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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-KSB


              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                       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 or other jurisdiction of          (I.R.S. Employer Identification Number)
incorporation or organization)

                         215 SOUTHPORT DRIVE, SUITE 1000
                        MORRISVILLE, NORTH CAROLINA 27560
                        ---------------------------------
                     (Address of principal executive office)

                    Issuer's telephone number: (919) 461-0722


        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. [ ]

         The Registrant's revenue for the year ended December 31,1999 was
$4,260,000.

         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 22, 2000, was approximately
$29,130,306.
<PAGE>

         As of March 22, 2000, there were 15,022,284 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


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
which 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 on which any
forward-looking statement is based. Factors which 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, subscription
and pay-per-play games and services, including simulation, parlor, strategy,
role playing and action games through its Internet distribution infrastructure.
The Company is the preferred provider of online games for AT&T WorldNet, an
Internet service provider, has been contracted to provide online games for
America Online, the world's leading online Internet services company, operates
EarthLink's Games Arena, and provides content for Time Warner Inc.'s
ENTERTAINDOM site.

         During the year ended December 31, 1999, the Company:

     o   completed a shift in its business focus to an Internet-only strategy;

     o   sold certain assets relating to the retail CD-ROM portion of its
         business in order to focus its efforts exclusively on the development
         of its Internet properties and strategies;

     o   acquired MPG-Net, enabling the Company to

         o  implement the key elements of its fully-integrated online gaming
            service, including real-time chat, player tracking, customer e-mail,
            e-commerce, advertising, billing, database, management and
            marketing; and

         o  expand its online offerings from multiple individual online games to
            a comprehensive online gaming service incorporating a variety of
            community-building features; and

     o   changed its name to iEntertainment Network, Inc. and instituted a new
         management team.

         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. The Company's address is 215 Southport Drive,
Suite 1000, Morrisville, North Carolina 27560 and its telephone number is (919)
461-0722.

                                      -3-
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(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, subscription and
pay-per-play games and services, including simulation, parlor, strategy, role
playing and action games.

         The Company is the preferred provider of online games for AT&T
WorldNet, has been contracted to provide online games for America Online
("AOL"), the world's leading online Internet services company, operates
EarthLink's Games Arena, and provides content for Time Warner, Inc.'s
ENTERTAINDOM site. The Company seeks to establish itself as a major provider of
online gaming services for Internet service providers ("ISPs"), Internet portals
and online services in order to broaden its audience of users. GameHub, AT&T
WorldNet's co-branded online gaming service, was launched in January 1999 and is
currently being marketed by AT&T to new WorldNet subscribers as a premium
service included with their subscription. The GameHub site offers consumers a
mix of free and pay-per-play games in all categories, including strategy, role
playing, simulation, action and parlor games. In addition to games, GameHub will
offer chat rooms, forums and shopping areas. GameHub is expected to generate
revenue from subscriber premiums, e-commerce and advertising. GameHub
complements the Company's online gaming strategy by expanding its network of
player communities.

         Historically, the Company has generated revenue primarily from
developing, publishing and distributing simulation and strategy games on CD-ROM
for the PC platform. In June 1999, the Company sold certain assets related to
the retail CD-ROM portion of its business for $2,500,000 in cash to focus its
efforts exclusively on the development of its Internet properties and
strategies. By focusing on delivering realistic games with high quality
graphics, the Company believes it has developed strong brand recognition and
consumer loyalty among game enthusiasts.

         The Company introduced its first large-scale online multi-player game
(WarBirds) in April 1997 following the acquisition of Interactive Creations,
Inc. ("ICI"). WarBirds, 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.

         To further expand its customer base and brand recognition, the Company
has entered into a partnership with AOL to provide high-quality, large-scale
multi-player games for AOL's game channel. The Company launched Fighter Ops in
December 1999, a simplified, mass-market version of WarBirds, on AOL's games
channel. Raider Wars, scheduled to be launched during 2000, is an online space
combat simulation game that allows hundreds of players to fly different types of
spaceships against one another.

         The Company is a technological leader within the online gaming industry
with a number of leading edge online and multi-player gaming technologies which
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's MEGAvoice technology allows
groups of up to four players to engage in real-time voice communication over the
Internet while playing a game together.

         Through its acquisition of MPG-Net in February 1999, the Company
acquired the ICONS gaming services platform, which enables implementation of the
key elements of a fully-integrated online gaming service. These elements include
real-time chat, player tracking, customer e-mail, e-commerce, advertising,
billing, database management and marketing. The Company's ICONS platform allows
the Company to expand its online offerings from multiple individual online games
to a comprehensive online gaming service incorporating a variety of
community-building features.


                                      -4-
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         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
physically-distant players.

         The Internet and online services present a new platform on 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.

         Online gaming presents many distinct advantages for game developers and
publishers over traditional CD-ROM publishing. The online gaming model
eliminates traditional cost of sales such as product packaging, warehousing and
physical distribution, and minimizes distribution issues such as return
allowances and rebates. Online gaming can allow for higher margins and
encourages recurring revenues through subscription-based revenue models. Unlike
CD-ROM products which have a limited shelf life, online-only games are often
perpetual products which are continually under development and require
continuous updates and maintenance. Revenue sources in the online gaming model
include pay-for- play fees, subscriptions, e-commerce transaction fees,
advertising and direct merchandising. Online gaming presents more favorable
economics, eliminates distribution channel issues, provides for a larger number
of potential revenue sources and enables the publisher to maintain a more
intimate relationship with its customers.

         A 1998 Jupiter Communications report estimates that more than 3.7
million consumers in the United States are currently playing games over the
Internet, generating revenues of approximately $81 million in 1998, and projects
that 26.8 million consumers will generate $1.1 billion in revenues in 2002.
These figures include subscription and pay-for-play revenues generated from
online games and CD-ROM games with an online component, as well as advertising
revenues from online gaming sites. Jupiter expects that by 2002, consumer
revenues will account for $622 million, or 57% of total online gaming revenues.
Advertising, in the form of sponsorships, banners and interstitialis, is also
expected to become an important revenue stream for online gaming sites,
generating $464 million, or 43% of total online gaming revenues by 2002.

         The emerging popularity of online games is evidenced by the increasing
number of industry participants. 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. 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 of the order of 4/10th of a second, which


                                      -5-
<PAGE>

significantly affects the quality of multi-player action games. A majority of
the competitors vying for the on-line and Internet gaming market are focused on
multi-player action games which require low latency data links between the
players and the host. Online game networks include America Online's The Game
Parlor, Microsoft's Internet Gaming Zone, Gamesville, Pogo, Yahoo! Games and
Uproar.

         Traditional publishers of games for the PC platform are also
increasingly including options for online play in their game software.

         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. According to a study conducted by Jupiter Communications, by
offering free online play, publishers are able to increase retail sales of their
products by 10% to 15%.

         ONLINE PRODUCTS

         The Company acquired ICI in April 1997 as a vehicle to enter the online
gaming market. ICI had developed and launched a pioneer Internet gaming service
with the online-only game WarBirds. WarBirds has been named "Online Only Game of
the Year" every year since 1996 by PC Games magazine, and is recognized as one
of the world's leading real-time large-scale online multi-player games.

         The acquisition of MPG-Net provides the Company with the ICONS(TM)
fully integrated gaming network platform which is designed to seamlessly control
game play, player tracking, chat, advertising, billing and e-commerce. Using the
ICONS platform, the Company plans to position itself as a leading entertainment
destination on the Web by expanding the scope of its services to include
advertising and e-commerce and enhancing the community-building features of its
gaming networks, such as chat and messaging.

         The Company is the preferred provider of online games for AT&T
WorldNet's GameHub, EarthLink's Games Arena, and the iEntertainment Network. The
Company also provides Internet content for America Online and Time Warner,
Inc.'s ENTERTAINDOM site. The acquisition of MPG-Net and its technology
portfolio enabled the Company to accelerate the development of its online game
service offerings and its launch of iEntertainment Network ("iEN"), its fully
integrated online gaming service, in the first quarter of 1999.

         IEN

         The Company currently offers six real-time large-scale online games.
WarBirds is available on a subscription basis. The Company currently offers
players three subscription options. Users choose to pay $9.95, $19.95 or $29.95
for five, thirteen or twenty hours, respectively, of game play per month. Users
pay an additional $1.99 for each hour played beyond this subscription
allocation. The Company believes that this pricing plan caters to the needs of a
variety of players ranging from novices to experts and provides players with an
incentive for added 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 is one of the few online developers that have
the knowledge, skill and experience necessary and are recognized within the
industry for their 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, unlike the
mission-oriented or level-based


                                      -6-
<PAGE>

CD-ROM games, they have a perpetual shelf life. 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, 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. WarBirds, 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 players online at one time. WarBirds 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, the Company's MEGAvoice
technology, which allows groups of up to four players to engage in real-time
voice communication, and the Company's MEGAplayer technology, which minimizes
latency and onscreen "warping", add to the realism of the playing experience.

         WarBirds is played on a continuous basis, allowing players to enter the
game 24 hours a day, seven days a week. WarBirds also incorporates a number of
features that are conducive to community-building: players can fly in a
squadron, participate in organized special events and advance and build careers
as pilots. To encourage recurring play, the Company promotes the development of
communities of regular WarBirds players that participate in special promotional
events such as squadron conferences, conventions and competitions around the
world. WarBirds has been named "Online Only Game of the Year" every year since
1996 by PC Games, and in 1996 and 1997 by Computer Games/Strategy Plus.

         DAWN OF ACES. Dawn of Aces is a WWI air combat simulation game based on
the WarBirds engine. Dawn Of Aces places players in the middle of an ongoing WWI
air battle over Continental Europe and carries a more historic feel than
WarBirds. Dawn of Aces 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.

         iEN, GameHub, and Games Arena are full-featured entertainment
destinations containing software downloads, free and premium games, news updates
for the computer gaming and entertainment industry, online advertising,
personalized portals providing daily interest content, such as national news,
weather, sports and stocks. These destinations feature:

         Premium Games: WarBirds(TM), the award-winning World War II flight
         simulation voted "Online Game of the Year" for the third consecutive
         year; WarBirds(TM) Air Combat; Dawn of Aces(TM), an exciting World War
         I air combat simulation; ShockForce(TM), an action-packed futuristic
         hovertank game; and Drakkar II, a medieval role playing game.

         Free Games: Bingo, Bingo eXtreme, Wild Card Games (to include Bridge,
         Hearts, Pinochle, Rummy and Spades), Video Poker, Checkers, Empire
         Builder, Operation Market Garden, Minion Hunter, Backgammon, FiefQuest,
         Chess, Wari, Tic Tac Toe, Video Slots, Blackjack, Roulette, Euchre,
         Four in a Row, SuperTris, Diceridoo, Shuffle Puzzle, Word Scrambler and
         Word Painter.

         The Company offers a three- tier service structure in order to expand
its user base and build a successful mainstream online entertainment service.

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         The first tier of the Company's services consists of free entertainment
in the form of chat, messaging and online parlor games such as chess, checkers,
Poker, Hearts, Spades, Bingo and backgammon to attract a large user audience to
the Company's site. Following the lead of major Internet portals which have used
free 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 of services consists 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. Players are charged $9.95 per month for unlimited
usage of these services.

         The third-tier of the Company's 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 and Dawn of Aces. 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 which 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 and draw
revenue from advertising, sponsorship and e-commerce offerings. The Company has
launched an online store which sells both Company and third-party products.

         CD-ROM PRODUCTS

         In June 1999, the Company sold certain assets related to the retail
CD-ROM portion of its business for $2,500,000 in cash to focus its efforts
exclusively on the development of its Internet properties and strategies.

         Consistent with the Company's new Internet-only strategy, in the fourth
quarter of 1999, the Company decided to discontinue its overseas operations in
Germany and the United Kingdom effective in early 2000.

         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 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 exist. 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 filed a patent application on its MEGAplayer technology, which
minimizes latency and addresses problems such as "warping", which is inherent in
high and variable latency networks such as the Internet.

         As part of the MPG-NET acquisition, the Company obtained the ICONS
online gaming platform which provides features such as player tracking, chat,
messaging and billing and enables advertising and e-commerce.


                                      -8-
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The acquisition of MPG-Net's ICONS software technology enables the Company to
expand its online offering from multiple individual online games to a
comprehensive online gaming service incorporating a variety of
community-building features. The ICONS system involves the use of trained
systems operators available online within the Company services to offer tours,
answer questions and to generally assist both new visitors and service members
with the utilization of services and the purchase of various products, games and
game-related merchandise.

         The Company regards its copyrights, service marks, trademarks, trade
secrets and other intellectual property as critical to its success. The Company
relies on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its intellectual property rights. Despite its
precautions, it may be possible for third parties to obtain, copy and use its
intellectual property without authorization. Unauthorized copying is common
within the software industry. A significant amount of unauthorized copying of
the Company's products could adversely affect its business. Furthermore, the
validity, enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. As a result, the
Company may not be able to secure adequate protection of its intellectual
property rights. The Company's inability to effectively protect its intellectual
property rights would have a material adverse effect on its business, results of
operations and financial conditions.

         Effective trademark protection may not be available in all the
countries in which the Company conducts business. The global nature of certain
wide area networks, particularly the Internet, makes it virtually impossible to
control the ultimate destination of the Company's products. Policing
unauthorized use of its marks is also difficult and expensive. In addition, it
is possible that the Company's competitors will adopt product or service names
similar to the Company's, thereby impeding its ability to build brand identity
and possibly leading to customer confusion.

         To license its products to end users, the Company primarily relies 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. The
Company also intends to continue to license technology from third parties. The
market in which the Company operates is continually and rapidly evolving, and
the Company may need to license additional technologies to remain competitive.
In addition, the Company may fail to successfully integrate any licensed
technology into its services. The Company's inability to obtain any of these
licenses could delay product and service development until alternative
technologies can be identified, licensed and integrated.

         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 the Company in the future with respect to current or
future products. As is common in the industry, from time to time, the Company
receives notices from third parties claiming infringement of intellectual
property rights of such parties. The Company investigates these claims and
responds as it deems appropriate.

         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 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 playtest staff and other Company employees.
Products are then submitted to groups of up to 50


                                      -9-
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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. This
competition is intense and is expected to increase significantly in the future
as the number of entertainment-orientated Web sites continue to grow. The
Company's success, to date, 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's primary direct competitors include:

     o   Gamesville/Lycos;

     o   Pogo;

     o   Zone.com;

     o   Yahoo! Games; and

     o   Uproar.com

         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:

     o   significantly greater financial, technical, marketing, sales and
         customer support and other resources; and

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

      These competitors may also be able to:

     o   undertake more extensive marketing campaigns for their brands and
         services;

     o   adopt more aggressive advertising pricing policies;

     o   use superior technology platforms to deliver their products and
         services; and

     o   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.


                                      -10-
<PAGE>

         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 materially adversely affect 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. 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 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 WEB SITES 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, or 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 result in liability to the Company,
it 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

                                      -11-
<PAGE>

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.

         PRIVACY CONCERNS. The United States Federal Trade Commission, or 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:

     o   give adequate notice to consumers regarding information collection and
         disclosure practices;

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

     o   provide consumers with access to their personal information and with
         the ability to rectify inaccurate information;

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

     o   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 in part based 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,


                                      -12-
<PAGE>

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.

         DATA PROTECTION Legislative proposals have been made by the United
States government that would afford broader protection to owners of databases of
information such as stock quotes and sports scores. This protection already
exists in the EU. If enacted, this legislation could result in an increase in
the price of services that provide data to Web sites and could create potential
liability for unauthorized use of this data. Either of these possibilities could
have a material adverse effect on the Company's business, results of operations
and financial condition.

         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. Although the United States Congress recently placed
a three-year moratorium on state and local taxes on Internet access or on
discriminatory taxes on electronic commerce, existing state or local laws were
expressly excepted from this moratorium. Further, once this moratorium is
lifted, some type of federal and/or state taxes may be imposed upon Internet
commerce. 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 domain names may lose their value, or the Company may
not 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
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 from 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 17, 2000, the Company had 54 full-time employees and two
part-time employees, of which six employees in Europe are serving out their
termination notice period in connection with discontinuing the Company's
operations in Europe. None of the Company's employees is party to any collective
bargaining agreements or labor unions. The Company has not experienced any work
stopages and believes that its relations with its employees are good.

ITEM 2.  DESCRIPTION OF PROPERTY

         The Company leases approximately 15,000 square feet in an office park
in Morrisville, North Carolina. The lease is non-cancelable, expires in May 2001
and has annual rental payments of approximately $210,000. All


                                      -13-
<PAGE>

of the Company's operations are conducted from this facility. The Company
believes that this facility is 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.

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

         At an annual shareholders meeting held on December 30, 1999, the
following matters were approved:

     o   election of five directors;

     o   approval and ratification of an amendment to the Company's Articles of
         Incorporation to change the Company's name to iEntertainment Network,
         Inc.;

     o   approval and ratification of an amendment to the Company's 1998 Stock
         Option Plan to increase the number of shares of common stock reserved
         for issuance under the plan from 800,000 to 1,800,000 shares;

     o   approval and ratification of the Company's Series D preferred stock
         financing; and

     o   approval and ratification of the appointment of Ernst & Young LLP.

The respective vote tabulations are detailed below:

Proposal 1                     For                 Withhold
----------                     ---                 --------

Jacob Agam                     8,011,600             7,300
Marc S. Goldfarb               8,002,572            16,328
W. Joseph McClelland           8,008,637            10,263
Michael Pearce                 8,015,300             3,600
J.W. Stealey                   8,002,612            16,288


Proposal 2                     For                 Against             Abstain
----------                     ---                 -------             -------

Amendment to the               8,015,800           2,400               700
Articles of Incorporation

Proposal 3                     For                 Against             Abstain
----------                     ---                 -------             -------

Amendment to the 1998          7,981,685           28,965              8,250
Stock Option Plan

Proposal 4                     For                 Against             Abstain
----------                     ---                 -------             -------

Series D preferred stock       7,995,902           14,098              8,900
financing

Proposal 5                     For                 Against             Abstain
----------                     ---                 -------             -------

Appointment of Ernst &         8,017,600           750                 550
Young, LLC

                                      -14-
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         On October 14, 1999 the Company's common stock began trading on the
Nasdaq SmallCap Market under the symbol "IENT." From July 22, 1998 (the date of
the Company's initial public offering) to October 14, 1999, the Company's common
stock traded on the Nasdaq National Market under the ticker symbol "IMGK." Prior
to July 22, 1998, there was no public market for the Company's common stock. The
following sets forth the quarterly high and low bid prices during each of the
six quarters shown as reported on Nasdaq. 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

               September 30, 1998             $14.00                   $6.50
               December 31, 1998              $ 6.50                   $4.13
               March 31, 1999                 $ 7.75                   $3.50
               June 30, 1999                  $ 4.03                   $2.06
               September 30, 1999             $ 3.25                   $0.50
               December 31, 1999              $ 2.56                   $0.75

         On March 22, 2000, the closing price of the Company's common stock on
the Nasdaq SmallCap Market was 3 17/32 per share. The Company has approximately
175 holders of record of its common stock and estimates that it has
approximately 3,000 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 issue any equity securities during the quarter
ended December 31, 1999 which were not registered under the Securities Act of
1933, as amended, except that, in:

     o   October 1999, the Company issued warrants to purchase 100,000 shares of
         its common stock to Royce Investment Group, Inc. for consulting
         services provided by Royce Investment Group, Inc. to the Company;

     o   November 1999, RGC International Investors, LDC (Rose Glen) exchanged
         the remainder of its unconverted debenture, which, as of September 30,
         1999, had an outstanding principal balance of $3,310,845, plus accrued
         interest and penalties, for 3,310.845 shares of the Company's Series D
         Preferred Stock with a stated value of $1,000 per share, and which is
         convertible into shares of the Company's common stock;

     o   November 1999, Rose Glen purchased an additional 1,100 shares of the
         Company's Series D Preferred Stock for $1,100,000;

     o   November 1999, Vertical Financial Holdings purchased 700,000 shares of
         the Company's common stock for $700,000;

     o   November 1999, Value Management & Research AG purchased 400,000 shares
         of the Company's common stock for $400,000; and

                                      -15-
<PAGE>

     o   November 1999, J.W. Stealey, the Company's former Chief Executive
         Officer and one of the Company's directors, arranged for the Company's
         release from the line of credit indebtedness to BB&T in the amount of
         $1,000,000 in exchange for 1,000,000 shares of the Company's common
         stock. The Company also paid $15,000 due on this line. In addition, as
         part of these transactions, Mr. Stealey's resignation agreement dated
         August 16, 1999 was amended, such that his consulting services are no
         longer being used and the sole remaining consideration due to him was
         reduced to one lump sum payment of $200,000 (less the value of 12
         months health insurance payments and car lease payments totaling
         approximately $20,000) and 50,000 shares of the Company's common stock
         valued at $62,500. The Company has agreed to convey to Mr. Stealey all
         trademarks and available rights to the name Interactive Magic. Mr.
         Stealey agreed to waive the interest due him from us in the amount of
         $183,000 under the terms of the line of credit with BB&T that he had
         personally guaranteed.

          In addition, in January 2000, the Company issued an aggregate of
77,420 shares of its common stock to Tech Data, in partial payment of amounts
owed by the Company to Tech Data.

         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 4(2) or Regulation D of the Securities Act. The sale of
such securities was without the use of an underwriter, and the certificates for
the securities contain a restrictive legend permitting the transfer of such
securities only upon registration of the securities or an exemption under the
Securities Act.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         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 Company is the preferred provider of online games for AT&T
WorldNet, has been contracted to provide online games for America Online
("AOL"), the world's leading online Internet services company, operates
EarthLink's Games Arena, and provides content for Time Warner, Inc.'s
ENTERTAINDOM site. The Company seeks to establish itself as a major provider of
online gaming services for Internet service providers("ISPs"), Internet portals
and online service in order to broaden its audience of users. GameHub, AT&T
WorldNet's co-branded online gaming service, was launched in January 1999 and is
currently being marketed by AT&T to new WorldNet subscribers as a premium
service included with their subscription. The GameHub site offers consumers a
mix of free and pay-per-play games in all categories, including strategy, role
playing, simulation, action and parlor games. GameHub complements the Company's
online gaming strategy by expanding its network of player communities.

         The Company acquired MPG-Net, an online game company, in February 1999
and in June 1999 the Company sold its rights for the development of certain
CD-ROM games. The Company retained the online rights for these games. The sale
of the development rights marked the Company's exit from the CD-ROM business and
its focus on the development of its Internet properties and strategies. These
transactions cause a lack of year to year comparability of the fiscal years
ended December 31, 1998 and 1999 because of the following:

     o   the Company's results of operations for 1998 include a full year of
         operations of its CD-ROM business, while its results of operations for
         1999 include only six months of operations of this business; and

     o   the Company's results of operations for 1999 include advertising
         revenues related to its online game activities, while its results of
         operations for 1998 do not include these revenues.

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


                                      -16-
<PAGE>

         RESULTS OF OPERATIONS

FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1998

NET REVENUES. During 1999, 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:

     (i)  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;
     (ii) 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. This reporting approach, although it does reduce the Company's
reported revenues by the amount of the agency commission, has no impact on cash
or earnings. For example, during 1999, the Company reported net advertising and
contract revenue of $1,351,000, and recorded $824,000 of advertising agency
commission expense. If the Company had recognized revenue on a gross basis, that
is prior to deduction for third party advertising commission, advertising and
other revenue would have been $2,175,000. In those instances where the Company's
own internal personnel sells advertising direct to the advertiser, there is no
outside sales commission, and therefore, revenues are recognized on a gross
basis which is consistent with the cash received.

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

Net revenues decreased by $8.3 million, or 66%, from $12.6 million in 1998 to
$4.3 million in 1999. The decline in revenue was due primarily to the Company's
exit from the CD-ROM business, which was only partially offset by increased
advertising and other revenue related to the Company's Internet and online games
and services. This increase in advertising and other revenue was due to the
significant number of ad impressions and clicks generated at the Company's
sites. This growth in advertising activity was a result of the Company's
strategic relationships with AT&T WorldNet and Earthlink, as well as the
development of the Company's iEN site; coupled with its full array of free game
content.

The following table summarizes the changes in revenue from 1998 to 1999:

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

Revenue for 1998                                     $12,566
Decrease in CD-ROM revenue                          (  8,567)
Increase in Online revenue                                 86
Decrease in Royalty & Licensing                     (  1,176)
Increase in Advertising & Other                         1,351
                                                    ---------
Revenue for 1999                                    $  4,260


COST OF REVENUES. Cost of revenues consist of costs of products sold (including
cost of Internet access) and royalties and amortization of software development
costs. Cost of revenues in 1999 decreased by $3.2 million, or 53%, from $6.1
million in 1998 to $2.9 million in 1999. The decrease reflects the substantial
decrease in CD-ROM shipments, offset partially by the expenses in the second
quarter for the establishment of reserves and inventory write-downs associated
with the exit from the CD-ROM business.

                                      -17-
<PAGE>

OPERATING EXPENSES. Operating expenses decreased $2.5 million, or 15%, from
$17.2 million in 1998 to $14.7 million in 1999. The decline was due primarily
due to the exit from the CD-ROM business which resulted in lower sales,
marketing, and product development expenses, offset slightly by increased
general and administrative expenses, as well as goodwill amortization relating
to the Company's acquisitions during 1999.

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

Operating Expenses for 1998                                  $17,157
Decrease in Sales and Marketing                             (  4,079)
Decrease in Product Development                             (    996)
Increase in General and Administrative                          1,245
Increase in Goodwill Amortization                               1,332
                                                            ---------
Operating Expenses for 1999                                  $ 14,659


SALES AND MARKETING. Sales and marketing expenses decreased 4.1 million, or 48%,
from $8.5 million in 1998 to $4.4 million in 1999 due primarily to the Company's
exit from the CD-ROM business, as well as to a reduction in market development
spending in 1999 compared to 1998 as a result of the change in the Company's
business focus.

PRODUCT DEVELOPMENT. Product development expenses decreased by $1.0 million, or
17%, from $6.0 million in 1998 to $5.0 million in 1999 due primarily to the
Company's exit from the CD-ROM business, which more than offset the increased
spending for the Company's development of on-line games.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$1.2 million, or 46%, from $2.7 million in 1998 to $3.9 million in 1999 due
primarily to the additional expenses of being a publicly-held company and
relocation expenses relating to the consolidation of the Company's Florida and
Texas operations to North Carolina, as well as employee severance related to
such consolidation.

GOODWILL AND AMORTIZATION. There was $1,332,000 of expense in 1999 as compared
to no expense in 1998, with the majority of the expense due to the goodwill from
the 1999 MPG-Net acquisition amortized to income over 36 months.

OTHER EXPENSE. Other expense increased by $3.5 million, or 761%, from $.5
million in 1998 compared to $4.0 million in 1999. This increase was due to the
interest expense relating to the recognition of the beneficial conversion
feature of the $4,000,000 convertible debenture, and related warrants, which
were issued in the first quarter of 1999, as well as the interest expense on
these debentures, which was only partially offset by the gain on the sale of the
CD-ROM business in the second quarter of 1999.

INCOME TAX EXPENSE. The Company recorded $58,000 in income tax expense in 1999
compared to $28,000 for the same period in 1998. The entire tax expense in each
period was attributable to earnings in Europe.

EXTRAORDINARY GAIN/(LOSS). The Company recorded an extraordinary gain in the
amount of $5.7 million related to the extinguishment of the outstanding
debentures in 1999. In settlement of the outstanding debenture, the Company used
the fair value of the Series D Redeemable Convertible Preferred Stock and the
beneficial conversion feature of the Preferred Stock as the extinguishment
proceeds. The carrying value of the debenture and the intrinsic value of the
beneficial conversion price feature in the debenture exceeded the aggregate
extinguishment proceeds, resulting in an extraordinary gain. The 1998
extraordinary loss arose from the extinguishment of outstanding notes payable
with proceeds from the Company's July 1998 IPO. At the date of this
extinguishment, the outstanding principal of the notes payable were in excess of
the carrying values, resulting in an extraordinary loss.

                                      -18-
<PAGE>

         LIQUIDITY AND CAPITAL RESOURCES

         The Company's capital requirements have been and will continue to be
significant, and, 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, 1999, the Company had cash and cash
equivalents of $3.1 million. The following is a condensed table of cash on hand
and major cash flow items:

                                                      ($000)
                                                      ------

Cash on hand, December 31, 1998                    $  2,943

Net loss                                            (11,663)
Add: non-cash charges and expenses                    9,278
Less:  non-cash gains                                (6,517)
Changes in working capital                            1,688
                                                   --------
              Net Cash Used in Operations            (7,214)
Net proceeds from sale of CD-Rom                      2,315
Net proceeds from issuing convertible debentures      3,660
Other investing and financing activities              1,410

Effect of exchange rates on cash and cash
equivalents                                             (22)
                                                   --------
Net change in cash                                      149
                                                   --------
Cash on hand, December 31, 1999                    $  3,092


         Net cash used in operating activities totaled $7.2 million during 1999
compared to $10.7 million during 1998. This decrease was primarily due to
exiting the CD-ROM business and increasing the focus on a pure Internet strategy
during 1999, resulting in reduced operating cash requirements..

         Net cash provided by investing activities totaled $1.8 million during
1999 compared to net cash used in investing activities of $2.0 million during
1998 primarily as a result of the net proceeds received by the Company from the
sale of its CD-ROM assets. Net cash used in investing activities in 1998
resulted primarily from software development costs related to the Company's
CD-ROM business.

         Net cash provided by financing activities amounted to $5.6 million 1999
as compared to net cash provided by financing activities of $15.3 million during
1998. Net cash provided by financing activities during 1999 resulted primarily
from the issuance of the $4 million convertible debenture and related warrants
during the first quarter of 1999 and the issuance of the Company's common stock
and convertible preferred stock during 1999, partially offset by the repayment
of lines of credit and capital lease obligations. During 1998, net cash provided
by financing activities was provided primarily by net proceeds received from the
Company's initial public offering in the amount of $20.7 million partially
offset by a repayment of shareholder loans, long-term bank loans and lines of
credit.

         In January 1999, the Company issued a $4.0 million convertible
debenture for net cash proceeds of $3.7 million to RGC International Investors,
LDC (Rose Glen). The Company also issued 200,000 warrants to purchase shares of
its common stock to the broker in the transaction. The debenture accrued
interest at an annual interest rate of 6% and matured on January 25, 2002. Rose
Glen could convert all or any portion of the debenture into the Company's common
stock where the number of shares to be issued would be determined by dividing
the principal plus interest due by the conversion price. The conversion price
would be equal to the lesser of a conversion price ranging from 77% to 93% of
the market price of the Company's common stock (as defined in the securities
purchase agreement) or a conversion price ranging from 104% to 120% of a fixed
conversion price (as defined in


                                      -19-
<PAGE>

the securities purchase agreement). During September 1999, Rose Glen converted
$689,000 of principal and the related accrued interest of $142,000 into
1,683,786 shares of the Company's common stock.

         In November 1999, the Company extinguished the remainder of its
obligation to Rose Glen under the debenture in exchange for 3,810.844 shares of
the Company's newly created Series D Preferred Stock with a stated value of
$1,000 per share. The unconverted debenture had an outstanding principal balance
of $3,310,844. Rose Glen agreed to waive $260,000 of the $760,000 related
accrued interest. The Company recognized a $5,662,000 extraordinary gain on the
extinguishment of debt. Interest expense related to the debenture totaled
$4,552,000, which consisted of $2,933,000 related to the beneficial conversion
feature of the debenture, $291,000 related to the amortization of the debt
discount, $427,000 related to the accretion of the contingently issuable
warrants to the face value of the debenture, and $901,000 related to interest
and penalties. In addition, in November 1999, Rose Glen purchased 1,100 shares
of Series D Preferred Stock for $1,100,000. The Series D Preferred Stock is
convertible into shares of the Company's common stock at conversion price of $1
per share of common stock. The number of shares of common stock issuable upon
conversion of a share of Series D Preferred Stock increases over time to provide
the holder with additional shares of common stock equal to a 6% annual return
since November 1999 and any penalty amounts otherwise due thereunder. Subject to
certain conditions, the Series D Preferred Stock will automatically convert into
common stock in November 2002.

         In February 1999, the Company completed the acquisition of MPG-Net,
Inc. 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.

         In June 1999, the Company sold its rights under certain development
contracts for CD-ROM products between the Company and third party developers to
Ubi Soft Entertainment S.A. for $2.5 million. The Company maintained a license
to use these products for Internet gaming.

         In August 1999, the Company acquired the assets of Virtual Business
Designs, Inc., doing business as The Gamers Net, for 107,143 shares of the
Company's common stock valued at approximately $288,000.

         In November 1999, Vertical Financial Holdings purchased 700,000 shares
of the Company's common stock for $700,000.

         In November 1999, Value Management & Research AG purchased 400,000
shares of the Company's common stock for $400,000.

         During 1999, the Company maintained a revolving line of credit with
BB&T for up to $2,750,000. In November 1999, J.W. Stealey, the former Chairman
and Chief Executive Officer of the Company, arranged for the release of the
Company from the line of credit indebtedness to BB&T in the amount of $1,000,000
in exchange for 1,000,000 shares of common stock. The Company also paid $15,000
due on this line. Interest expense on this line of credit was $89,000 and
$158,000 for the years ended December 31, 1999 and 1998, receptively. In
addition, as part of these transactions, Mr. Stealey's resignation agreement
dated August 16, 1999 was amended such that his consulting services are no
longer being used and the sole remaining consideration due to him has been
reduced to one lump sum payment of $200,000 (less the value of 12 months health
insurance payments and car lease payments totaling approximately $20,000) and
50,000 shares of the Company's common stock valued at $62,500. This payment was
made in November 1999. The Company agreed to convey to Mr. Stealey all
trademarks and available rights to the name Interactive Magic. Mr. Stealey
agreed to waive the interest due to him from the Company in the amount of
$183,000 under the terms of the line of credit with BB&T that he had personally
guaranteed; in consideration of which the Company incurred additional interest
expense of $59,000 for 1999 and $107,000 for 1998. The amount of waived interest
has been reflected as a credit to additional paid-in capital.

         The Company's success is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to obtain
additional financing or refinancing as may be required, and ultimately to attain
profitability. Management expects the disposition of its CD-ROM operations will
reduce its operating losses and expects to be able to attract additional
capital, if needed, for its online operations. However, there can be no
assurance that management's plans will be executed as anticipated.

                                      -20-
<PAGE>

         The Company believes that it has sufficient cash resources to fund the
Company's operations through at least the end of fiscal 2000. The Company does
not have any current arrangements or commitments for any future financing. The
Company may not be able to obtain sufficient additional financing to satisfy its
cash requirements. The Company may be required to obtain financing on terms that
are not favorable to it and its shareholders. If the Company is unable to obtain
additional financing when needed, it may be required to delay or scale back
product development and marketing programs in order to meet its short-term cash
requirements, which could have a material adverse effect on its business,
financial condition and results of operations.

         The Company's forecast for the period of time through which its
financial resources will be adequate to support its operations is a
forward-looking statement that involves risks and uncertainties, and actual
results could vary. The factors described in the preceding paragraphs will
impact the Company's future capital requirements and the adequacy of its
available funds.

UNAUDITED PRO FORMA FINANCIAL DATA

The following unaudited pro forma consolidated financial data present the
unaudited pro forma condensed consolidated balance sheet of iEntertainment
Network, Inc. (f/k/a Interactive Magic, Inc.) at December 31, 1999 and the
unaudited pro forma condensed consolidated statement of operations for the year
then ended. The unaudited pro forma condensed consolidated balance sheet gives
effect to the registration on March 17, 2000 of sufficient shares to effect the
conversion of the Series D Convertible Preferred Stock, thereby eliminating the
redemption feature that was not within the control of the Company, as if it had
occurred on December 31, 1999. The unaudited pro forma consolidated statement of
operations data gives effect to the acquisition of MPG-NET and the
recapitalization of the Company as if they had occurred on January 1, 1999. The
November 1999 recapitalization resulted in the settlement of the outstanding
convertible debenture, issuance of 1,100,000 shares of common stock to certain
stockholders and the release of the BB&T line of credit indebtedness and the
former chief executive officer's personal guarantee of such indebtedness.

The unaudited pro forma consolidated financial data are based on the historical
consolidated financial statements of iEntertainment Network, Inc. The unaudited
pro forma financial data do not purport to represent what iEntertainment
Network's consolidated financial position or results of operations would
actually have been if the transactions had in fact occurred on the dates
indicated and are not necessarily representative of consolidated financial
position or results of operations at any future date or for any future period.


                          IENTERTAINMENT NETWORK, INC.
                 Unaudited Consolidated Pro Forma Balance Sheet
                        (in thousands, except share data)

<TABLE>
<CAPTION>
<S>                                                           <C>                             <C>

                                                                            Pro Forma
                                                            Historical     Adjustments         Pro Forma
                                                          -------------------------------------------------
Assets
Current assets:
   Cash and cash equivalents                                  $    3,092                      $    3,092
   Trade receivables, net of allowances of $241                      421                             421
   Advance royalties, software development costs and                 230                             230
    other, net
                                                          ---------------                 -----------------
Total current assets                                               3,743                           3,743

Property and equipment, net                                          714                             714

Noncurrent assets:
   Royalties receivable                                               80                              80

                                      -21-
<PAGE>

   Goodwill, net of accumulated amortization of $1,332             3,329                           3,329
   Other                                                              10                              10
                                                          -------------------------------------------------
Total noncurrent assets                                            3,419                           3,419
                                                          -------------------------------------------------
Total assets                                                  $    7,876                      $    7,876
                                                          =================================================
</TABLE>



                          IENTERTAINMENT NETWORK, INC.
                 Unaudited Consolidated Pro Forma Balance Sheet
                        (in thousands, except share data)
<TABLE>
<CAPTION>

                                                                        Pro Forma
                                                       Historical      Adjustment        Pro Forma
                                                     -------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S>                                                     <C>                              <C>
   Accounts payable and accrued expenses                $    2,258                       $    2,258
   Royalties and commissions payable                           120                              120
   Current portion of capital lease obligations                 55                               55
                                                     -------------------------------------------------
Total current liabilities                                    2,433                            2,433

Noncurrent liabilities:
   Capital lease obligations, less current portion              29                               29
                                                     -----------------------------    ----------------
Total noncurrent liabilities                                    29                               29

Series D Redeemable Convertible Preferred Stock,
   $.10 par value; liquidation and stated value of
   $1,000 per share, plus accumulated accretion;
   4,911 shares authorized, issued and outstanding           4,951      (4,951)  (a)           -
   at December 31, 1999

Stockholders' equity:
Series D Convertible Preferred Stock, $.10 par
   value; liquidation and stated value of $1,000 per
   share, plus accumulated accretion; 4,911 shares
   authorized, issued and outstanding at December             -            491   (a)            491
   31, 1999, pro forma
   Common stock, $.10 par value; 50,000,000 shares
      authorized; 14,722,203 shares issued and               1,472                            1,472
      outstanding
   Additional paid-in capital                               36,672       4,460   (a)         41,132
   Accumulated deficit                                     (37,565)                         (37,565)
   Accumulated other comprehensive loss                       (116)                            (116)
                                                     -----------------------------    ----------------
Total stockholders' equity                                     463       4,951                5,414
                                                     -------------------------------------------------
Total liabilities and stockholders' equity              $    7,876          -            $    7,876
                                                     =================================================
</TABLE>


                                      -22-
<PAGE>

(a)  Reflects reclassification of the Series D redeemable convertible preferred
     stock to permanent equity due to the registration of sufficient shares to
     effect the conversion of the Series D convertible preferred stock, which
     occurred on March 17, 2000, thereby removing the redemption feature that
     was not within the control of the Company.



                          IENTERTAINMENT NETWORK, INC.

       UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1999
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
<S>     <C>


                                                                              PRO FORMA
                                                          HISTORICAL           ADJUSTMENTS           PRO FORMA

Net revenues:
      CD-ROM product sales                            $        610    $         --       $        610
      Online sales                                           1,859              17(c)           1,876
      Advertising and contract revenue                       1,351              77(c)           1,428
      Royalties and licenses                                   440              --                440
                                                      ------------    ------------       ------------
Total net revenues                                           4,260              94              4,351

Cost of revenues:
      Cost of products and services                          2,516              12(c)           2,528
      Royalties and amortized software costs                   341               3(c)             344
                                                      ------------    ------------       ------------
Total cost of revenues                                       2,857              15              2,872

Gross profit                                                 1,403              79              1,482

Operating expenses:
      Sales and marketing                                    4,411              44(c)           4,455
      Product development                                    4,987             135(c)           5,122
      General and administrative                             3,929             187(c)           4,116
      Goodwill amortization                                  1,332             173(c)           1,505
                                                      ------------    ------------       ------------
Total operating expenses                                    14,659            (539)            15,198

Operating loss                                             (13,256)           (460)           (13,716)

Other (income) expense:
      Interest expense - third parties                       4,649          (3,593)(a)            989
                                                                                                  (67)(b)
      Interest expense - related parties                       130             (57)(b)             73
      Other                                                   (768)             --               (768)
                                                      ------------    ------------       ------------
Total other (income)                                         4,011          (3,717)               294
      expense

Income (loss) before income taxes                          (17,267)          3,257            (14,010)
      and extraordinary items
Income tax expense                                             (58)           --                  (58)
                                                      ------------    ------------       ------------
Income (loss) before extraordinary item                    (17,325)          3,257            (14,068)

                                      -23-
<PAGE>

Pro forma per share data:
      Loss before extraordinary item                       (17,325)             --            (14,068)
      Accretion of Series D Redeemable Convertible             (40)           (255)(d)           (295)
      Preferred Stock                                 ------------    ------------       ------------

Loss before extraordinary items available                  (17,365)           (255)      $    (14,363)
                                                      ------------    ------------       ------------
      to common stockholders

Pro forma basic loss per share before                $       (1.51)                      $      (1.08)
                                                      ------------                       ------------
      extraordinary item

Weighted average shares used in computing pro forma     11,448,186             (e)         13,336,953
      basic loss  per share before extraordinary      ------------                       ------------
      item
</TABLE>


                          iEntertainment Network, Inc.

        Notes to Unaudited Condensed Consolidated Statement of Operations

                          Year ended December 31, 1999

     a)  Reflects the reduction in interest expense related to the
         extinguishment of the remainder of the Company's obligation to the
         holder of a convertible debenture which, at November 11, 1999, had an
         outstanding principal balance of approximately $3.3 million and a net
         carrying value of $2.2 million, in exchange for 3,810.844 shares of the
         Company's newly created Series D Redeemable Convertible Preferred Stock
         ("Series D Preferred") with a stated value of $1,000 per share. The
         Company also issued 1,100 shares of Series D Preferred to the holder of
         the debenture for $1.1 million. At the date of extinguishment, accrued
         interest and penalties related to the debenture totaled $760,000. The
         Company recognized an extraordinary gain of $5.7 million as a result of
         this extinguishment. Interest expense relating to the portion of the
         debt extinguished totaled $3,593,000 for the year ended December 31,
         1999.

     b)  Reflects the reduction in interest expense related to (1) the former
         chief executive officer's ("CEO") assumption of the Company's line of
         credit indebtedness to a bank in the amount of $1,000,000 in exchange
         for 1,000,000 shares of common stock and the (2) the interest expense
         related to the former CEO's guarantee of the Company's line of credit.
         The former CEO also agreed to waive interest due him from the Company
         in the amount of $183,000 related to a personal guarantee of the
         Company's line of credit. Interest expense under this guarantee totaled
         $57,000 for the year ended December 31, 1999. Interest expense on the
         portion of the line of credit indebtedness assumed by the former CEO
         totaled $67,000 for the year ended December 31, 1999.

     c)  Reflects the acquisition of MPG-Net, Inc., Multiplayer Games Network,
         Inc. and Tantalus, Inc. (collectively referred to as "MPG-Net") as if
         it had occurred on January 1, 1999. Adjustments include the operations
         of MPG-Net from January 1, 1999 through February 12, 1999, excluding
         interest expense to related parties on debt that was settled during the
         acquisition and including the amortization of goodwill related to the
         acquisition.

     d)  Reflects the accretion of the Series D Redeemable convertible preferred
         stock as if the shares were outstanding for the entire period.

     e)  Reflects the issuance of 750,000 shares of common stock in connection
         with the acquisition of MPG-Net, the issuance of 1,000,000 shares of
         common stock to the former CEO for the assumption of the Company's line
         of credit indebtedness and the issuance of 1,100,000 shares of common
         stock to a certain stockholders as if these shares were outstanding for
         the entire period.


                                      -24-
<PAGE>
         YEAR 2000 ISSUE

         Prior to January 1, 2000, the Company conducted a review of its
products and operating systems to identify those products and systems which
could be affected by the potential Year 2000 problem. The Company's products are
of a nature that they are not date dependent or subject to failure because of
Year 2000 issues. As a result, the Company believes that all of its products and
operating systems were assessed, and if necessary, remedied to be Year 2000
compliant.

         The Company has developed a contingency plan to deal with certain
critical Year 2000 situations should they arise. Under the Company's Year 2000
contingency plan, the Company has and will continue to inventory and collect
documentation on all of its computers, computer related equipment, and equipment
with embedded processors. In addition, the Company will continue to monitor and
test systems as necessary.

         The Company has also communicated with significant vendors, suppliers
and critical business partners to determine the extent to which the Company
might be vulnerable in the event those parties failed to properly remediate
their own Year 2000 issues. Based on those communications, the Company believes
that its significant vendors, suppliers and critical business partners are Year
2000 compliant.

         The Company believes that it is currently Year 2000 compliant. All of
the Company's products and operating systems have continued to function beyond
January 1, 2000 without any business interruption. As the Year 2000 progresses,
however, the Company may experience problems associated with the Year 2000 that
have not yet been discovered. There can be no assurances that the Company's
internal systems and products or those of third parties on which the Company
relies will not suffer disruptions relating to Year 2000 issues. The failure to
achieve Year 2000 compliance or to have appropriate contingency plans in place
to deal with any noncompliance could result in significant disruption of the
Company's operations and could have a material adverse effect on the Company's
financial condition and results of operations.

         Based on the assessments described above, the Company estimates that it
expended less than $25,000 to achieve Year 2000 compliance.

         EURO CONVERSION

         On January 1, 1999, the European Community began denominating
significant financial transactions in a new monetary unit, the Euro. The Euro is
intended to replace the traditional currencies of the individual EU member
countries. The Company is evaluating when to convert its local currency in
Europe to the Euro with as little disruption to customer and vendors as
possible. The Company does not intend to make such a conversion in 2000.

         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 in December 1999.
The recognition of revenue in this manner is consistent with the actual cash
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 sells advertising direct to the advertiser, there is no outside sales
commission, therefore revenues are recognized on a gross basis which is
consistent with the cash received.

         In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 137 defers
for one year the effective date of SFAS 133. The rule will now apply to all
fiscal quarters of all fiscal years beginning after June 15, 2000. Because the
Company's minimal use of derivatives, management does not anticipate the
adoption of the new statement will have a significant effect on earnings or the
financial position of the Company.

                                      -25-
<PAGE>

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


                                      -26-
<PAGE>

                                    PART III

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

         DIRECTORS AND EXECUTIVE OFFICERS

         The current directors of the Company are as follows:

                                    YEAR FIRST
            NAME OF DIRECTOR     ELECTED AS DIRECTOR          AGE

J.W. Stealey                           1995                    52
W. Joseph McClelland (1)               1997                    53
Jacob Agam                             1999                    45
Michael Pearce                         1999                    38
Marc S. Goldfarb (1)                   1999                    36

(1)  Member of Audit Committee

         The current executive officers of the Company are as follows:

             NAME           AGE                          POSITION

Michael Pearce               38           Chief Executive Officer
Robert L. Hart               41           Chief Financial Officer and Secretary
James F. Hettinger           36           Chief Technology Officer


         BIOGRAPHIES OF THE DIRECTORS AND EXECUTIVE OFFICERS

         Jacob Agam was elected as Chairman of the Board in August 1999. Mr.
Agam also serves as the Chairman of Vertical Financial Holdings, a member of the
Vertical Group. The Vertical Group is an international private equity firm
specializing in providing equity capital to mid-sized growth companies operating
in a variety of industries, including technology. Mr. Agam has also served since
October 1996 as the Chairman of the Board and since April 1998 as the Chairman
of the Board and Chief Executive Officer of Spigadoro, Inc. (f/k/a IAT
Multimedia, Inc.), a publicly-traded food and animal feed company. Mr. Agam
received his J.D. from Tel Aviv University in 1984 and his L.L.M. in Securities
and Corporate Finance from the University of Pennsylvania in 1986.

         J.W. Stealey served as Chairman of the Board of Directors and Chief
Executive Officer of the Company from January 1995 until August 1999. Mr.
Stealey remains a director of the Company. 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.

         W. Joseph McClelland has served as a director of the Company since
February 1997. Until December 1999, Mr. McClelland had been 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


                                      -27-
<PAGE>

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.

         James Hettinger, has served as the Chief Technology Officer of the
Company since October 1999. Mr. Hettinger was the founder and Chief Executive
Officer of MPG-Net, an online game company which was acquired by the Company in
February 1999, and served as the Vice President of Business Development of the
Company from February 1999 to August 1999 and served as the interim Chief
Executive Officer of the Company from August 1999 to October 1999. Mr. Hettinger
has more than 10 years of experience in the gaming business. Mr. Hettinger is a
graduate of New York University with degrees in both History and Psychology.

         Robert L. Hart has served as the Chief Financial Officer and Secretary
of the Company since October 1999, after serving as the interim Chief Financial
Officer from September 1999 to October 1999. Prior to joining the Company, Mr.
Hart was self-employed as a contract Chief Financial Officer in the
manufacturing and pharmaceutical industries. From November 1997 through February
1999, he was employed as the V.P. of Finance for Jasco Tools, Inc., a
multi-state metal machining and cutting tool company. From April 1996 through
November 1997, he was employed by J.C. Plastics as Controller and G.M. From
September 1994 through April 1996, Mr. Hart was the Executive V.P. of Pittsford
Capital Finance, Inc., a financial services firm that he started and
subsequently sold. Mr. Hart was employed by Mobil Oil Corp. from July 1983
through September 1994 where he served in various financial positions in both
operational and corporate capacities. Mr. Hart received a B.B.A. in Accounting
from Siena College in 1981, and his M.B.A. from Rennselaer Polytechnic Institute
in 1982.

         Michael Pearce has served as the Chief Executive Officer of the Company
since October 1999 and as a director since December 1999. Prior to joining the
Company, Mr. Pearce held a variety of technology industry positions, including
serving as Senior Vice President of Sales and Marketing at VocalTec
Communications Inc, a public company specializing in Internet telephony, from
1996-1998. He also provided consulting services to VocalTec during 1999.
Previously, Mr. Pearce served as Senior Vice President of Sales and Marketing
for Ventana Communications Inc, a publisher of software and computer reference
books, from 1995-1996. During 1990-1993, he was Vice President, Sales, at Librex
Computer Systems, a wholly-owned subsidiary of Nippon Steel, Tokyo, Japan,
engaged in the manufacture and marketing of portable computers. From 1987-1990,
Mr. Pearce was employed by Hyundai Electronics America, a wholly-owned
subsidiary of Hyundai Group, Seoul, Korea, ultimately in the capacity of
National Sales Manager for this manufacturer of personal computers and
peripherals.

         Marc S. Goldfarb has served as a director of the Company since December
1999. Mr. Goldfarb has served as a director of Spigadoro, Inc. (f/k/a IAT
Multimedia, Inc.), a public company, since September 1999. Since August 1998,
Mr. Goldfarb has been the President and Managing Director of Orida Capital USA,
Inc., a consulting firm that is the U.S. representative of the Vertical Group.
Prior to joining Orida Capital, Mr. Goldfarb was a corporate and securities
attorney for over 10 years, most recently as a partner at Bachner, Tally &
Polevoy LLP in New York, where he specialized in corporated finance, venture
capital and mergers and acquisitions. Mr. Goldfarb holds a B.S. degree in
Management and Industrial Relations from Cornell University and a J.D. degree
from the University of Pennsylvania Law School.

         All directors hold office until the next annual meeting of shareholders
or until their successors are elected and qualified; vacancies and any
additional positions created by board action are filled by action of the
existing Board of Directors. All officers serve at the discretion of the Board
of Directors.

         RIGHTS TO NOMINATE DIRECTORS

         So long as Vertical holds at least 10% of the outstanding shares of the
Company, Vertical has the right, but not the obligation, to nominate three
persons as members of the management slate for election to the Board of
Directors of the Company. In addition, so long as Mr. Stealey holds at least 10%
of the outstanding shares of the Company, Mr. Stealey has the right, but not the
obligation, to nominate two persons as members of the management slate for
election to the Board of Directors of the Company. Mr. Agam, the Company's
Chairman of the Board, and Mr. Goldfarb were nominated by Vertical. Vertical has
the right to nominate a third director to the Board of Directors. Mr. Stealey
and Mr. McClelland were nominated by Mr. Stealey. In addition, Vertical and Mr.
Stealey have agreed to vote, and to direct their nominees to


                                      -28-
<PAGE>

vote, for each other's nominees at the next annual meeting of shareholders. See
"Certain Relationships and Related Transactions."


         COMMITTEE OF THE BOARD OF DIRECTORS

         AUDIT COMMITTEE

         The Audit Committee consists of Messrs. Goldfarb and McClelland. The
primary functions of the Audit Committee are to recommend engagement of the
Company's independent public accountants and to maintain communications among
such independent auditors, the Board of Directors and the Company's internal
accounting staff with respect to accounting and audit procedures, the
implementation of recommendations by such independent auditors, the adequacy of
the Company's internal controls and related matters.

         ADVISORY COMMITTEES TO THE BOARD OF DIRECTORS

         ADVISORY COMPENSATION COMMITTEE

         The Advisory Compensation Committee consists of Messrs. Goldfarb, Hart
and Pearce. The principal functions of the Advisory Compensation Committee are
to review the management organization and development, review significant
employee benefit programs, including bonus plans, stock option and other
equity-based programs, deferred compensation plans and any other cash or stock
incentive programs and to advise and recommend to the Board action to be taken
by the Board with respect to such matters.

         SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, executive officers and persons who own more
than 10% of a class of the Company's equity securities which are registered
under the Exchange Act to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes of ownership of such
registered securities. Such executive officers, directors and greater than 10%
beneficial owners are required by Commission regulation to furnish the Company
with copies of all Section 16(a) forms filed by such reporting persons.

         To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and on representations that no other
reports were required, no person required to file such a report failed to file
on a timely basis during fiscal 1999, except that (i) a report on Form 4
reporting the acquisition of shares of the Company's common stock by J.W.
Stealey, a director of the Company, on November 11, 1999 was filed on February
3, 2000, (ii) a report on Form 3 reporting the hiring of Robert L. Hart as the
Company's Chief Financial Officer on October 27, 1999 was filed on January 21,
2000, (iii) a report on Form 3 reporting the hiring of Michael Pearce as the
Company's Chief Executive Officer on October 27, 1999 was filed on January 21,
2000, (iv) a report on Form 5 reporting various acquisitions of shares of the
Company's common stock by W. Joseph McClelland, a director of the Company,
during 1999 was filed on January 21, 2000, (v) a report on Form 3 reporting the
election of Jacob Agam to the Company's Board of Directors on August 16, 1999
was filed on January 12, 2000, (vi) a report on Form 3 reporting the election of
Marc S. Goldfarb to the Company's Board of Directors on December 30, 1999 was
filed on January 12, 2000, (vii) a report on Form 3 reporting the hiring of
Michael Oliver as the Company's Chief Executive Officer on January 4, 1999 was
filed on February 8, 2000, (viii) a report on Form 5 reporting various
transactions during 1998 by Avi Suriel, a former director of the Company, was
filed on February 16, 1999, (viii) a report on Form 5 reporting various
transactions during 1998 by David Kestel, a former director of the Company, was
filed on February 16, 1999, (x) a report on Form 5 reporting various
transactions during 1998 by Joseph Rutledge, a former executive officer of the
Company, was filed on February 17, 1999, and (xi) a report on Form 5 reporting
various transactions during 1998 by Raymond Rutledge, a former executive officer
of the Company, was filed on February 17, 1999.

ITEM 10.  EXECUTIVE COMPENSATION

         The following summary compensation table sets forth the aggregate
compensation paid or accrued by the Company to J.W. Stealey, the Chief Executive
Officer of the Company until August 1999, and Michael Pearce, the


                                      -29-
<PAGE>

Chief Executive Officer of the Company since October 1999, and two of the
Company's executive officers whose annual compensation exceeded $100,000 for
fiscal 1999 and who were no longer serving in such capacity at December 31,
1999, for services rendered during the fiscal years ended December 31, 1999,
1998 and 1997.


                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

                                              Annual Compensation                             Long-Term Compensation
                                              -------------------                             ----------------------
                                                                                    Restricted      Securities
Name and                                             Bonus      Other Annual        Stock           Underlying     All other
Principal Position            Year     Salary ($)    ($)(1)     Compensation ($)    Awards($)       Options(#)     Compensation ($)
------------------            ----     ----------    ------     ----------------    ---------       ----------     ----------------
<S>                           <C>      <C>           <C>            <C>                                <C>
J.W. Stealey                  1999     150,000       25,000         263,125(3)          --             25,000             --
Chairman of the Board         1998     170,742         --            14,306(3)                           --               --
and Chief Executive           1997     160,000         --            16,832(3)                           --               --
Officer(2)

Joseph Rutledge               1999     115,625       27,905            --               --             81,663             --
Senior Vice President         1998     125,000       12,508            --                                --               --
Technology(4)

Raymond Rutledge              1999     106,385       38,555            --               --             84,206             --
Vice President Licensing(5)   1998     120,000       24,396            --                                --               --

Michael Pearce                1999        --           --             --(6)             --            800,000(6)          --
Chief Executive Officer

Robert L. Hart                1999      36,143(7)      --              --               --            200,000             --
Chief Financial Officer and
Secretary
</TABLE>
-----------------

(1)  Amount paid during year, earned in prior year.

(2)  Mr. Stealey resigned as Chairman and Chief Executive Officer in August
     1999. He remains on the Company's Board of Directors. See "Employment
     Contracts and Termination of Employment and Change-In-Control Arrangements"
     and "Certain Relationships and Related Transactions."

(3)  Consists of country club expenses in 1997 and 1998 and $200,000 of
     severance payments and 50,000 shares of common stock (valued at $1.25 per
     share) in 1999.

(4)  Mr. Joseph Rutledge left the Company in October 1999. See "Employment
     Contracts and Termination of Employment and Change-In-Control Arrangements"
     and "Certain Relationships and Related Transactions."

(5)  Mr. Raymond Rutledge left the Company in October 1999. See "Employment
     Contracts and Termination of Employment and Change-In-Control Arrangements"
     and "Certain Relationships and Related Transactions."

(6)  Mr. Pearce's employment commenced as of October 27, 1999. Pursuant to an
     Employment Agreement, effective October 27, 1999, between Mr. Pearce and
     the Company, Mr. Pearce, in lieu of his annual salary of $180,000, elected
     to receive options to purchase a total of 800,000 shares of common stock.
     See "Employment Contracts and Termination of Employment and
     Change-In-Control Arrangements" and "Certain Relationships and Related
     Transactions."

(7)  Mr. Hart's employment commenced as of October 27, 1999, and accordingly,
     represents amounts accrued from October 27, 1999 to December 31, 1999, all
     of which were paid in 1999. Mr. Hart is entitled to an annual salary of
     $132,000. Also includes amounts received by Mr. Hart as a consultant to the
     Company from September 1999 to October 1999.


                                      -30-
<PAGE>

                      OPTION GRANTS IN THE LAST FISCAL YEAR

         The following table sets forth certain information regarding stock
options granted to the named executive officers during the fiscal year ended
December 31, 1999. No stock appreciation rights were granted to these
individuals during such year.


                                    Individual Grants
                      -------------------------------------------

                      Number of       Percent of
                      Securities      Total Options
                      Underlying      Granted to      Exercise or
                      Options         Employees in    Base Price      Expiration
Name                  Granted (#)     Fiscal Year(1)  ($/Sh)          Date
----                  -----------     --------------  ------          ----

Joseph Rutledge         6,663(2)        .3%            $4.188         10/18/02
                       50,000(2)       1.9%            $4.250         10/18/02
                       25,000(2)        .9%            $1.125         10/15/02


Raymond Rutledge        9,206(2)        .3%            $4.188         10/18/02
                       50,000(2)       1.9%            $4.250         10/18/02
                       25,000(2)        .9%            $1.125         10/15/02


J.W. Stealey           25,000(2)        .9%            $4.250        12/31/04


Michael Pearce        800,000(3)      30.0%            $1.093        12/31/04


Robert L. Hart        200,000(4)       7.5%            $1.093         12/31/04

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

(1)  Based upon 2,662,580 total options granted.

(2)  The options are all exercisable in full commencing from the date of grant.

(3)  The options are exercisable on a cumulative basis as follows: 133,333 on
     10/27/99, 133,333 on 10/27/00, 266,667 on 10/27/01 and 266,667 on 10/27/02.

(4)  These options are exercisable on a cumulative basis as follows: 33,250 on
     10/27/99, 33,250 on 10/27/00, 66,750 on 10/27/01 and 66,750 on 10/27/02.


                                      -31-
<PAGE>

               AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                         FISCAL YEAR END OPTION VALUES

         The following table sets forth certain information with respect to the
exercise of stock options during the fiscal year ended December 31, 1999 by the
named executive officers and the number and value of unexercised options held by
each of the named executive officers as of December 31, 1999:
<TABLE>
<CAPTION>
                                                                   Number of Securities Under-       Value of Unexercised
                     Shares Acquired                               lying Unexercised Options at      In-the- Money Options at
Name                 on Exercise (#)     Value Realized ($)        Fiscal Year-End (#)               Fiscal Year-End ($)(1)
----                 ---------------     ------------------        -------------------               ----------------------

                                                                   Exercisable      Unexercisable    Exercisable    Unexercisable
                                                                   -----------      -------------    -----------    -------------
<S>                                                                <C>             <C>               <C>            <C>
Joseph Rutledge          --                  --                    295,000         0                 $214,657       $0

Raymond Rutledge         --                  --                    271,000         0                 $191,443       $0

J.W. Stealey             --                  --                    241,250         65,000            $223,850       $0

Michael Pearce           --                  --                    133,333         666,667           $116,666       $583,334

Robert L. Hart           --                  --                     38,250         166,750           $32,342        $142,968
</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 the common stock
at December 31, 1999 ($1.968), as quoted on the Nasdaq SmallCap Market, and the
exercise price of the options.

             EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
                         CHANGE-IN-CONTROL ARRANGEMENTS

         The Company entered into employment agreements with J.W. Stealey and
Joseph Rutledge effective January 1995 and Raymond Rutledge effective February
1995. Each employment agreement had an initial term of three years that
automatically renewed for an additional one-year term. Under the employment
agreements, each as amended in July 1998, Mr. Stealey, Mr. J. Rutledge and Mr.
R. Rutledge were entitled to annual salaries of $180,000, $125,000 and $120,000,
respectively. During the term of employment, the parties had the right to
terminate the employment for any reason upon notice. If the termination was for
any reason other than voluntary termination by the employee or by the Company
for cause, the Company was obligated to make the following payments to the
employee:

     (1) any unpaid base compensation for services performed prior to the date
         of termination;

     (2) the amount of any accrued annual vacation pay and other accrued but
         unpaid benefits; and

     (3) an amount as liquidated damages equal to twice the amount of the
         employee's (A) annual base salary then in effect, (B) any earned
         incentive compensation due but unpaid, and (C) such incentive
         compensation as would have been earned from January 1 of the year of
         termination through the date of termination pursuant to performance
         criteria established by the Board of Directors.

         If the termination was voluntary by the employee or by the Company for
cause, the Company would have had to pay the employee:

     (1) any unpaid compensation for services performed prior to the date of
         termination,

                                      -32-
<PAGE>

     (2) the amount of any accrued annual vacation pay, and

     (3) such incentive compensation as would have been earned from January 1 of
         the year of termination through the date of termination pursuant to
         performance criteria established by the Board of Directors.

         Voluntary termination did not include termination by the employee as a
result of:

     (1) a material change in the employee's duties, responsibilities or
         authority, including the sale or other disposition of a substantial
         part of the business of the Company that would decrease the scope of
         the employee's position,

     (2) failure to obtain the assumption of the obligation to perform the
         agreement by any successor,

     (3) breach of the employment agreement by the Company, or

     (4) relocation of the employee's office to a location more than 50 miles
         from the employee's residence or the Company's principal offices.

         The employment agreements each included a non-competition provision,
effective during the term of the employment agreement and for a period of one
year (two years for Mr. Stealey) following termination of employment, pursuant
to which the employee cannot compete with the Company within 250 miles of any
location at which the Company maintains its principal administrative
headquarters by becoming interested, directly or indirectly, as a partner,
officer, director, shareholder, advisor, employee or in any other capacity with
any competitive business engaged in the design, manufacture or sale of games
used on personal computers. The employment agreements each prohibited disclosure
of any confidential information about the Company. The Company and Mr. Stealey
terminated his agreement when he left the Company in August 1999. The employment
agreements with Mr. J. Rutledge and Mr. R. Rutledge were terminated in December
1999. The terms of Mr. Stealey's, Mr. J. Rutlege's and Mr. R. Rutledge's
severance packages are described in "Certain Relationships and Related
Transactions".

         The Company entered into an employment agreement with Michael Pearce
effective in October 1999. The agreement has an initial term of three years that
automatically renews for additional one-year terms absent notice of non-renewal
by either party at least sixty days prior to expiration of the term. In lieu of
receiving the stated annual salary for his position of $180,000, pursuant to the
agreement Mr. Pearce elected instead to receive options to purchase a total of
800,000 shares of common stock with an exercise price of $1.09 per share. These
options are exercisable as follows: 133,333 are immediately exercisable, 133,333
become exercisable on the first anniversary of the grant date and 266,667 become
exercisable on each of the second and third anniversaries of the grant date. If
Mr. Pearce is terminated because of death, extended illness, disability or
without cause, all of these options that would have vested at any time during
the calendar year of termination become fully exercisable, provided Mr. Pearce,
or his estate, must exercise such options within six months following
termination. Mr. Pearce and his family are entitled to participate in such
employee benefit plans as the Company may offer from time to time to its senior
officers.

         DIRECTOR COMPENSATION

         The Company reimburses each director for out-of-pocket expenses
incurred in connection with the rendering of services as a director. In
addition, directors are eligible to receive stock options and warrants to
purchase shares of the Company's common stock. In January 1999 and July 1999,
the Company granted options to purchase 15,000 and 25,000 shares of its common
stock, respectively, all immediately exercisable, to W. Joseph McClelland. In
January 2000, the Company granted options to purchase 32,500 shares of its
common stock, all immediately exercisable, to Marc S. Goldfarb upon joining the
Board of Directors. All options were granted at the then fair market value.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Unless otherwise indicated, the address of the directors and officers
is c/o iEntertainment Network, Inc., 215 Southport Drive, Suite 1000,
Morrisville, North Carolina 27560. Beneficial ownership is defined in


                                      -33-
<PAGE>
accordance with the rules of the SEC and generally means the power to vote
and/or to dispose of the securities regardless of any economic interest therein.
In computing number and percentage ownership of shares of common stock
beneficially owned by a person, shares of common stock subject to options and
warrants held by that person that are exercisable within 60 days are deemed
outstanding. Such shares of common stock, however, are not deemed outstanding
for purposes of computing the percentage ownership of stockholders other than
such person.

         The following table sets forth the only shareholders known by the
Company to be the beneficial owners, as of March 17, 2000, of more than five
percent (5%) of the outstanding shares of the Company:
<TABLE>
<CAPTION>
            NAME AND ADDRESS                         NUMBER OF SHARES                      PERCENTAGE OF SHARES
           OF BENEFICIAL OWNER                      BENEFICIALLY OWNED                    BENEFICIALLY OWNED (1)
------------------------------------------ -------------------------------------- -------------------------------------------
J.W. Stealey
<S>                                                    <C>       <C>                                <C>
  215 Southport Drive                                  3,976,867 (2)                                25.7%
  Morrisville, NC  27560

Vertical Financial Holdings
  Hambrechtikerstrasse 61                              2,745,649 (3)                                18.3%
  Ch-8640 Rapperswil
  Switzerland

Elliot Bossen                                          1,036,480                                     6.9%
  3100 Tower Blvd.
  Suite 1104
  Durham, NC  27707

---------------------
(1)      Based on 15,022,284 shares outstanding.

(2)      Includes 251,250 shares subject to options and 236,389 shares subject
         to warrants that are exercisable within 60 days of March 17, 2000.
         Excludes 62,500 shares issuable upon exercise of options that are not
         exercisable within 60 days of March 17, 2000. Also 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 held
         in the trusts.

(3)      Includes 427,394 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.

         The table below gives the number of shares of common stock of the
Company beneficially owned as of March 17, 2000 by persons who are members of
the Board and the named executive officers of the Company.
<CAPTION>
             NAME AND ADDRESS                           NUMBER OF SHARES                         PERCENTAGE OF SHARES
           OF BENEFICIAL OWNER                         BENEFICIALLY OWNED                        BENEFICIALLY OWNED(1)
------------------------------------------- ------------------------------------------ -----------------------------------------
<S>                                                   <C>       <C>                                     <C>
J.W. Stealey                                          3,976,867 (2)                                     25.7%

Jacob Agam                                                   -- (3)                                        --

Joseph Rutledge                                         271,663 (4)                                      1.8%

Raymond Rutledge                                        259,206 (5)                                      1.7%

Michael Pearce                                          133,333 (6)                                         *

Robert L. Hart                                           38,250 (7)                                         *

W. Joseph McClelland                                     79,000 (8)                                         *

Marc S. Goldfarb                                         32,500 (9)                                         *

                                      -34-
<PAGE>

All directors and executive officers as a                 4,784,950                                     30.3%
group (5 directors and 3 executive
officers) (10)
</TABLE>
-------------------------------------------

*    Less than one percent

(1)  Based on 15,022,284 shares outstanding.

(2)  Includes 251,250 shares subject to options and 236,389 shares subject to
     warrants that are exercisable within 60 days of March 17, 2000. Excludes
     62,500 shares issuable upon exercise of options that are not exercisable
     within 60 days of March 17, 2000. Also 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 held in the trusts. Mr. Stealey resigned
     as Chairman and Chief Executive Officer in August 1999.

(3)  Jacob Agam, the Chairman of the Board of the Company, is the Chairman of
     Vertical Financial Holdings, a principal stockholder of the Company. Mr.
     Agam disclaims beneficial ownership of the shares held by Vertical.

(4)  Includes 265,000 shares issuable upon exercise of options that are
     exercisable within 60 days of March 17, 2000. Mr. Rutledge left the Company
     in October 1999.

(5)  Includes 250,000 shares issuable upon exercise of options that are
     exercisable within 60 days of March 17, 2000. Mr. Rutledge left the Company
     in October 1999.

(6)  Represents shares issuable upon exercise of options that are exercisable
     within 60 days of March 17, 2000. Excludes 666,667 shares issuable upon
     exercise of options that are not exercisable within 60 days of March 17,
     2000.

(7)  Represents shares issuable upon exercise of options that are exercisable
     within 60 days of March 17, 2000. Excludes 170,500 shares issuable upon
     exercise of options that are not exercisable within 60 days of March 17,
     2000.

(8)  Includes 66,000 shares issuable upon exercise of options that are
     exercisable within 60 days of March 17, 2000.

(9)  Represents shares issuable upon exercise of options that are exercisable
     within 60 days of March 17, 2000.

(10) Includes the shares discussed in the relevant footnotes above. Excludes
     899,667 shares issuable upon exercise of options and warrants that are not
     exercisable within 60 days of March 17, 2000.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company, Mr. Stealey and Robert Pickens, former President of the
Company, are parties to a January 3, 1995 Stock Purchase and Stockholder
Agreement (the "Co-Sale Agreement"). The Co-Sale Agreement grants Mr. Pickens a
co-sale right to participate in any transfer of shares of Common Stock by Mr.
Stealey on the same terms and conditions as offered to the third party by Mr.
Stealey. The co-sale right entitles Mr. Pickens to participate in such transfer
in the same proportion to the number of shares to be sold by Mr. Stealey that
the number of shares of common stock owned by Mr. Pickens prior to the transfer
bears to the number of shares of common stock owned by Mr. Stealey prior to the
transfer. Mr. Pickens resigned from his position as President of the Company in
October 1998.

         The Company has also entered into a marketing agreement, dated January
3, 1995, with Mr. Stealey, the Company's Founder and former Chairman of the
Board and Chief Executive Officer, pursuant to which Mr. Stealey makes his T-28
Trojan aircraft and his services as a pilot available to the Company in
consideration for which the Company pays all of the expenses to store, operate
and maintain such aircraft and to maintain Mr. Stealey's pilot license. This
marketing agreement was terminated in November 1999.

         On March 6, 1995, the Company issued a demand Promissory Note to Mr.
Pickens in the principal amount of $600,000 at an annual interest rate of 12%,
which increased to 14% on June 30, 1996 because the balance thereunder exceeded
$400,000 on that date. In consideration of this loan, the Company issued
warrants to Mr. Pickens to purchase 13,845 shares of Common Stock at an exercise
price of $1.00 per share. In connection with the Company's Series B Preferred
Stock financing, Mr. Pickens, on February 4, 1998, converted the outstanding
principal of the $600,000 Promissory Note into 132,744 shares of Series C
Preferred Stock, which shares were converted into 132,744 shares of common stock
in connection with the recapitalization affected in connection with the
Company's initial public offering in July 1998 (the "Recapitalization"). Also in
connection with the Recapitalization, Mr. Pickens forgave $50,000 of the accrued
interest outstanding in connection with this


                                      -35-
<PAGE>

loan in payment of the $1.00 per share exercise price of 50,000 options held by
Mr. Pickens. The Company paid Mr. Pickens $111,421 of the remaining $183,864 in
accrued interest due to him under this loan upon the consummation of the
Company's initial public offering.

         On April 11, 1995, the Company entered into a joint development
agreement with NDL for the development of the Company's DEMON technology. J.
Nicholas England, a director of the Company at such time, was also a director of
NDL. To date, the Company has paid $322,500 to NDL for the rights to the
technology which includes amounts paid pursuant to a royalty of 1% of net sales
based on products that incorporate the DEMON technology.

         On December 4, 1995, the Company entered into a leasehold agreement
with Southport Business Park Limited Partnership ("Southport") for the Company's
principal executive offices located at 215 Southport Drive in Morrisville, North
Carolina. The term of the lease is for a period of five years commencing April
1, 1996 at a monthly rent of $13,962, subject to adjustment in certain
circumstances. J. W. Stealey executed a personal guarantee in favor of Southport
in connection with the leasehold agreement.

         Since the Company's inception, Mr. Stealey has executed several
personal guaranties and pledges of personal collateral in favor of BB&T, one of
the Company's primary bank creditors, in connection with revolving and term
loans extended by BB&T to the Company. On January 24, 1997, the Company issued a
$2,500,000 Promissory Note to BB&T secured by Mr. Stealey's guarantee and pledge
of collateral. The January 24, 1997 note has been paid in full, and Mr.
Stealey's guarantee and pledge in respect thereof have been extinguished. On
August 25, 1997, the Company issued a $2,750,000 Promissory Note to BB&T secured
by Mr. Stealey's guarantee and pledge of collateral in replacement of the
January 24, 1997 note. On November 25, 1997, the Company issued a $250,000
Promissory Note to BB&T secured by Mr. Stealey's guarantee and pledge of
collateral. The November 25, 1997 note has been paid in full, and Mr. Stealey's
guarantee and pledge in respect thereof have been extinguished. On March 27,
1998, the Company issued a $250,000 Promissory Note to BB&T secured by Mr.
Stealey's guarantee and pledge of collateral. In connection with his guaranties
to BB&T, the Company became obligated to pay Mr. Stealey a fee equal to 6% per
annum of the indebtedness borrowed. All of such indebtedness has been repaid and
Mr. Stealey has waived all payment rights relating to his guaranties.

         On May 20, 1996, the Company issued a Promissory Note to Mr. Stealey in
the principal amount of $1,000,000, payable on November 17, 1996, with interest
at the annual rate of 15%, increasing to 17% if the Company did not repay Mr.
Stealey by November 17, 1996. In connection with this loan, the Company issued
warrants to Mr. Stealey to purchase 25,000 shares of common stock at a price of
$2.00 per share. Under the original terms of the note, if the note was not
repaid by November 17, 1996, the Company was obligated to issue additional
warrants to Mr. Stealey to purchase 25,000 shares of common stock per 180 days
prorated over the time until repayment occurred. On March 20, 1997, in
connection with a loan to the Company made by Petra, Mr. Stealey waived his
right under the note to accrue additional warrants after November 16, 1997. On
February 4, 1998, in connection with the Company's Series B Preferred Stock
financing, Mr. Stealey converted the $1,000,000 principal outstanding under the
May 20, 1996 note into 221,239 shares of common stock. In connection with the
Recapitalization, Mr. Stealey forgave $268,750 of the accrued interest
outstanding under this note in payment of the $1.00 per share exercise price of
268,750 options held by Mr. Stealy.

         On July 10, 1996, the Company issued a Promissory Note to Mr. Stealey
in the principal amount of $1,000,000, payable on January 6, 1997, with interest
at the annual rate of 15%, increasing to 17% if the Company did not repay Mr.
Stealey by January 6, 1997. In connection with this loan, the Company issued
warrants to Mr. Stealey to purchase 50,000 shares of common stock at a price of
$6.00 per share. Under the original terms of the note, if the note was not
repaid by January 6, 1997, the Company was obligated to issue additional
warrants to Mr. Stealey to purchase 250,000 shares of common stock per 180 days
prorated over the time until repayment occurred. On March 20, 1997, in
connection with a loan to the Company by Petra, Mr. Stealey waived his right
under the note to accrue additional warrants after January 6, 1998. On February
4, 1998, in connection with the Company's Series B Preferred Stock financing,
Mr. Stealey converted the $1,000,000 principal outstanding under the July 10,
1996 note into 221,239 shares of common stock. The Company paid Mr. Stealey
$234,729 accrued interest due to him in connection with the loan upon
consummation of the Company's initial public offering.

         The Company has borrowed approximately $870,000 from Laura M. Stealey,
the former wife of Mr. Stealey, under a $1,000,000 credit line established by
Ms. Stealey in favor of the Company, which is guaranteed by


                                      -36-
<PAGE>

Mr. Stealey, pursuant to a Letter Agreement dated October 31, 1996. In
consideration of the credit line, the Company granted to Ms. Stealey a warrant
exercisable for 14,948 shares of common stock at a purchase price of $5.82 per
share. On March 24, 1997, in connection with a loan to the Company by Petra, Ms.
Stealey waived her right to convert debt under the credit line into shares of
the Company's common stock. The Company repaid the entire principal amount, plus
the $117,175 in accrued interest thereon through March 31, 1998, of this credit
line upon the consummation of the Company's initial public offering.

         On February 4, 1998, Vertical Financial Holdings, Suriel Financial
Consulting and several other investors purchased an aggregate of 778,746 shares
of the Company's Series B Preferred Stock for $3,500,000. Avi Suriel, then a
director of the Company, is a Director of Vertical Financial Holdings and
founder and a principal of Suriel Financial Consulting. Jacob Agam, the
Company's Chairman of the Board is the Chairman of Vertical. All of the Series B
Preferred Stock investors have signed a proxy agreement with Vertical Financial
Holdings granting Vertical Financial Holdings voting rights with respect to
their shares. In connection with the Recapitalization, the 778,746 shares of
Series B Preferred Stock converted into 2,045,649 shares of common stock.

         The Company and General Capital, an affiliate of Vertical Financial
Holdings, also signed a Marketing Agreement dated February 4, 1998, pursuant to
which the Company was obligated to pay $400,000 to General Capital for marketing
services when the Company's shareholders' equity equals or exceeds $5,000,000.
The Company satisfied such obligation upon the consummation of the Company's
initial public offering.

         In February 1999, the Company completed the acquisition of MPG-Net,
Inc. 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. Mr. Hettinger, the Company's
Chief Technology Officer, was the founder and Chief Executive Officer of
MPG-Net. In connection with the Company's acquisition of MPG-Net, the Company
assumed MPG-Net's obligations under a License Agreement with World Gaming
Corporation under which MPG-Net licensed the rights to certain online games in
exchange for the payment of royalties to World Gaming Corporation, James F.
Hettinger, the Company's Chief Technology Officer, owned approximately 10% of
World Gaming Corporation prior to its sale to Women.com in December 1999.
Royalty expense and payments under the License Agreement totaled $261,000 and
$193,000, respectively, during the year ended December 31, 1999.


         In August 1999, the Company and Mr. Stealey entered into an agreement:
(1) providing for the resignation of Mr. Stealey from his position as Chairman
of the Board and Chief Executive Officer; (2) appointing Jacob Agam, a designee
of Vertical Financial Holdings (a significant shareholder of the Company), as
Chairman of the Board to fill the vacancy created by the departure of Avi
Suriel; and (3) designating management's slate of nominees for election to the
Board at the annual meeting of shareholders (to include a total of three
designees from Vertical, together with Mr. Stealey and one designee of Mr.
Stealey. Vertical also signed the agreement for the purpose of agreeing to vote
its shares in favor of management's slate of nominees. As part of this agreement
the Company also agreed to: (1) retain Mr. Stealey as a consultant through
December 31, 2000 at an annual fee of $180,000 and other benefits identical to
those provided under his employment agreement, which agreement was terminated,
together with Mr. Stealey's severance rights thereunder (this consulting
arrangement was terminated in November 1999 as described below); (2) undertake
best efforts to have Mr. Stealey removed from personal guarantees he made to
secure approximately $1 million of Company indebtedness (Mr. Stealey arranged to
have the Company released from this indebtedness in November 1999 as described
below); (3) grant certain registration rights to Mr. Stealey with respect to his
shares; (4) sell to Mr. Stealey for $1,000 the Company's rights to its old name,
logo and URL (imagicgames.com) following the Company's transition to its new
name; and (5) limit Mr. Stealey's noncompetition restrictions to nonsolicitation
of Company employees for the next 17 months.

         In November 1999, the Company effected the following significant
financing transactions with affiliates:

     o   Vertical Financial Holdings, a significant shareholder of the Company,
         purchased 700,000 shares of common stock for $700,000. Jacob Agam, the
         Chairman of the Company's Board of Directors, is Chairman of Vertical
         Financial Holdings.

     o   J. W. Stealey, the Company's founder, former Chief Executive Officer
         and current director, arranged for the release of the Company from
         $1,000,000 of line-of-credit indebtedness to BB&T in exchange for
         1,000,000 shares of common stock. In addition, Mr. Stealey's
         resignation agreement dated August 16, 1999 was amended such that his
         consulting services are no longer being used and the sole remaining
         consideration due him was reduced to one lump sum payment of $200,000
         (less the value of 12 months of health insurance payments and car lease
         payments totaling approximately $20,000) and 50,000 shares of the
         Company's common stock. The Company also agreed to convey to Mr.
         Stealey all trademarks and available rights to the name Interactive
         Magic. Mr. Stealey agreed to waive the interest due him from the
         Company in the amount of $183,000 under the terms of the line of credit
         agreement with BB&T that he personally guaranteed.

         The Company granted registration rights for the shares of common stock
purchased in connection with the Reorganization. These registration rights were
exercised and the shares of common stock and the shares of


                                      -37-
<PAGE>

common stock issuable upon conversion or exercise of convertible securities of
the Company owned by Mr. Stealey and other shareholders have been registered for
resale by the Company. In addition, Mr. Stealey and Vertical Financial Holdings
agreed to vote all of their shares at the 1999 annual meeting in favor of the
Series D Preferred Stock financing and the convertibility of such shares into
common stock.

         In December 1999, the Company entered into an agreement with each of
Mr. J. Rutledge and Mr. R. Rutledge under which (i) the parties agreed that the
employment agreements between the Company and each of Mr. J. Rutledge and Mr. R.
Rutledge had been fully satisfied and (ii) the Company agreed to extend the
exercise periods for the options held by each of these former employees for a
period of three years.

         In December 1999, the Company also entered into a consulting agreement
with each of Mr. J. Rutledge and Mr. R. Rutledge under which each of the
individuals has agreed to provide consulting services to the Company for a
period of one year. Under the agreements, each of the consultants will receive a
monthly payment of $10,300 payable in shares of common stock of the Company
based upon the average closing price of the common stock for the last five
trading days of the preceding month. In the event the Company terminates the
agreements at any time during the one year term, the Company will be obligated
to pay the remaining amounts owed under the agreement, in shares of common stock
of the Company, within five business days of termination.

                                  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.

         We have experienced significant losses since our inception. Our losses
have resulted primarily from overhead and other costs incurred in our
development and expansion. For the years ended December 31, 1998 and 1999, we
incurred net losses of approximately $11.7 million each year. At December 31,
1999, we had an accumulated deficit of approximately $37.6 million. We expect to
incur substantial up-front expenditures and operating costs in connection with
the expansion of our marketing efforts and product lines. These activities are
expected to result in significant losses for the foreseeable future. We cannot
predict the extent of future losses or whether we will ever be able to achieve
or sustain profitable operations.

         WE HAVE CHANGED OUR BUSINESS FOCUS AND WE MAY NOT BE SUCCESSFUL
OPERATING A NEW BUSINESS.

         Until June 1999, a substantial portion of our revenues were generated
from sales of our CD-ROM software products. In June 1999, we completed the sale
of our CD-ROM business unit. Our current strategy is to focus our business
primarily on the Internet entertainment business, specifically online games.
Although we completed the acquisition of MPG-Net, Inc. to expand our Internet
business, to date, we have generated limited revenues from sales of our Internet
products. As a result, we have a limited relevant operating history upon which
an evaluation of the prospects of our business can be made. Such prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in connection with the operation and expansion of a new
business. We are subject to the risks associated with the rapidly evolving
interactive entertainment software industry, which is characterized by:

     o   an increasing number of market entrants;
     o   intense competition;
     o   substantial capital requirements; and
     o   a high failure rate.

                                      -38-
<PAGE>

         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.

         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 our recent private placement, together
with anticipated revenues from operations, we anticipate to have sufficient
funds on hand to continue operations. However, our future cash requirements may
vary significantly from what we expect them to be based on factors such as:

     o   the cost and timing of expansion of research and product development
         efforts and the success of these efforts;

     o   the cost and timing of expansion of sales and marketing activities;

     o   the extent our existing and new products gain market acceptance;

     o   competing technological and market developments; and

     o   the cost involved in maintaining and enforcing patent claims and other
         intellectual property rights.

         We do not have any current arrangements or commitments for any future
financing. We may not be able to obtain sufficient additional financing to
satisfy cash requirements. We may be required to obtain financing on terms that
are not favorable to us and our shareholders. If we are unable to obtain
additional financing when needed, we may be required to delay or scale back
product development and marketing programs 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 GROWTH STRATEGY, INCLUDING ACQUISITIONS, MAY NOT SUCCEED AND MAY
ADVERSELY EFFECT OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS.

         We cannot predict whether we will be able to expand our operations or
effectively manage any such expansion. Our growth strategy will place
significant demands on our management, technical, financial and other resources.
We may be unable to anticipate and satisfy all of the changing demands and
requirements that such growth will impose upon our operations. Acquisitions
involve numerous additional risks that could materially adversely affect our
business and financial performance. Such risks include:

     o   difficulties in the assimilation of the operations and products of the
         acquired companies;

     o   the expenses incurred in connection with the acquisition and subsequent
         assimilation of operations and products;

     o   the diversion of management's attention from other business concerns;
         and

     o   the potential loss of key employees of the acquired company.

         A part of our business strategy is growth through acquisition. The
success of our acquisition strategy will depend upon, among other things, our
ability to:

     o   hire and retain skilled management, marketing, technical and other
         personnel;

     o   develop and improve upon our operational, management and financial
         systems and controls in order to properly monitor our expanded
         operations; and

     o   control our costs and maintain effective quality controls.

         We intend to evaluate, on an ongoing basis, potential acquisitions of,
or investments in, other software publishers or developers, distributors or
other businesses which we believe will complement or enhance our existing
business. Under North Carolina law, various forms of business combinations can
be effected without shareholder approval. Accordingly, in certain instances
shareholders will neither receive nor otherwise have the opportunity to evaluate
any financial or other information concerning any potential acquisition.
Shareholders will


                                      -39-
<PAGE>

have to rely entirely upon the ability of management to select, structure and
consummate acquisitions that are consistent with our business objectives.

         THE LOSS OF OUR KEY PERSONNEL MAY ADVERSELY EFFECT OUR BUSINESS.

         Our success depends to a significant extent on the performance and
continued service of our senior management and certain key employees. During the
second half of 1998, three of our executive officers resigned. In August 1999,
both our then Chief Executive Officer and Chief Financial Officer resigned. Both
positions have since been filled with permanent, full-time replacements.
However, 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.

         INDUSTRY RISKS

         A number of the following risk factors relate to our former CD-ROM
software business. Accordingly, some of such risk factors will only be
applicable to the extent we retain an interest in the CD-ROM software business,
which is limited to the on-line rights to the game rights we sold.

         WE EXPERIENCE FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS WHICH MAY
CAUSE OUR STOCK PRICE TO FLUCTUATE.

         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:

     o   the demand for our products and the products of our competitors;

     o   the level of usage of the Internet;

     o   the size and rate of growth of the interactive entertainment software
         market;

     o   the development and promotional expenses related to the introduction of
         new products or enhancements;

     o   the degree of market acceptance for our new product introductions and
         enhancements;

     o   the level of price competition; o software defects and other quality
         problems; and

     o   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 disproportionately adversely affect our operating results in
any given quarter. As a result, we believe that period-to-period comparisons of
operating results should not be relied upon as indicative of future results.

         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:

     o   develop higher quality, distinctive products that incorporate
         increasingly sophisticated effects; and

     o   support new product releases with increased marketing.

         OUR BUSINESS MAY BE ADVERSELY AFFECTED BY OUR DEPENDENCE UPON A SMALL
NUMBER OF PRODUCTS.

         We derive a significant portion of our revenues from a limited number
of online products released each year. 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:

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

     o   introduce products which are commercially viable; or

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

         OUR PRODUCTS HAVE A LENGTHY DEVELOPMENT CYCLE AND WE MAY NOT BE ABLE TO
TIMELY INTRODUCE NEW PRODUCTS.

                                      -40-
<PAGE>

         Our success will depend 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. Many of
our proposed products are in the early stages of development and will require us
to commit considerable time, effort and resources to complete their development.

         The development of new products is subject to a variety of risks,
including:

     o   unanticipated delays;

     o   increased costs and expenses for product development; and

     o   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 likely 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.

         Our online products 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:

     o   delay sales of our products;

     o   cause us to incur additional costs; and

     o   adversely affect our reputation.

         OUR 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 has decreased. This decrease is
due to the significant increases in:

     o   software acquisition and development costs;

     o   promotion and marketing expenses; and

                                      -41-
<PAGE>

     o   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:

     o   the popularity, price and timing of new entertainment software products
         being released and distributed;

     o   international, national, regional and local economic conditions
         (particularly economic conditions adversely affecting discretionary
         consumer spending);

     o   changes in consumer demographics;

     o   the availability of other forms of entertainment; and

     o   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.

         Our strategy is to primarily focus on online games. 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:

     o   a viable market for online games will develop;

     o   we will be able to attract and retain subscribers to our online game
         products;

     o   we will be successful in developing additional products for online use;
         or

     o   our online game products will ever achieve widespread market
         acceptance.

         WE DEPEND ON THE CONTINUED GROWTH IN USE OF THE INTERNET.

         Rapid growth of interest in and use of the Internet is a recent
phenomenon. Our success is highly dependent upon the increased acceptance and
use of the Internet. The novelty of the Internet may adversely affect our
ability to retain new subscribers. New subscribers who are unfamiliar with the
Internet may be more likely to discontinue our services after an initial trial
period.

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

     o   the lack of development of high speed modems and communication lines;

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

     o   the 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 can not assure you that the Internet infrastructure will provide the
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 which faces all of the same potential risks.

         OUR BUSINESS MAY BE ADVERSELY AFFECTED BY RISKS RELATED TO ONLINE
GAMES.

         Having completed the sale of our CD-ROM business, online games have
become the primary factor in the success of our business. Online games, and
particularly multiplayer online games such as our Warbirds product, have risks
not associated with sales of our CD-ROM products. Such risks include:

                                      -42-
<PAGE>

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

     o   in multiplayer games, unanticipated player conduct can significantly
         affect the performance of the game and determine player satisfaction;

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

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

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

         The 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.

         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:

     o   evolving industry standards;

     o   frequent new platform introductions; and

     o   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
video disks, 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:

     o   our future product offerings will keep pace with technological changes;
         or

     o   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:

     o   rapidly changing technology;

     o   evolving industry standards;

     o   emerging competition; and

     o   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:

     o   accessible by screen-based telephones, television or other consumer
         electronic devices; or

     o   deliverable through other means such as coaxial cable or wireless
         transmission.

         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.

         INTENSE COMPETITION MAY ADVERSELY AFFECT OUR OPERATING RESULTS.

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

                                      -43-
<PAGE>

     o   product quality and features;

     o   the compatibility of products with popular platforms;

     o   access to distribution channels, including access to retail shelf
         space;

     o   marketing effectiveness;

     o   reliability and ease of use; and

     o   price and the quality of user support services.

         As compared to us, many of our competitors have:

     o   significantly greater financial, technical, marketing, sales and
         customer support and other resources; and

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

         As a result, our competitors may be able to:

     o   undertake more extensive marketing campaigns;

     o   adopt more aggressive pricing policies; and

     o   make higher offers or guarantees to third party software developers and
         licensors.

         Increased competition may result in significant price competition,
increased product development and production costs and reduced profit margins.
Competition may also limit our ability to grow and retain our subscriber base
for online game play. We may not be able to compete successfully against current
or future competitors.

         OUR BUSINESS MAY BE ADVERSELY AFFECTED BY OUR DEPENDENCE ON THIRD-PARTY
SOFTWARE DEVELOPERS.

         We rely on third-party software developers to develop a significant
number of our products. Our payment of advances and guaranteed royalties to such
independent software developers has increased and may continue to increase
primarily due to the increased demand for quality interactive entertainment
software programs. 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 risk that:

     o   the cost of any proposed online or Internet distributor relationship
         will exceed our expectations; or

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

         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:

     o   trademark;

     o   trade secret;

     o   copyright;

                                      -44-
<PAGE>

     o   other proprietary rights laws;

     o   license agreements; and

     o   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:

     o   to enforce our intellectual property rights;

     o   to protect our trade secrets;

     o   to determine the validity and scope of the proprietary rights of
         others; or

     o   to 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 EFFECT
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:

     o   user privacy;

     o   defamation;

     o   pricing;

     o   taxation;

     o   content regulation;

     o   quality of products and services; and

     o   intellectual property ownership and infringement.

         Such legislation could:

     o   expose us to substantial liability;

     o   dampen the growth in use of the Internet;

     o   decrease the acceptance of the Internet as a communications and
         commercial medium; or

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

         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:

                                      -45-
<PAGE>

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

     o   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:

     o   fluctuations in exchange rates;

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

     o   the costs of transferring and localizing products for foreign markets;

     o   longer accounts receivable collection periods and difficulty in
         collection of accounts receivable;

     o   unexpected changes in regulatory requirements;

     o   tariffs and other barriers; and

     o   potential political and economic instability.

         Revenues and expenses 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 from the reported results of our foreign operations. We intend
to continue to expand our direct and indirect sales and marketing activities
worldwide. We cannot predict whether we will be able to maintain or increase
international market demand for our products.

         CONTROL BY SHAREHOLDERS

         OUR OFFICERS, DIRECTORS AND THEIR AFFILIATED ENTITIES CONTROL
IENTERTAINMENT NETWORK.

         As of March 17, 2000, our executive officers, directors and their
affiliated entities owned approximately 50% of our outstanding shares of common
stock. As a result, such persons are in the position to influence:

     o   the election of our directors; and

     o   the outcome of corporate actions or other matters requiring shareholder
         approval.

         The concentration of ownership may have the effect of delaying or
preventing a change in control of iEntertainment Network. In addition, Vertical
Financial Holdings, one of our principal stockholders, has the right to nominate
three members for election to our Board of Directors so long as Vertical
continues to own at least 10% of our outstanding common stock and Mr. Stealey,
our former Chairman and Chief Executive Officer, has the right to nominate two
members for election to our Board of Directors so long as Mr. Stealey continues
to own at least 10% of our outstanding common stock.

         STOCK AND MARKET RISKS

         OUR STOCK PRICE MAY BE VOLATILE.

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

                                      -46-
<PAGE>

     o   variations in quarterly operating results;

     o   announcements of new products by us or our competitors;

     o   failures to meet or exceed the expectations of securities analysts or
         investors; or

     o   general economic conditions.

         Furthermore, the stock market has experienced significant price and
volume fluctuations unrelated or disproportionate to the operating performance
of particular companies. These market fluctuations may also adversely affect the
market price of our common stock.

         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.

         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 17, 2000, we had 15,022,284
shares of common stock outstanding. All of these shares are eligible for sale,
subject to Rule 144.

         In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons who may be deemed to be
"affiliates" of the company as that term is defined under the Securities Act of
1933, is entitled to sell within any three-month period a number of restricted
shares beneficially owned for at least one year that does not exceed the greater
of:

     o   one percent (1%) of the then outstanding shares of common stock, or

     o   the average weekly trading volume in the common stock during the four
         calendar weeks preceding such sale.

         Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and the availability of current public information about
us. However, a person who is not an affiliate and has beneficially owned such
shares for at least two years is entitled to sell such shares without regard to
the volume or other requirements. No prediction can be made as to the effect, if
any, that sales of such securities or the availability of such securities for
sale will have on the market prices prevailing from time to time.

         We have an outstanding registration statement relating to the resale of
an aggregate of 9,681,692 shares of our common stock. A substantial portion of
these shares are issuable upon exercise or conversion of our convertible
securities. 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 March 17, 2000, we had outstanding:

     o   warrants to purchase an aggregate of approximately 1,202,403 shares of
         our common stock;

     o   4,910.844 shares of preferred stock which are convertible into up to
         4,910,844 shares of our common stock.

         As of March 17, 2000, we have authorized for issuance and outstanding
the following options:

     o   2,875,000 shares of our common stock in connection with our 1995
         Incentive Stock Option Plan, 1,995,589 of which are outstanding;

                                      -47-
<PAGE>

     o   1,800,000 shares of our common stock in connection with our 1998 Stock
         Plan, under which options to purchase 1,726,867 shares are outstanding;
         and

     o   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:

     o   the market price of our stock may be adversely affected;

     o   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;

     o   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

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

         The holders of warrants and options are also likely to exercise them
when, in all likelihood, we could obtain additional capital on terms more
favorable than those provided by the warrants and options.

         OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ SMALLCAP MARKET IF WE
DO NOT MEET THE CONTINUED LISTING CRITERIA.

         Our common stock was delisted from the Nasdaq National Market in
October 1999 for failure to meet the continued listing criteria and is now
listed on the Nasdaq SmallCap Market, which may impair the liquidity of our
common stock. If in the future we are unable to satisfy the continued listing
requirements of the Nasdaq SmallCap Market, our stock may be delisted from the
Nasdaq SmallCap Market. If our stock is delisted from the Nasdaq SmallCap
Market, the liquidity of our stock could be further impaired, not only in the
number of securities which could be bought and sold, but also through delays in
the timing of transactions, reduction in coverage by security analysts and the
news media and lower prices for our common stock than might otherwise be
attained. We cannot assure that we will continue to meet the criteria for
continued listing on the Nasdaq SmallCap Market.

         If our stock is delisted from the Nasdaq SmallCap Market, trading, if
any, in our stock would thereafter be conducted:

     o   in the over-the-counter market in the "pink sheets;" or

     o   on the National Association of Securities Dealers, Inc.'s "Electronic
         Bulletin Board."

         Continued inclusion on the Nasdaq SmallCap Market generally requires
that we maintain:

     o   at least $2,000,000 in "net tangible assets" (total assets less total
         liabilities and goodwill) or a market capitalization of at least $35
         million;

     o   a minimum bid price of the common stock of $1.00 per share;

     o   at least 500,000 shares in the public float valued at $1,000,000 or
         more;

     o   at least two active market makers for our common stock; and

     o   at least 300 holders of our common stock.

         IF OUR COMMON STOCK IS DELISTED FROM NASDAQ IT MAY BE SUBJECT TO
INVESTOR SUITABILITY REQUIREMENTS WHICH MAY ADVERSELY AFFECT OUR STOCK'S
LIQUIDITY.

         If our stock is delisted from the Nasdaq SmallCap Market, 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.

                                      -48-
<PAGE>

         IF OUR COMMON STOCK IS DELISTED FROM NASDAQ IT MAY BE A "PENNY STOCK"
WHICH REQUIRES SIGNIFICANT DISCLOSURE IN CONNECTION WITH STOCK TRADES, WHICH MAY
ADVERSELY AFFECT OUR STOCK'S LIQUIDITY.

         If our stock is delisted from Nasdaq or we do not meet certain minimum
net tangible assets or average revenue criteria, we may be subject to the
Commission's "penny stock" rules. For any transaction involving a penny stock,
unless exempt, the rules require:

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

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

     o   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:

     o   that has a market price of less than $5.00 per share; or

     o   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.

13.      EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits

                  1.01      Underwriting Agreement with Blue Stone Capital
                            Partners, L.P.(1)

                  3.01      Amended and Restated Articles of Incorporation

                  3.01(a)   Articles of Amendment establishing the Series D
                            Preferred Stock of Interactive Magic, Inc.,(6)

                  3.01(b)   Articles of Amendment changing the name of the
                            Company to iEntertainment Network, Inc.

                  3.02      Bylaws (1)

                  4.04      Form of Representatives' Warrant Agreement,
                            including Form of Warrant Certificate(1)

                  4.05      Registration Rights Agreement dated August 16, 1999
                            between Registrant and John W. Stealey(5)

                 10.01      Stock Purchase Agreement, dated February 4, 1998, by
                            and between the Company and Vertical Financial
                            Holdings(1)

                 10.02      Investor's Rights Agreement, dated February 4, 1998,
                            by and between the Company and Vertical Financial
                            Holdings (1)

                 10.03      Marketing Agreement, dated February 4, 1998, between
                            the Company and General Capital (1)

                 10.04      Merger Agreement, dated as of March 24, 1997, as
                            amended April 2, 1997, by and among the Company,
                            Interactive Creations Acquisition Corp., certain
                            shareholders of Interactive Creations Incorporated
                            and Interactive Creations Incorporated (1)

                 10.05      Form of Shareholder Agreement between the Company
                            and each shareholder of Interactive Creations
                            Incorporated (1)

                                      -49-
<PAGE>

                 10.06      Form of Stock Purchase Warrant issued to each of
                            J.W. Stealey, Robert L. Pickens, Laura Stealey,
                            David H. Kestel, J. Nicholas England, W. Joseph
                            McClelland, Avi Suriel, Marion Bass and Oppenheimer
                            (1)

                 10.08      Loan and Security Agreement, dated March 24, 1997,
                            as amended April 1, 1997 (See Exhibit 10.10 below),
                            by and between the Company and Petra Capital LLC (1)

                 10.09      Stock Purchase Warrant, dated March 24, 1997, as
                            amended April 1, 1997 (See Exhibit 10.10 below), and
                            January 31, 1998, as amended, issued by the Company
                            to Petra Capital LLC (1)

                 10.10      First Amendment to Loan and Security Agreement and
                            Stock Purchase Warrant dated April 1, 1997 by and
                            between the Company and Petra Capital LLC (1)

                 10.11      Promissory Note, dated August 25, 1997, issued by
                            the Company to Branch Banking & Trust Company (1)

                 10.12      Guaranty Agreement, dated August 25, 1997, between
                            J.W. Stealey and Branch Banking & Trust Company (1)

                 10.13      Loan and Security Agreement, dated September 29,
                            1997, among the Company, iMagic Online Corporation
                            and Oberlin Capital, L.P. (1)

                 10.14      Loan and Security Agreement, dated April 30, 1997,
                            between Greyrock Business Credit, a Division of
                            NationsCredit Commercial Corporation, and the
                            Company (1)

                 10.15      Lease Agreement, dated December 4, 1995, as amended
                            February 7, 1996, by and between Southport Business
                            Park Limited Partnership and the Company (1)

                 10.16      Employment Agreement, dated January 3, 1995, between
                            the Company and J.W. Stealey, as amended (1)

                 10.17      Employment Agreement, dated January 3, 1995, between
                            the Company and Robert L. Pickens, as amended (1)

                 10.18      Employment Agreement, dated March 25, 1996 between
                            the Company and William J. Kaluza (1)

                 10.19      Employment Agreement, dated January 3, 1995, between
                            the Company and Joseph Rutledge, and form of
                            amendment thereto (1)

                 10.20      Employment Agreement, dated February 1, 1995,
                            between the Company and Raymond Rutledge, and form
                            of amendment thereto (1)

                 10.22      1995 Incentive Stock Option Plan (1)

                 10.23      ICI Stock Option Plan (1)

                 10.24      1998 Stock Plan (1)

                 10.25      1998 Employee Stock Purchase Plan (1)

                 10.26      Letter Agreement, dated as of May 27, 1998, by and
                            among the Company and the holders of the Company's
                            outstanding Series B Preferred Stock (1)

                 10.27      Amendment No. 1 dated February 12, 1999 to the
                            Merger Agreement (3)

                 10.28      Securities Purchase Agreement dated as of January
                            25, 1999 between the Company and RGC International
                            Investors LDC ("RGC") (2)

                 10.29      Promissory Note dated January 26, 1999 issued by the
                            Company to RGC ("Note") (2)

                 10.30      Registration Rights Agreement dated as of January
                            25, 1999 between the Company and RGC (2)

                 10.31      Form of Warrant issuable by the Company pursuant to
                            the Note (2)

                 10.33      Escrow Agreement dated as of February 12, 1999 by
                            and among the Company, Branch Banking and Trust
                            Company, Multiplayer Games Network, Inc., Tantalus,
                            Inc. and James Hettinger (3)

                 10.34      Registration Rights Agreement dated as of February
                            12, 1999 by and among the Company, Multiplayer Games
                            Network, Inc. and Tantalus, Inc. (3)

                 10.35      Registration Rights Agreement dated as of February
                            12, 1999 by and among the Company, Andrew G. Burch,
                            IFM Venture Group and James Bailey (3)

                 10.36      Agreement Regarding Assignment of Contracts dated as
                            of May 25, 1999, between Registrant and Ubi Soft
                            Entertainment S.A. (4)

                 10.37      Online Rights License Agreement dated effective June
                            28, 1999 between the Registrant and Ubi Soft
                            Entertainment S.A. (4)

                                      -50-
<PAGE>
                 10.37(a)   Securities Purchase and Exchange Agreement dated
                            November 8, 1999 between Interactive Magic, Inc. and
                            RGC International Investors, LDC (6)

                 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.(6)

                 10.39      Employment Agreement, dated October 27, 1999,
                            between the Company and Michael Pearce

                 10.40      Memo of Understanding with Joseph F. Rutledge

                 10.41      Independent Contractor Agreement with Joseph F.
                            Rutledge

                 10.42      Memo of Understanding with Raymond E. Rutledge

                 10.43      Independent Contractor Agreement with Raymond E.
                            Rutledge

                  21.1      Subsidiaries of the Company

                  23.1      Consent of Ernst & Young LLP

                  27.1      Financial Data Schedule

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

(1)  Incorporated by reference to the Registrant's Registration Statement on
     Form SB-2 as filed on May 28, 1998.

(2)  Incorporated by reference to the Registrant's Current Report on Form 8-K as
     filed on January 29, 1999.

(3)  Incorporated by reference to the Registrant's Current Report on Form 8-K as
     filed on February 22, 1999.

(4)  Incorporated by reference to the Registrant's Current Report on Form 8-K as
     filed on July 15, 1999.

(5)  Incorporated by reference to the Registrant's Current Report on Form 8-K as
     filed on August 25, 1999.

(6)  Incorporated by reference to the Registrant's Proxy Statement on Schedule
     14A as filed on December 9, 1999.


     (b) Reports on Form 8-K

         During the quarter ended December 31, 1999, the Registrant filed a
current report on Form 8-K under item 5 on October 13, 1999 and a current report
on Form 8-K under Item 5 on October 26, 1999. Since January 1, 2000, the
Registrant filed a current report on Form 8-K/A under Item 7 on February 15,
2000.

                                      -51-
<PAGE>

                          iEntertainment Network, Inc.

                        Consolidated Financial Statements

                     Years ended December 31, 1999 and 1998




                                    CONTENTS

Report of Independent Auditors.......................................F-1

Consolidated Financial Statements

Consolidated Balance Sheets..........................................F-2
Consolidated Statements of Operations................................F-4
Consolidated Statements of Stockholders' Equity......................F-5
Consolidated Statements of Cash Flows................................F-7
Notes to Consolidated Financial Statements...........................F-9
<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. (f/k/a Interactive Magic, Inc.) as of December 31, 1999 and 1998,
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, 1999 and 1998, and the consolidated
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.

                                                           /s/ ERNST & YOUNG LLP

Raleigh, North Carolina
February 25, 2000

                                      F-1
<PAGE>
                          iEntertainment Network, Inc.

                           Consolidated Balance Sheets
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                          DECEMBER 31
                                                                                    1999              1998
                                                                              ------------------------------------
<S>                                                                                   <C>               <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                      $    3,092       $     2,943
   Trade receivables, net of allowances of $241 and $2,871 at
      December 31, 1999 and 1998, respectively                                           421             2,109
   Inventories                                                                             -               892
   Advance royalties, net                                                                 44             1,586
   Software development costs, net                                                        92               912
   Prepaid expenses and other                                                             94               252
                                                                              ------------------------------------
Total current assets                                                                   3,743             8,694

Property and equipment, net                                                              714             1,082

Noncurrent assets:
   Royalties receivable                                                                   80               726
   Goodwill, net of accumulated amortization of $1,332                                 3,329                 -
   Other                                                                                  10                18
                                                                              ------------------------------------
Total noncurrent assets                                                                3,419               744


                                                                              ------------------------------------
Total assets                                                                      $    7,876       $    10,520
                                                                              ====================================
</TABLE>

                                      F-2
<PAGE>
<TABLE>
<CAPTION>
                                                                                            DECEMBER 31
                                                                                      1999              1998
                                                                                ------------------------------------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
<S>                                                                                <C>              <C>
   Accounts payable and accrued expenses                                           $    2,258       $    1,698
   Royalties and commissions payable                                                      120              768
   Lines of credit                                                                          -            1,348
   Current portion of capital lease obligations                                            55               23
                                                                                ------------------------------------
Total current liabilities                                                               2,433            3,837

Noncurrent liabilities:
   Accrued interest payable to related parties                                              -              117
   Capital lease obligations, less current portion                                         29               15
                                                                                ------------------------------------
Total noncurrent liabilities                                                               29              132

Series D Redeemable Convertible Preferred Stock, $.10 par value; liquidation and
   stated value of $1,000 per share, plus accumulated accretion; 4,911 shares
   authorized, issued and outstanding at December 31, 1999 (NOTE 7)                     4,951                -

Stockholders' equity:
   Common stock, $.10 par value; 50,000,000 shares authorized; 14,722,203 and
      9,850,867 shares issued and outstanding at December 31, 1999 and 1998,
      respectively                                                                      1,472              985
   Additional paid-in capital                                                          36,672           31,522
   Accumulated deficit                                                                (37,565)         (25,862)
   Accumulated other comprehensive loss                                                  (116)             (94)
                                                                                ------------------------------------
Total stockholders' equity                                                                463            6,551
                                                                                ------------------------------------
Total liabilities, redeemable preferred stock  and stockholders' equity            $    7,876       $   10,520
                                                                                ====================================
</TABLE>
SEE ACCOMPANYING NOTES.

                                      F-3
<PAGE>
                          iEntertainment Network, Inc.

                      Consolidated Statements of Operations
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
                                                                                        YEAR ENDED DECEMBER 31
                                                                                        1999             1998
                                                                                  -----------------------------------
Net revenues:
<S>                                                                                   <C>              <C>
   CD-ROM product sales                                                               $       610      $    9,177
   Online sales                                                                             1,859           1,773
   Advertising and contract revenue                                                         1,351               -
   Royalties and licenses                                                                     440           1,616
                                                                                  -----------------------------------
Total net revenues                                                                          4,260          12,566

Cost of revenues:
   Cost of products and services                                                            2,516           3,157
   Royalties and amortized software costs                                                     341           2,942
                                                                                  -----------------------------------
Total cost of revenues                                                                      2,857           6,099
                                                                                  -----------------------------------
Gross profit                                                                                1,403           6,467

Operating expenses:
   Sales and marketing                                                                      4,411           8,490
   Product development                                                                      4,987           5,983
   General and administrative                                                               3,929           2,684
   Goodwill amortization                                                                    1,332               -
                                                                                  -----------------------------------
Total operating expenses                                                                   14,659          17,157
                                                                                  -----------------------------------
Operating loss                                                                            (13,256)        (10,690)

Other (income) expense:
   Interest expense - third parties                                                         4,649             554
   Interest expense - related parties                                                         130             134
   Other                                                                                     (768)           (161)
                                                                                  -----------------------------------
Total other expense                                                                         4,011             527
                                                                                  -----------------------------------
Loss before income taxes and extraordinary items                                          (17,267)        (11,217)
Income tax expense                                                                            (58)            (28)
                                                                                  -----------------------------------
Loss before extraordinary items                                                           (17,325)        (11,245)
Extraordinary gain (loss) on early extinguishment of debt                                   5,662            (407)
                                                                                  -----------------------------------
Net loss                                                                                  (11,663)        (11,652)
Accretion of Series D Redeemable Convertible Preferred Stock                                  (40)              -
                                                                                  -----------------------------------
Net loss available to common stockholders                                            $    (11,703)    $   (11,652)
                                                                                  ===================================

Basic and diluted loss per share:
   Loss before extraordinary items                                                   $     (1.51)     $    (1.73)
   Extraordinary items                                                                      0.49           (0.06)
                                                                                  -----------------------------------
   Net loss per share                                                                $     (1.02)     $     (1.79)
                                                                                  ===================================
Weighted average shares used in computing basic and diluted loss per share            11,448,186       6,515,213
                                                                                  ===================================
</TABLE>

                                      F-4
<PAGE>
                          iEntertainment Network, Inc.

                 Consolidated Statements of Stockholders' Equity
                        (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                                     CONVERTIBLE PREFERRED STOCK
                                                           -------------------------------------------------
                                                                  SERIES A                SERIES B             COMMON STOCK
                                                           ----------------------------------------------------------------------
                                                              SHARES     AMOUNT      SHARES       AMOUNT      SHARES      AMOUNT
                                                           -------------------------------------------------------------------------

<S>                                                          <C>              <C>        <C>        <C>          <C>           <C>
     Balance at December 31, 1997                             82,634     $    $8         -        $    -              -  $       -
        Exercise of stock options                                  -           -         -             -              -          -
        Issuance of common stock                                   -           -         -             -              -          -
        Exercise of warrants                                       -           -         -             -              -          -
        Issuance of preferred stock                                -           -   778,746            78              -          -
        Conversion of notes payable into common stock              -           -         -             -              -          -
        Recapitalization contemporaneous with the
          initial public offering (NOTE 7)                   (82,634)         (8) (778,746)          (78)     6,793,699        679
        Issuance of common stock                                   -           -         -             -      2,990,000        299
        Exercise of warrants                                       -           -         -             -         18,330          2
        Exercise of stock options                                  -           -         -             -         48,838          5
        Issuance of warrants                                       -           -         -             -              -          -
        Comprehensive loss:
          Net loss                                                 -           -         -             -              -          -
          Cumulative translation adjustment                        -           -         -             -              -          -
        Total comprehensive loss                                   -           -         -             -              -          -
                                                           -------------------------------------------------------------------------
     Balance at December 31, 1998                                  -           -         -              -     9,850,867        985
        Exercise of stock options and issuance of
          shares for services                                      -           -         -              -       180,407         18
        Beneficial conversion feature of convertible
          debenture and related contingently issuable
          warrants (NOTE 5)                                        -           -         -              -             -          -
        Issuance of common stock for the acquisition
          of MPG-Net and The Gamers Net (NOTE 2)                   -           -         -              -       857,143         86
        Partial conversion of debenture into common
          stock (NOTE 5)                                           -           -         -              -     1,683,786        168
        Issuance of common stock (NOTE 7)                          -           -         -              -     2,150,000        215
        Issuance of redeemable convertible preferred
          stock for extinguishment of debenture (NOTE 7)           -           -         -              -             -          -
        Issuance of warrants                                       -           -         -              -             -          -
        Accretion of redeemable preferred stock                    -           -         -              -             -          -
        Comprehensive loss:
          Net loss                                                 -           -         -              -             -          -
          Cumulative translation adjustment                        -           -         -              -             -          -
        Total comprehensive loss                                   -           -         -              -             -          -
                                                           -------------------------------------------------------------------------
     Balance at December 31, 1999                                  -      $    -         -        $     -    14,722,203   $  1,472
                                                           =========================================================================
</TABLE>

                                      F-5
<PAGE>
<TABLE>
<CAPTION>
              CLASS A                   CLASS B                        ACCUMULATED
            COMMON STOCK             COMMON STOCK        ADDITIONAL       OTHER
     ---------------------------------------------------  PAID-IN     COMPREHENSIVE   ACCUMULATED
         SHARES       AMOUNT      SHARES       AMOUNT     CAPITAL         LOSS          DEFICIT         TOTAL
     --------------------------------------------------------------------------------------------------------------
            <S>          <C>          <C>         <C>         <C>        <C>              <C>            <C>
         3,145,696    $    314      7,875       $    1     $5,047       $    (59)      $   (14,210)   $   (8,899)
           268,750          27    102,500           10         381             -                 -           418
                 -           -     48,604            5          (5)            -                 -             -
           516,769          52          -            -         (52)            -                 -             -
                 -           -          -            -       3,091             -                 -         3,169
                 -           -    442,478           44       1,956             -                 -         2,000

        (3,931,215)       (393)  (601,457)         (60)        460             -                 -           600
                 -           -          -            -      20,176             -                 -        20,475
                 -           -          -            -          (2)            -                 -             -
                 -           -          -            -          76             -                 -            81
                 -           -          -            -         394             -                 -           394

                 -           -          -            -           -             -           (11,652)      (11,652)
                 -           -          -            -           -           (35)                -           (35)
                                                                                                   ----------------
                 -           -          -            -           -             -                 -       (11,687)
     --------------------------------------------------------------------------------------------------------------
                 -           -          -            -      31,522           (94)          (25,862)        6,551

                 -           -          -            -        378              -                 -           396


                 -           -          -            -      4,000              -                 -         4,000

                 -           -          -            -      4,060              -                 -         4,146

                 -           -          -            -        663              -                 -           831
                 -           -          -            -      1,932              -                 -         2,147

                 -           -          -            -     (6,479)             -                 -        (6,479)
                 -           -          -            -        596              -                 -           596
                 -           -          -            -          -              -               (40)          (40)

                 -           -          -            -          -              -           (11,663)      (11,663)
                 -           -          -            -          -            (22)                -           (22)
                                                                                                   ----------------
                 -           -          -            -          -              -                 -       (11,685)
     --------------------------------------------------------------------------------------------------------------
                 -    $      -          -      $    -      $36,672     $    (116)         $(37,565)  $       463
     ==============================================================================================================
</TABLE>
     SEE ACCOMPANYING NOTES.

                                      F-6
<PAGE>
<TABLE>
<CAPTION>
                          iEntertainment Network, Inc.

                      Consolidated Statements of Cash Flows
                                 (IN THOUSANDS)

                                                                                      YEAR ENDED DECEMBER 31
                                                                                      1999              1998
                                                                                ------------------------------------
OPERATING ACTIVITIES
<S>                                                                                  <C>           <C>
Net loss                                                                             $ (11,663)    $    (11,652)
Adjustments to reconcile net loss to net cash used in operating
   activities:
     Extraordinary (gain) loss                                                          (5,662)             407
     Gain on disposition of CD-ROM advance royalty assets                                 (855)               -
     Loss on disposal of equipment                                                         231                -
     Amortization of goodwill                                                            1,332                -
     Depreciation and amortization                                                         560              461
     Issuance of warrants                                                                  206              394
     Amortization of capitalized software development costs                                948              963
     Noncash compensation expense                                                           48                -
     Issuance of common stock for services                                                  61                -
     Noncash interest expense                                                            3,652               39
     Write-down of remaining CD-ROM assets                                               2,240                -
     Changes in operating assets and liabilities:
       Trade and royalties receivable                                                    1,238               85
       Inventories                                                                         492             (255)
       Advance royalties                                                                  (519)             403
       Other                                                                                30              126
       Accounts payable and accrued expenses                                             1,029           (1,078)
       Royalties and commissions payable                                                  (648)             (90)
       Accrued interest                                                                     66             (546)
                                                                                ------------------------------------
Net cash used in operating activities                                                   (7,214)         (10,743)

INVESTING ACTIVITIES
Acquisition of MPG-Net, Inc.                                                               (15)               -
Net proceeds from disposition of CD-ROM assets (NOTE 1)                                  2,315                -
Increase in note receivable                                                               (200)            (200)
Purchase of property and equipment                                                        (213)            (347)
Software development costs                                                                (128)          (1,450)
                                                                                ------------------------------------
Net cash provided by (used in) investing activities                                      1,759           (1,997)
</TABLE>
                                      F-7
<PAGE>
<TABLE>
<CAPTION>
                          iEntertainment Network, Inc.

                Consolidated Statements of Cash Flows (continued)
                                 (IN THOUSANDS)
                                                                                          DECEMBER 31
                                                                                    1999               1998
                                                                             ---------------------------------------
FINANCING ACTIVITIES
<S>                                                                                   <C>               <C>
Proceeds from issuance of common stock                                                1,252             20,655
Proceeds from issuance of redeemable convertible preferred stock                      1,100                  -
Proceeds from convertible preferred stock                                                 -              3,169
Proceeds from long-term debt                                                          3,660                350
Payments on long-term debt                                                                -             (5,300)
Payments on notes payable to related parties                                              -               (870)
Net payment on lines-of-credit                                                         (348)            (2,635)
Payments on capital lease obligations                                                   (38)               (35)
                                                                             ---------------------------------------
Net cash provided by financing activities                                             5,626             15,334

Effect of currency exchange rate changes on cash and cash equivalents                   (22)               (35)
                                                                             ---------------------------------------
Net increase in cash and cash equivalents                                               149              2,559
Cash and cash equivalents at beginning of year                                        2,943                384
                                                                             ---------------------------------------
Cash and cash equivalents at end of year                                         $    3,092         $    2,943
                                                                             =======================================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest                                                            $     112         $   1,376
                                                                              ======================================
Cash paid for income taxes                                                        $      41         $       -
                                                                              ======================================

NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of redeemable convertible preferred stock for extinguishment of
    debenture and accrued interest                                               $    3,811         $       -
                                                                              ======================================
Issuance of common stock to stockholder in exchange for accrued interest and
    stockholder's assumption of outstanding line of credit                       $    1,183         $       -
                                                                              ======================================
Issuance of warrants to broker in connection with convertible debenture
    (NOTE 5)                                                                     $      390         $       -
                                                                              ======================================
Contingently issuable warrants provided to holder of convertible
    debenture (NOTE 5)                                                           $    1,067         $       -
                                                                              ======================================
Partial conversion of debenture into common stock                                $      831         $       -
                                                                              ======================================
Issuance of common stock for acquisition of MPG-Net, Inc. and The Gamers
    Net, Inc.                                                                    $    4,146        $        -
                                                                              ======================================
Conversion of notes payable to related parties into common stock                 $        -        $    2,600
                                                                              ======================================
Exercise of stock options for forgiveness of accrued interest                    $        -        $      319
                                                                              ======================================
</TABLE>
SEE ACCOMPANYING NOTES.

                                      F-8
<PAGE>
                          iEntertainment Network, Inc.

                   Notes to Consolidated Financial Statements

                                December 31, 1999


1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

iEntertainment Network, Inc. (f/k/a Interactive Magic, Inc.) (or 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-per-play games and services,
including simulation, parlor, strategy, role playing and action games. Effective
December 30, 1999, the Company changed its name from Interactive Magic, Inc. to
iEntertainment Network, Inc.

DISPOSITION OF CD-ROM ASSETS

On May 25, 1999, the Company executed an Agreement Regarding Assignment of
Contracts (the "Agreement") to sell its rights under certain development
contracts for CD-ROM products between the Company and third party developers
(and assume certain liabilities thereto) for $2.5 million thereby exiting the
CD-ROM portion of its business. The Agreement does provide, however, a license
by which the Company can continue to use these products for Internet gaming
purposes. The transaction was consummated on June 30, 1999. Cash proceeds to the
Company, net of related expenses, were $2.3 million. The carrying value of net
assets sold (primarily CD-ROM advance royalties) was $ 1.6 million. The Company
recognized a gain of $855,000 related to the sale, which is included in other
(income) expense in the consolidated statements of operations.

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, 1999 was $692,000 and is reflected as
accounts payable and accrued expenses in the consolidated balance sheet. In the
first quarter of 2000, the Company settled with its two largest distributors by
paying $250,000 in cash and issuing common stock valued at $300,000.

During the fourth quarter of 1999, management of the Company decided to close
its European operations which historically had supported its CD-ROM business.
The Company recorded a charge to operating expenses in the fourth quarter which
consisted primarily of lease termination fees and severance for four employees.
These termination costs are included in accounts payable and accrued expenses in
the December 31, 1999 consolidated balance sheet.

                                      F-9
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

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.

CONCENTRATIONS

The Company maintains certain cash and cash equivalents with banks which are in
excess of insured limits. The Company does not believe the risk of loss is
significant.

The Company uses an outside vendor to solicit advertisers to use its advertising
services, to deliver ads to its websites and to bill and collect for these
services. Substantially all of the Company's advertising revenues are generated
through this vendor relationship. The Company does not believe, however, that
there is a significant risk associated with this vendor for the services
provided, as alternative sources are generally available on commercially
reasonable terms.

INVENTORIES

Inventories consisted of pre-packaged CD-ROM software packages and related
materials and were stated at the lower of cost or market with costs determined
using the first-in, first-out ("FIFO") cost flow assumption. Because the Company
exited the CD-ROM portion of its business in 1999, all remaining CD-ROM
inventory was written off.

                                      F-10
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)


1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVENTORIES (CONTINUED)

Inventories consisted of the following (IN THOUSANDS):

                                                        DECEMBER 31
                                                   1999             1998
                                            ------------------------------------

   Finished goods                              $      -          $  1,065
   Components                                         -               117
                                            ------------------------------------
                                                      -             1,182
   Inventory valuation reserve                        -              (290)
                                            ------------------------------------
                                               $      -          $    892
                                            ====================================

ADVANCE ROYALTIES

Advance royalties represent prepayments made to independent software developers
under development agreements. Advance royalties are expensed as part of
royalties and amortized software costs at the contractual royalty rate based on
actual net product sales. Management continuously evaluates the future
realization of advance royalties, and charges to cost of revenues any amount
that management deems unlikely to be amortized at the contractual royalty rate
through gaming revenues. At December 31, 1999 and 1998, the reserve for advance
royalties was $0 and $1,654,000, respectively.

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. Depreciation expense, including amortization of equipment leased under
capital leases, was $560,000 and $461,000 for the years ended December 31, 1999
and 1998, respectively.

                                      F-11
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PROPERTY AND EQUIPMENT (CONTINUED)

Property and equipment consists of the following (IN THOUSANDS):

                                                             DECEMBER 31
                                                        1999             1998
                                                   -----------------------------

   Equipment                                        $   1,063         $   1,547
   Furniture and fixtures                                 147               188
   Software                                               450               488
   Leasehold improvements                                  56                59
                                                   -----------------------------
                                                        1,716             2,282
   Less accumulated depreciation and amortization      (1,002)           (1,200)
                                                   -----------------------------
                                                    $     714         $   1,082
                                                   =============================
GOODWILL

The Company has classified as goodwill the cost in excess of fair value of net
assets acquired in purchase transactions. Goodwill is being amortized on a
straight-line basis over two to three years. On an ongoing basis, the Company
assesses 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. Goodwill determined to be unrecoverable based on
future cash flows would be written-off in the period in which such determination
is made.

SOFTWARE DEVELOPMENT COSTS

Costs incurred in the development of software for sale to customers are
capitalized after a product's technological feasibility has been established.
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.

                                      F-12
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SOFTWARE DEVELOPMENT COSTS (CONTINUED)

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

                                                  1999             1998
                                             ----------------------------------

   Balance at beginning of year                $     912          $    425
   Capitalized                                       128             1,450
   Amortized                                        (948)             (963)
                                             ----------------------------------
   Balance at end of year                      $      92          $    912
                                             ==================================

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash and cash equivalents, trade and royalties
receivable, accounts payable and accrued expenses, lines of credit and
redeemable convertible preferred stock approximate their fair values at December
31, 1999 and 1998.

REVENUE RECOGNITION

Revenue from online sales is recognized at the time the game is played and is
based upon actual usage by the customer on an hourly basis. 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 vendor. The Company's
advertising contracts do not guarantee a minimum number of impressions to be
delivered.

In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements", which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. SAB No. 101 provides guidance on
a variety of revenue recognition issues, including gross versus net income
statement presentation. The Company's 1999 quarterly reporting on Form 10-QSB
reported advertising revenues gross with related fees reported as selling and
marketing expenses. Based on the criteria of SAB No. 101, the Company has
revised its 1999 reporting to present its advertising revenues net of these
administrative fees.

                                      F-13
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)


1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION (CONTINUED)

Revenue from CD-ROM product sales was recognized at the time of product
shipment. Revenue from royalties and licenses is 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 is recognized upon delivery of the
product master or the first copy provided collectibility is probable. Per copy
royalties on sales that exceed the guarantee are recognized as earned. The
Company accepts product returns and provides price protection on certain unsold
merchandise. Revenue is recorded net of an allowance for estimated future
returns, markdowns, price protection and warranty costs. Such reserves are based
upon management's evaluation of historical experience, current industry trends
and estimated costs.

In October 1997, the Accounting Standards Executive Committee "(AcSEC)" issued
Statement of Position "(SOP)" 97-2, "Software Revenue Recognition" as amended in
March 1998 by SOP 98-4 and October 1998 by SOP 98-9. These SOPs provide guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions. The Company adopted SOP 97-2 for software transactions
entered into beginning January 1, 1998. Based on the current requirements of the
SOPs, application of these statements did not have a material impact on the
Company's revenue recognition policies. However, AcSEC is currently reviewing
further modifications to the SOP with the objective of providing more
definitive, detailed implementation guidelines. This guidance could lead to
unanticipated changes in the Company's operations and revenue recognition
practices.

Revenue from certain software development contracts with fixed price components
is recognized on the percentage of completion basis in accordance with the
American Institute of Certified Public Accountants' SOP 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts." In
accordance with SOP 81-1, the Company recognizes percentage of completion
revenue based upon the ratio of accumulated incurred costs to the total
estimated costs to complete each contract.

The accounts receivable allowance at December 31, 1998 consists primarily of
reserves for product returns, markdowns, price protection and warranty costs.
The allowance at December 31, 1999, as well as the allowance at December 31,
1998, includes 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-14
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

ADVERTISING

The Company expenses advertising costs as incurred. Advertising expense was
approximately $1,582,000 and $3,590,000 for the years ended December 31, 1999
and 1998, respectively.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles 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, sales returns
and allowances, warranty provisions, and estimates regarding the recoverability
of prepaid royalty advances and inventory. 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.

                                      F-15
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)


1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

EMPLOYEE STOCK COMPENSATION

The Company has elected to continue to follow APB Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25") and related interpretations in
accounting for its employee stock options as permitted by SFAS No. 123
"Accounting for Stock-Based Compensation" and make the required pro forma
disclosures required by SFAS No. 123 (see Note 8). Under APB No. 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.

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.

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. All shares used in computing basic net loss
per share reflect the retroactive effect of the Company's July 1998 one-for-two
reverse stock split.

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.

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133, as
amended, is required to be adopted in years beginning after June 15, 2000.
Because of the Company's minimal use of derivatives, management does not
anticipate the adoption of the new statement will have a significant affect on
earnings or the financial position of the Company.

                                      F-16
<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
Accounting Principles Board Opinion ("APL") No. 16, "Business Combinations" and,
accordingly, the operating results of MPG-Net have been 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 is being amortized on a
straight-line basis over 3 years.

The following unaudited consolidated pro forma data summarizes the combined
operating results of the Company and MPG-Net as if the acquisition had occurred
at January 1, 1998:

                                                   YEAR ENDED DECEMBER 31
                                                   1999               1998
                                            ------------------------------------

Net revenues                                    $     4,354      $     12,889
Loss before extraordinary items                     (17,785)          (14,210)
Net loss                                            (12,123)          (14,617)
Net loss per share                              $    (1.05)      $      (1.96)

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 Opinion No. 16 and, accordingly, the
operating results of The Gamers Net have been included in the Company's
consolidated financial statements since the date of acquisition. The excess of
the aggregate purchase price over the fair value of the net assets acquired is
being amortized on a straight-line basis over a period of two years.

                                      F-17
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



3. LINES OF CREDIT

During 1999 and 1998, the Company maintained a revolving line of credit
arrangement with a bank for up to $2,750,000. The principal balance outstanding
at any point in time was payable on demand with interest payable monthly at the
current prime rate. The weighted-average interest rate on the line of credit was
7.8% and 8.5% for the years ended December 31, 1999 and 1998, respectively.
Advances on the line of credit were collateralized by a personal guarantee of
the Company's majority stockholder. In consideration for this guarantee, the
Company was obliged to pay the stockholder as additional interest expense an
amount equal to 6% of the outstanding balance on the line of credit. For the
years ended December 31, 1999 and 1998, the Company incurred $57,000 and $64,000
relating to this guarantee, respectively. In November 1999, the Stockholder
assumed the $1,000,000 outstanding balance on the line of credit in exchange for
the Company issuing 1,000,000 shares of its common stock to the stockholder.

The Company also entered into a line of credit agreement with its bank to borrow
up to $150,000. The line of credit was collateralized by the Company's net
property and equipment. The principal balance outstanding at any point in time
was payable on demand with interest payable monthly at the current prime rate.
The weighted-average interest rate on the line of credit was 7.8% and 8.5% for
the years ended December 31, 1999 and 1998, respectively. The balance
outstanding at December 31, 1998 was $32,000. All outstanding borrowings on the
loan were paid in full during 1999.

On April 30, 1998, the Company closed on a $5 million line of credit bearing an
interest rate of the bank's prime plus 2%. Borrowings on the line of credit were
limited to the lesser of $5 million or 65% of the Company's outstanding eligible
receivables and inventory. Borrowings on the line of credit were collateralized
by the Company's accounts receivable, inventory, and intellectual property. The
line of credit expired on October 15, 1998 and all outstanding borrowings were
repaid in full.

                                      F-18
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



4. NOTES PAYABLE TO RELATED PARTIES

On February 4, 1998, a $600,000 and two $1 million notes payable to stockholders
were converted into 132,744 shares of Series C Redeemable Convertible Preferred
Stock and 442,478 shares of Class B Common Stock, respectively. In connection
with the Company's July 1998 initial public offering, the Series C Redeemable
Convertible Preferred Stock was converted into 132,744 shares of common stock
and the 442,478 shares of Class B Common Stock were exchanged for an equal
number of shares of common stock (see Note 7). Utilizing proceeds from the
Company's initial public offering, a $870,000 note payable to a related party
was repaid in full during 1998.

5. LONG-TERM DEBT

On January 25, 1999, the Company issued a $4 million convertible debenture ("the
debenture") for net cash proceeds to the Company of approximately $3.7 million.
The Company also issued 200,000 warrants expiring in 2004 to the broker of the
debenture, which represented additional debt issuance costs, valued at $390,000.
These warrants were recorded as additional paid-in capital and the resulting
debt issuance costs were being amortized to interest expense over the three-year
term of the debenture. These warrants have a weighted average exercise price of
$4.85 and were exercisable upon issuance. For the year ended December 31, 1999,
amortization of the debt issuance costs was approximately $291,000.

The debenture accrued interest at an annual interest rate of 6% and was due with
principal on January 25, 2002. The holder of the convertible debenture could
convert all or any portion of the debenture into the Company's common stock
where the number of shares to be issued would be determined by dividing the
principal plus interest due by the conversion price. The conversion price would
be equal to the lesser of a conversion price ranging from 77% to 93% of the
market price of the Company's common stock (as defined in the securities
purchase agreement) or a conversion price ranging from 104% to 120% of a fixed
conversion price (as defined in the securities purchase agreement). The fact
that the conversion price was set below the market price of the Company's stock
resulted in the debenture having a beneficial conversion feature. On the date of
conversion, if the Company's common stock traded at a price higher than the
fixed conversion price, the Company was obligated to issue to the holder of the
debenture warrants to purchase the Company's stock at a one-for-two ratio of
common stock issued as a result of the debenture conversion at an exercise price
equal to the debenture conversion price (the "contingently issuable warrants").

                                      F-19
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



5. LONG-TERM DEBT (CONTINUED)

Subsequent to May 11, 1999, the debenture accrued additional interest at a
monthly rate of 4% of the outstanding principal balance until such time as the
Company's registration statement effecting the shares issuable under the
debenture became, and remained effective. For the year ended December 31, 1999,
the Company recorded approximately $738,000 of interest expense related to this
provision.

The contingently issuable warrants were valued at approximately $1.1 million at
the date of issuance and were recorded as additional paid-in capital. The
beneficial conversion feature of the debenture also resulted in a portion of the
proceeds of the debenture being allocated to the conversion feature at the date
of issuance based on its intrinsic value of $2.1 million, which was recorded as
additional paid-in capital. However, since the debenture was immediately
convertible at the date of issuance, the value of the conversion feature was
recorded as additional interest expense and accreted into the carrying value of
the debenture on the date of issuance. Based on the recorded fair value of the
contingently issuable warrants, the initial carrying value assigned to the
debenture at the date of issuance was $2.9 million.

The debenture provided for the beneficial conversion ratio to decrease when
certain conditions existed as defined in the related Securities Purchase
Agreement ("debenture agreement"). During 1999, the Company recorded adjustments
in the beneficial conversion ratio as an allocation of the additional proceeds
of the debenture. The incremental value of beneficial conversion feature ratio
adjustments was based on its intrinsic value, as defined in the debenture
agreement, and limited to the proceeds initially allocated to the debenture.
This incremental value was recorded as interest expense and additional paid-in
capital, respectively.

The difference between the initial carrying value of the debenture and the $4
million face value was being accreted into the carrying value as additional
interest expense over the term of the debenture. For the year ended December 31,
1999, the Company recorded approximately $3,360,000 in interest expense related
to such accretion. For the year ended December 31, 1999, total interest expense
related to this debenture was $4,552,000.

During September 1999, the holder of the debenture converted $689,000 of
principal and the related accrued interest of $142,000 into 1,683,786 shares of
the Company's common stock. The pro-rata portion of the unamortized debt
discount and unaccreted value assigned to the contingently issuable warrants of
approximately $243,000 at the date of the conversion was recorded as additional
interest expense.

                                      F-20
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



5. LONG-TERM DEBT (CONTINUED)

On November 11, 1999, the Company extinguished the remainder of its obligation
to the holder of the debenture in exchange for 3,810.844 shares of the Company's
newly created Series D Redeemable Convertible Preferred Stock ("Series D
Preferred") with a stated value of $1,000 per share. Contemporaneously, the
Company issued 1,100 shares of Series D Preferred to the holder of the debenture
for $1.1 million. On November 11, 1999, the debenture had an outstanding
principal balance of approximately $3.3 million and a net carrying value of $2.2
million. At the date of extinguishment, accrued interest and penalties related
to the debenture totaled $760,000. The Company recognized an extraordinary gain
of $5.7 million as a result of this extinguishment (NOTE 7). In connection with
this extinguishment, the contingently issuable warrants were terminated.

6. LEASES

The Company rents its facilities and certain office equipment under
noncancelable operating leases which expire at various times through 2001. 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
                                                 1999              1998
                                           -----------------------------------

   Leased equipment                            $    164          $    157
   Leased furniture and fixtures                     53                53
                                           -----------------------------------
                                                    217               210
   Less:  accumulated amortization                 (106)             (125)
                                           -----------------------------------
                                               $    111          $     85
                                           ===================================

                                      F-21
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



6. LEASES (CONTINUED)

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

     2000                                             $    55         $   277
     2001                                                  22              82
     2002                                                  13               -
     2003                                                   3               -
                                                    ----------------------------
     Total future minimum lease payments                   93         $   359
                                                                   =============
     Less: amounts representing interest                   (9)
                                                    ---------------
     Present value of future minimum lease payments        84
     Less: current portion                                (55)
                                                    ---------------
                                                      $    29
                                                    ===============

Total rent expense incurred was approximately $518,000 and $462,000 for the
years ended December 31, 1999 and 1998, respectively.

7. STOCKHOLDERS' EQUITY AND REDEEMABLE CONVERTIBLE PREFERRED STOCK

STOCK SPLIT

On July 1, 1998, the Company effected a one-for-two reverse stock split of the
Company's capital stock in connection with the Company reincorporating in North
Carolina. All references in the financial statements with regard to number of
shares of each class of stock have been restated to reflect the reverse stock
split for all periods presented.

                                      F-22
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



7. STOCKHOLDERS' EQUITY  AND REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)

INITIAL PUBLIC OFFERING

On July 27, 1998, the Company consummated an initial public offering ("IPO" or
"Offering") of 2,600,000 shares of its common stock at a price of $8.00 per
share. During August 1998, BlueStone Capital Partners, L.P. and Royce Investment
Group, Inc. (collectively, the "underwriters") exercised in full their
overallotment option to purchase an additional 390,000 shares of the Company's
common stock at the IPO price. All of such shares were sold by the Company. The
net proceeds to the Company from the offering and the exercise of the
overallotment option were approximately $20.5 million.

RECAPITALIZATION

The Company was recapitalized through the exchange of securities which was
effective as of the closing date of the Company's initial public offering as
follows:

     Class A Common Stock: Exchanged for an aggregate of 3,931,215 shares of
     common stock.

     Class B Common Stock: Exchanged for an aggregate of 601,457 shares of
     common stock.

     Series A Convertible Preferred Stock: Converted into an aggregate of 82,634
     shares of common stock.

     Series B Convertible Preferred Stock: Converted into an aggregate of
     2,045,649 shares of common stock.

     Series C Redeemable Convertible Preferred Stock: Converted into an
     aggregate of 132,744 shares of common stock.

     Upon consummation of the Offering, the Company had authorized capital of
     50,000,000 shares of $.10 par value common stock and 25,000,000 shares of
     $.10 par value preferred stock.

                                      F-23
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



7. STOCKHOLDERS' EQUITY  AND REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)

RECAPITALIZATION (CONTINUED)

During November 1999, the Company completed the following financing transactions
to eliminate certain long-term obligations and improve its financial position:

o    The Company extinguished the remainder of its obligation to the holder of
     the debenture in exchange for 3,810.844 shares of the Company's newly
     created Series D Redeemable Convertible Preferred Stock ("Series D
     Preferred") with a stated value of $1,000 per share. Contemporaneously, the
     Company issued 1,100 shares of Series D Preferred to the holder of the
     debenture for $1.1 million.

o    The Company issued 1,100,000 shares of common stock to existing
     stockholders for $1,100,000 in cash.

o    The former chief executive officer ("CEO") of the Company released the
     Company from its line of credit indebtedness to a bank in the amount of
     $1,000,000 in exchange for 1,000,000 shares of common stock. Also, in
     connection with the CEO's resignation on August 16, 1999, the Company
     accrued severance consisting of $200,000 and 50,000 shares of the Company's
     common stock. The former CEO also agreed to waive interest due him from the
     Company in the amount of $183,000 related to a personal guarantee of the
     Company's line of credit (NOTE 3).

The Company incurred approximately $137,000 in costs associated with the filing
of a registration statement for the underlying shares of common stock included
in the above transactions.

CONVERTIBLE PREFERRED STOCK

On February 4, 1998, the company issued 778,746 shares of its Series B
Convertible Preferred Stock ("Series B Preferred") for net proceeds of
$3,169,000. These shares were converted into 2,045,649 shares of common stock in
connection with the Company's initial public offering. The Company and an
affiliate of the holders of the Series B Preferred entered into a marketing
agreement pursuant to which the Company was obligated to pay to the affiliate
$400,000 for marketing services related to the Company's IPO. The Company
satisfied this obligation during 1998 from proceeds of the IPO.

                                      F-24
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



7. STOCKHOLDERS' EQUITY  AND REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)

SERIES D REDEEMABLE CONVERTIBLE PREFERRED STOCK

The following is a summary of the terms of the Series D Redeemable Convertible
Preferred Stock ("Series D Preferred"):

DIVIDENDS

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

REDEMPTION

The Series D Preferred must be redeemed by the Company if it is requested to do
so by the holders of a majority of the outstanding Series D Preferred shares
upon: (1) failure by the Company to comply with certain terms of the Articles of
Incorporation, the Securities Purchase and Exchange Agreement or the related
Registration Rights Agreement with respect to the Series D Preferred; (2)
bankruptcy of the Company; or (3) certain changes in control of the Company.

In any such event, the redemption price per share would be equal to the greater
of (1) $1,200 per share, plus an amount equal to a 6% annual return since
November 1999 on the $1,000 paid for each share and any penalty amounts due
under the terms of the Series D Preferred (including, but not limited to, as a
result of the failure to convert or deliver shares on a timely basis), and (2)
the "Parity Value" of the shares, which equals the product of (a) the number of
shares of the Company's common stock into which the Series D Preferred could
have been converted multiplied by (b) the highest reported closing price per
share of the common stock between the event triggering the right to request
redemption and the payment of the redemption price.

                                      F-25
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



7. STOCKHOLDERS' EQUITY  AND REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)

CONVERSION

Following shareholder approval of the Series D Preferred Stock financing in
December 1999, the Series D Preferred shares were convertible at $1 per share of
common stock. At any time, a holder of Series D Preferred Stock may convert all
of those shares into 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 increases
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.
Subject to certain conditions, the Series D Preferred Stock will automatically
convert into common stock in November 2002.

VOTING

The Series D Preferred has 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 is required for: (1) any adverse change to the rights of the Series
D Preferred; (2) the creation of 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.

                                      F-26
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



8. 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.

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.

                                      F-27
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)


8. STOCK OPTIONS, STOCK PLANS AND WARRANTS (CONTINUED)

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.

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
1,800,000 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. 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-28
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)


8. 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-
                                                               SHARES          SHARES                        AVERAGE
                                                              AVAILABLE       AVAILABLE                      EXERCISE
                                                             FOR GRANT -     FOR GRANT -       OPTIONS       PRICE PER
                                                             1995 PLANS      1998 PLANS      OUTSTANDING       SHARE
                                                           --------------------------------------------------------------
<S>                                                           <C>              <C>                 <C>                <C>
Balances at December 31, 1997                                  874,081                -      1,993,044          $1.83
   Options authorized for grant                                      -          800,000              -              -
   Options granted                                            (254,684)        (586,417)       841,101           4.84
   Options exercised                                                 -                -       (420,088)          1.19
   Options canceled                                            392,438            4,800       (397,238)          3.43
                                                           --------------------------------------------------------------
Balances at December 31, 1998                                1,011,835          218,383      2,016,819           2.91
   Options authorized for grant                                      -        1,000,000              -             -
   Options granted                                          (1,258,500)      (1,622,446)     2,880,946           2.07
   Options exercised                                                 -                -       (180,407)          1.96
   Options canceled                                            516,081          464,483       (981,564)          4.26
                                                           --------------------------------------------------------------
Balances at December 31, 1999                                  270,416           60,420     (3,735,794)         $1.95
                                                           ==============================================================

The following summarizes information about the Company's stock options
outstanding at December 31, 1999:
<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>
             $1.000                1,032,250          3.37           $1.000              877,875          $1.000
        $1.063 - $1.093            1,427,500          4.96           $1.093              339,583          $1.093
        $1.125 - $4.125              730,906          4.15           $2.777              548,882          $2.693
        $4.250 - $6.000              545,138          3.27           $4.889              471,901          $4.929
                              -------------------------------------------------    ---------------------------------
                                   3,735,794          4.12           $1.949            2,238,241          $2.258
                              =================================================    =================================
</TABLE>
                                      F-29
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)


8. STOCK OPTIONS, STOCK PLANS AND WARRANTS (CONTINUED)

The Company has adopted the disclosure-only provisions of SFAS No. 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
                                                    1999             1998
                                              ----------------- ----------------

   Expected dividend yield                              0%              0%
   Risk-free interest rate                            5.9%            5.0%
   Expected volatility                                141%             66%
   Expected life (in years from vesting)              4.1             3.4

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 $1.37 and $2.16 per share
for 1999 and 1998, respectively.

The following table shows pro forma net loss and net loss per share as if the
fair value accounting method prescribed by SFAS No. 123 had been used to account
for stock based compensation (IN THOUSANDS, EXCEPT PER SHARE DATA):

                                                          YEAR ENDED DECEMBER 31
                                                            1999          1998
                                                         ------------ ----------

   Net loss available to common stockholders as reported  $(11,703)    $(11,652)
   Pro forma compensation expense                           (2,434)        (585)
                                                         ------------ ----------
   Pro forma net loss                                     $(14,137)    $(12,237)
                                                         ============ ==========

   Net loss available to common stockholders per share:
     Historical                                           $ (1.02)     $ (1.79)
     Pro forma (for SFAS 123 disclosure purposes)         $ (1.23)     $ (1.88)

STOCK WARRANTS

Warrants issued in connection with notes payable were recorded at their
estimated fair value and credited 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. The estimated fair value of warrants
issued to the placement agent in connection with the issuance of preferred stock
in February 1998 was recorded as a stock issuance cost.

                                      F-30
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



8. STOCK OPTIONS, STOCK PLANS AND WARRANTS (CONTINUED)

The following summarizes the activity of warrants:
                                                              WARRANTS
                                                            OUTSTANDING
                                                    ------------------------

Balance at December 31, 1997                                   769,740
   Issued                                                      413,327
   Exercised                                                  (535,104)
                                                    ------------------------
Balance at December 31, 1998                                   647,963
   Issued                                                      584,998
   Canceled                                                    (27,058)
                                                    ------------------------
Balance at December 31, 1999                                 1,205,903
                                                    ========================

All of the Company's outstanding warrants at December 31, 1999 were exercisable
at prices ranging from $1.00 to $9.60 per share.

In connection with the conversion of a note payable, the Company had an
additional commitment to issue 48,604 shares of its Class B common stock to the
former holder of the note. The Company satisfied its commitment in August 1998
by issuing 48,604 shares of the Company's common stock.

COMMON STOCK RESERVED FOR FUTURE ISSUANCE

The Company has reserved authorized shares of Common Stock for future issuance
as follows at December 31, 1999:

   Outstanding incentive stock options                           3,735,794
   Possible future issuance under stock option plan                330,836
   Stock purchase warrants                                       1,205,903
   Series D Redeemable Convertible Preferred Stock               4,951,207
                                                          ---------------------
                                                                10,223,740
                                                          =====================

                                      F-31
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



9. INCOME TAXES

At December 31, 1999, the Company has a cumulative domestic federal net
operating loss carryforward available to offset future taxable income of
approximately $28 million which begins to expire in the year 2011. State tax
losses of approximately $28 million will begin to expire in 2001. The Company
also has $608,000 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
                                                           1999           1998
                                                     ---------------------------
    Deferred tax assets:
       Net operating loss carryforwards                $  10,947      $   7,797
       Sales and accounts receivable reserves                309            782
       Accrued salaries                                        7             42
       Other reserves                                        (49)            91
       Accrued interest to related party                      57             77
       Depreciation                                           18            (78)
       Research and development credit carryforward          608            354
                                                     ---------------------------
    Total deferred tax assets                             11,897          9,065

    Deferred tax liabilities:
       Accounting method change                               60             54
                                                     ---------------------------
    Total deferred tax liabilities                            60             54

    Less:
       Valuation allowance                                11,837          9,011
                                                     ---------------------------
    Total net deferred taxes                           $       -      $       -
                                                     ===========================

                                      F-32
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



9. INCOME TAXES (CONTINUED)

The Company has recorded a valuation allowance for the full amount of its
deferred income tax assets as of December 31, 1999 and 1998, based on
management's evaluation of the criteria set forth in SFAS No. 109.

For financial reporting purposes, loss before income taxes and extraordinary
items includes the following components (IN THOUSANDS):
                                                DECEMBER 31
                                           1999              1998
                                     -----------------------------------
    Pretax loss:
       United States                   $   (14,951)      $   (11,195)
       Foreign                              (2,316)              (22)
                                     -----------------------------------
                                       $   (17,267)      $   (11,217)
                                     ===================================

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

                                                       DECEMBER 31
                                                 1999              1998
                                           ------------------------------------
     Current:
        Federal                                  $    -           $    -
        Foreign                                      58               28
        State                                         -                -
                                           ------------------------------------
     Total current expense                       $   58           $   28
                                           ====================================

10. 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, 1999 and 1998.

                                      F-33
<PAGE>
                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)


11. SIGNIFICANT CUSTOMERS

Revenues from significant customers, those representing 10% or more of net
revenues for the respective periods, are summarized as follows:
                                               YEAR ENDED DECEMBER 31
                                             1999                 1998
                                      -------------------- --------------------

   Customer 1                                  -                   13%
   Customer 2                                  -                   16%

Additionally, one customer comprised 16% of accounts receivable at December 31,
1999 and three customers comprised 22% of accounts receivable at December 31,
1998.

12. GEOGRAPHIC INFORMATION

In addition to domestic sales, the Company sells its product through its
subsidiaries to international customers. These sales amounted to 7% and 50% of
net revenues during the years ended December 31, 1999 and 1998, respectively.

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

                                                YEAR ENDED DECEMBER 31
                                                 1999              1998
                                          ------------------------------------
Net revenue:
   United States                             $    3,939         $    6,284
   Europe and other                                 321              6,282
                                          ------------------------------------
                                             $    4,260         $   12,566
                                          ====================================

                                                      DECEMBER 31
                                                 1999              1998
                                          ------------------------------------
Long-lived assets:
   United States                             $      678       $      989
   United Kingdom and Germany                        36               93
                                          ------------------------------------
                                             $      714       $    1,082
                                          ====================================

                                      F-34
<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 24, 2000                      By: /s/ Robert L. Hart
                                               -------------------------------
                                            Name:  Robert L. Hart
                                            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>
<S>                                       <C>                                                           <C>
                SIGNATURE                                        TITLE                                         DATE

     /s/ Michael Pearce                    Chief Executive Officer (Principal Executive               March 24, 2000
---------------------------------------    Officer) and Director
         Michael Pearce

     /s/ Robert L. Hart                    Chief Financial Officer (Principal Financial               March 24, 2000
----------------------------------------   Officer and Principal Accounting Officer)
         Robert L. Hart

     /s/ Jacob Agam                        Chairman of the Board                                      March 24, 2000
----------------------------------------
         Jacob Agam

     /s/ W. Joseph McClelland              Director                                                   March 24, 2000
-------------------------------------------
         W. Joseph McClelland

     /s/ Marc S. Goldfarb                  Director                                                   March 24, 2000
-------------------------------------------
         Marc S. Goldfarb

     /s/ J.W. Stealey                      Director                                                   March 24, 2000
-------------------------------------------
         J.W. Stealey
</TABLE>