                                                           ==============================================================

</TABLE>

The following summarizes information about the Company's stock options
outstanding at December 31, 2001:

<TABLE>
<CAPTION>
                                             Options Outstanding                        Options Exercisable
                              -------------------------------------------------    ----------------------------
                                                   Weighted
                                                    Average        Weighted                          Weighted
                                                   Remaining        Average                          Average
                                   Number         Contractual      Exercise             Number       Exercise
  Range of Exercise Prices       Outstanding         Life            Price           Exercisable      Price
-------------------------------------------------------------------------------    ----------------------------
<S>                           <C>                 <C>             <C>              <C>              <C>
         $0.050-$0.050             1,000,000          4.97         $ 0.05                500,000      $0.05
         $0.250-$1.063               471,374          1.50           0.92                443,358       0.94
         $1.093-$1.093               700,321          3.00           1.09                659,071       1.09
         $1.125-$6.000               338,000          1.93           2.94                284,425       3.05
                              -------------------------------------------------    ----------------------------
                                   2,509,695          3.36         $ 0.89              1,886,854      $1.08
                              =================================================    ============================
</TABLE>



                                       F-23

<PAGE>



                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

9. Stock Options, Stock Plans and Warrants (continued)

The Company has adopted the disclosure-only provisions of SFAS 123. The fair
value for each option was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions:

                                                 Year ended December 31
                                                  2001             2000
                                              --------------- ------------
   Expected dividend yield                          0%                0%
   Risk-free interest rate                        3.7%              6.2%
   Expected volatility                            541%              185%
   Expected life (in years from vesting)          2.9               1.8

For purpose of pro forma disclosures, the estimated fair value of the stock
options are amortized to expense over the vesting period. The grant date
Black-Scholes weighted-average value of options was $0.06 and $1.58 per share
for 2001 and 2000, respectively.

The following table shows pro forma net loss and net loss per share as if the
fair value accounting method prescribed by SFAS 123 had been used to account for
stock based compensation (in thousands, except per share data):

<TABLE>
<CAPTION>

                                                                                    Year ended December 31
                                                                                   2001                2000
                                                                            ------------------- --------------------
<S>                                                                         <C>                 <C>
   Net loss available to common stockholders as reported                      $      (1,889)    $        (5,623)
   Pro forma compensation expense                                                      (411)             (1,161)
                                                                            ------------------- --------------------
   Pro forma net loss                                                         $      (2,300)    $        (6,784)
                                                                            =================== ====================

   Net loss available to common stockholders per share:

     Historical                                                               $     (0.12)      $         (0.37)
     Pro forma (for SFAS 123 disclosure purposes)                             $     (0.14)      $         (0.44)

</TABLE>


                                       F-24

<PAGE>


                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

9. Stock Options, Stock Plans and Warrants (continued)

Common Stock Warrants

Warrants issued in connection with certain notes payable were recorded at their
estimated fair value and an increase to additional paid in capital. The
resulting debt discount was amortized to interest expense over the term of the
related debt. Warrants issued to consultants and financial advisors are recorded
at their estimated fair value and the related general and administrative expense
is charged when the warrants are issued. During 2000, the Company issued
warrants to purchase 25,000 shares of its common stock at the then fair value of
$1.13 per share. The warrants were exercisable immediately and have a term of
five years.

The following summarizes the activity of warrants:

                                               Warrants
                                             Outstanding
                                     ------------------------
Balance at December 31, 1999                  1,185,903
   Issued                                        25,000
                                     ------------------------
Balance at December 31, 2000                  1,210,903
   Expired                                      (78,998)
                                     ------------------------
Balance at December 31, 2001                  1,131,905
                                     ========================

All of the Company's outstanding warrants at December 31, 2001 were exercisable
at prices ranging from $1.00 to $9.60 per share.

10. Common Stock Reserved for Future Issuance

The Company has reserved authorized shares of Common Stock for future issuance
as follows at December 31, 2001:

   Outstanding incentive stock options                         2,509,695
   Possible future issuance under stock option plans           1,542,247
   Stock purchase warrants                                     1,131,905
   Possible future issuance under stock purchase agreement    10,000,000
   Future issuance under revised consulting agreement            937,500
                                                            --------------
                                                              16,121,347
                                                            ==============



                                       F-25

<PAGE>


                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

11. Income Taxes

At December 31, 2001, the Company has a cumulative domestic federal net
operating loss carryforward of approximately $34 million which begins to expire
in the year 2011. State tax losses of approximately $34 million will begin to
expire in 2011. The Company also has $980,000 of research credits to
carryforward for use against future domestic federal income taxes. U.S. tax laws
impose limitations on the use of net operating losses and credits following
certain changes in ownership. If such a change occurs, the limitations could
reduce the amount of these benefits that would be available to offset future
taxable income each year, starting with the year of ownership change.

Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities consisted of the following at
(in thousands):

                                                              December 31
                                                           2001         2000
                                                      --------------------------
    Deferred tax assets:
       Net operating loss carryforwards               $  13,239     $ 11,627
       Sales and accounts receivable reserves                68          462
       Accrued salaries                                      63          544
       Other reserves                                        32           60
       Accrued interest to related party                      8           74
       Depreciation                                           3           13
       Research and development credit carryforward         980          980
                                                      --------------------------
    Total deferred tax assets                            14,393       13,760

    Deferred tax liabilities:
       Accounting method change                              60           60
                                                      --------------------------
    Total deferred tax liabilities                           60           60

    Less:
       Valuation allowance                              (14,333)     (13,700)
                                                      --------------------------
    Total net deferred taxes                          $      -      $     -
                                                      ==========================

The Company has recorded a valuation allowance for the full amount of its
deferred income tax assets as of December 31, 2001 and 2000, based on
management's evaluation of the criteria set forth in SFAS No. 109.


                                       F-26

<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

11. Income Taxes (continued)

The reconciliation of income tax computed at the U.S. federal statutory rate to
income tax expense is as follows (in thousands, except percentages):

<TABLE>
<CAPTION>

                                                       Year ended December 31             Year ended December 31
                                                       2001              2000             2001             2000
                                                  ---------------- ----------------- ---------------- ----------------
<S>                                               <C>              <C>               <C>              <C>
Income tax expense (benefit)                       $      (550)    $     (1,752)         (34.00%)         (34.00%)
State taxes, net of federal benefit                        (83)            (264)          (5.12%)          (5.12%)
Non-deductible items                                         -              152                -            2.94%
Change in valuation allowance                              633            1,864           39.12%           36.18%
Other                                                        -                -                -               -
                                                  ---------------- ----------------- ---------------- ----------------
Income tax expense (benefit)                       $         -     $          -                -               -
                                                  ================ ================= ================ ================
</TABLE>

For financial reporting purposes, loss before income taxes and extraordinary
items includes the following components (in thousands):

                                               December 31
                                          2001              2000
                                      ---------------------------------
    Pretax loss:
       United States                  $    (1,630)      $    (5,156)
       Foreign                                (16)                4
                                      ---------------------------------
                                      $    (1,646)      $    (5,152)
                                      =================================

Significant components of the provision for income tax expense (benefit)
attributable to continuing operations are as follows (in thousands):

                                                December 31
                                           2001             2000
                                      --------------------------------
     Current:
        Federal                         $    -            $    -
        Foreign                            (41)               16
        State                                -                 -
                                      ---------------   --------------
     Total current expense (benefit)    $  (41)           $   16
                                      ===============   ==============


                                       F-27

<PAGE>



                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

12. Retirement Plan

The Company has a qualified 401(k) Retirement Plan. The Plan covers
substantially all of the Company's full-time employees. Effective November 20,
1996, the Plan requires six months of full-time service for an employee to be
eligible to participate. Participants may contribute up to 15% of their
compensation to the Plan, subject to the yearly maximums established by the
Internal Revenue Service. Employer matching contributions are at the discretion
of the Company's Board of Directors. There were no discretionary employer
contributions made during the years ended December 31, 2001 and 2000.

13. Significant Customers

Revenues from one significant customer represented 29% or more of net revenues
during 2000. Additionally, one customer comprised 60% of accounts receivable at
December 31, 2001 and one customer comprised 49% of accounts receivable at
December 31, 2000.

14. Geographic Information

In addition to domestic sales, the Company sells its products through its
subsidiaries to international customers. These sales amounted to 1% and 7% of
net revenues during the years ended December 31, 2001 and 2000, respectively.

The following table presents information related to the Company's operations by
geographic location (in thousands):

                                             Year ended December 31

                                              2001              2000
                                        -----------------------------------
Net revenue:
   United States                          $    1,623         $    6,807
   Europe and other                                1                104
                                        -----------------------------------
                                          $    1,624         $    6,911
                                        ===================================

                                                   December 31

                                              2001              2000
                                        -----------------------------------
Long-lived assets, net:
   United States                          $      428         $      914
   United Kingdom and Germany                      -                  -
                                        -----------------------------------
                                          $      428         $      914
                                        ===================================


                                       F-28

<PAGE>



                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)

15. Subsequent Events

Since December 31, 2001, the Company has sold approximately 3,284,000 shares of
its common stock in exchange for approximately $164,000 in cash to new investors
under the terms of the Securities Purchase and Exchange Agreement dated December
18, 2001. Pursuant to the anti-dilution obligations under the Series D Preferred
Stock Exchange Agreement, the Company issued approximately 364,000 shares of its
common stock to certain shareholders.

In January 2002, the Company entered into a licensing arrangement with IamGame,
Inc., a Company owned by the Chief Executive Officer of iEntertainment, Inc.
(the "related entity") for the right to utilize a gaming system developed by
that related entity. Under the terms of the arrangement, the Company has agreed
to manage the related entity's gaming website for a fee. The costs associated
with operating the website are the responsibility of the Company. The Company,
further, has agreed to pay certain set fees and monthly royalties to the related
entity under the license to use its gaming system and on advertising revenue
from the related entity's website. The Company does not have the right to
transfer the license, but it can terminate the arrangement at any time. The
arrangement is subject to approval of the Board of Directors.


                                       F-29

<PAGE>

                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Acts, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                          iENTERTAINMENT NETWORK, INC.

Dated:  March 29, 2002                            By: /s/ Allan F. Kalbarczyk
                                                      -----------------------
                                                  Name:  Allan F. Kalbarczyk

                                                  Title: Chief Financial Officer

In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
        SIGNATURE                                     TITLE                                   DATE
<S>                             <C>                                                       <C>
   /s/ J.W. Stealey             Chief Executive Officer (Principal Executive              March 29, 2002
 -----------------------          Officer) and Chairman of the Board
     J.W. Stealey

 /s/ Allan F. Kalbarczyk        Chief Financial Officer (Principal Financial              March 29, 2002
 -----------------------          Officer and Principal Accounting Officer)
   Allan F. Kalbarczyk

     /s/ Daniel R. Young          Director                                                March 29, 2002
 -----------------------
       Daniel R. Young

 /s/ W. Joseph McClelland         Director                                                March 29, 2002
 ------------------------
  W. Joseph McClelland

  /s/ David Kestel                Director                                                March 29, 2002
  --------------------
    David Kestel

</TABLE>

                                       F-30