SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   -----------


                                  FORM 10-KSB/A
                                 Amendment No. 1

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

                   For the fiscal year ended December 31, 2000

                                       OR

            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

              For the transition period from _________ to _________

                        Commission file number 000-29750

                          IENTERTAINMENT NETWORK, INC.
                 (Name of small business issuer in its charter)

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


                                 124 Quade Drive
                           Cary, North Carolina 27513
                     (Address of principal executive office)

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

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

                                      None

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

                          Common Stock, $.10 par value

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


         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/A or any amendment to this Form 10-KSB/A. [X]

         The Registrant's revenue for the year ended December 31, 2000 was
$6,911,000.

         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 23, 2001, was approximately
$2,304,359.

         As of March 23, 2001, there were 15,914,311 shares of the Registrant's
common stock, $.10 par value per share, issued and outstanding.

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



                       DOCUMENTS INCORPORATED BY REFERENCE

         No documents are incorporated by reference into this report.


See the Exhibit Index hereto.
<PAGE>

                                     PART I

                    NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

Item 1:  Description of Business

(a)      BUSINESS DEVELOPMENT

         iEntertainment Network, Inc. (the "Company") develops and publishes
proprietary Internet and online multi-player games. The Company also operates
online game services and offers online gamers a variety of free and subscription
games and services, including simulation, parlor, strategy, role playing and
action games through its Internet distribution infrastructure. The Company is
the preferred provider of online games for AT&T WorldNet(R), an Internet service
provider and operates EarthLink's Games Arena, as well its own premiere family
of game sites: iENCentral, Calle De Juegos (Spanish language game site), Woogle
(kids-oriented games and content). The Company also provides game content for
ISPs and portal sites such as Juno, RoadRunner, and The Globe's Happy Puppy.

         During the year ended December 31, 2000, the Company:

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

         o    Solidified co-brand relationships with two primary U.S. ISPs -
              AT&T WorldNet(R)and Earthlink;

         o    Acquired content partnerships with broadband and internet service
              providers, RoadRunner and Juno, respectively;

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         o    Partnered with America Online in providing game content for their
              Extreme Games channel;

         o    Expanded online properties with the successful launch of Latin
              American and kids-oriented destinations - Calle De Juegos, and
              Woogle;

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

         o    Established a primary ad inventory representation partnership with
              Engage, a CMGI company; and

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

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

(b)      BUSINESS OF THE REGISTRANT

         OVERVIEW

         The Company is a developer and publisher of Internet and online games
and an operator of online game services. The Company develops and publishes
proprietary online multi-player games, and through its Internet distribution
infrastructure, offers online gamers a variety of free and subscription 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(R) and operates EarthLink's Games Arena and iEntertainment Network
proprietary games sites, as well as provides game channel content for Juno,
RoadRunner, and the Globe's Happy Puppy site. The Company has established itself
as a major provider of online gaming services for Internet service providers
("ISPs"), Internet portals and online services by consistently broadening its
audience of users, traffic partner diversification, targeted site development,
and marketable advertising impressions. AT&T WorldNet(R) Service's GameHub and
Earthlink's The Games Arena, co-branded online gaming channels, have been
marketed by AT&T and Earthlink to new subscribers as a premium service included
with their subscription. The GameHub site and The Games Arena, as well as Juno,
RoadRunner and Happy Puppy game content sites offer 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, all co-brands and
game content channels offer chat rooms, and advertiser supported e-commerce
areas.

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

         The Company is a technological leader within the online gaming industry
with a number of leading-edge online and multi-player gaming technologies that
enhance the play value of its games and augment its service capabilities. The
Company's MEGAplayer technology enables the implementation of


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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.

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

         Revenue sources in the online gaming model include pay-for-play fees,
subscriptions, e-commerce transaction fees, advertising and direct
merchandising. Online gaming presents 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.

         Forrester Research predicts online games will attract more than 18
million players and revenues topping $1.6 billion in 2001. Optimistic forecasts
suggest that approximately one quarter of all games played will be played online
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


                                      -3-
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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 approximately 4/10th of a second, which 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 that 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, Lycos Gamesville, Pogo, and FlipSide/Uproar.

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

         As the Internet develops into a popular medium for online gaming,
traditional game publishers, which are primarily focused on retail distribution,
are increasingly using the Internet to directly promote traditional retail
titles by providing free online play on their Web sites as an added benefit to
retail buyers. 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 is the preferred provider of online games for AT&T
WorldNet(R) Service's GameHub, EarthLink's Games Arena, and its own
iEntertainment Network, as well as game channel content provider for Juno,
RoadRunner, and The Globe's Happy Puppy site. The successful launch of the
iEntertainment Network provided a platform that ushered in the development of
niche sites targeting Latin American and kids-oriented players and markets.

         IEN

         The Company currently offers six real-time large-scale online games.
WarBirds(TM) is available on a subscription basis. The Company has opted for a
universal subscription plan that allows users to pay a monthly fee for unlimited
play. The Company believes that this flexible pricing plan caters to the needs
of a variety of players ranging from novices to experts and provides players
with an incentive to become immersed in regularized game play.

         The Company's sites are distinguished by the real-time large-scale
nature of its online games. While a number of multi-player games are available
over the Internet, generally only four, eight or 16 players can play
simultaneously with or against each other. By contrast, large-scale multi-player
games permit a significantly greater number, frequently hundreds, of
simultaneous players. The Company 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

                                      -4-
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Company's customer base. The Company believes that its massively multi-player
online games create a gaming experience that constantly engage the player,
presenting fresh challenges. Large-scale online games are infinitely expandable
and can grow organically through regular development and modification. As such,
they have a longer shelf life than mission-oriented or level-based CD-ROM games.
These games present ongoing submersive play experiences where players can choose
to reenter the game environment at any time, 24 hours a day, seven days a week.

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

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

         WARBIRDS(TM). WarBirds(TM), an award winning World War II air combat
simulation game, allows hundreds of players from around the world to
simultaneously fly air combat missions in a single campaign. To date, there have
been as many as 350 WarBirds(TM) players online at one time, but average usage
is significantly lower. WarBirds(TM) combines strategy, realism and community
building to offer players a unique, compelling and engaging online gaming
experience. Players choose to fly for one of four teams, select an airplane from
an array of 50 historically accurate bombers or fighters and choose a role as a
pilot, gunner or bomber. Individual combatants then engage in dogfights or fly
bombing missions over enemy territories, with the outcome of each individual
mission affecting the outcome of the overall campaign. The incorporation of 3D
rolling terrain graphics, 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(TM) is played on a continuous basis, allowing players to enter
the game 24 hours a day, seven days a week. To encourage recurring play, the
Company promotes the development of communities of regular WarBirds(TM) players
that participate in special promotional events such as squadron conferences,
conventions and competitions around the world. WarBirds(TM) has been named
"Online Only Game of the Year" every year from 1996 - 1999 by PC Games, and the
1999 and 2000 "Dogfighter.com Online Flight Simulation Game of the Year."

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

         iEN, GameHub, and Games Arena are full-featured entertainment
destinations containing software downloads, free and premium games, news
updates, online advertising, tournaments and special game events. These
destinations as well as the game channels developed for Juno, RoadRunner and the
Globe feature:

                                      -5-
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         Premium Games:
         -------------

         o    WarBirds II(TM), the award-winning World War II flight simulation
              voted "Online Only Game of the Year" for the third consecutive
              year;

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

         o    WarBirds(TM) Air Combat;

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

         o    ShockForce(TM), an action-packed futuristic hovertank game; and

         o    Drakkar II(TM), a medieval role playing game.

         Free Game Category Selections:
         -----------------------------

                  Trivia, Bingo, Casino Games, Card Games, Arcade Games, Puzzle,
                  Fantasy Sports, War Games, Simulations, Kids Games, Word
                  Games, and Fantasy/RPG.

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

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

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

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

                                      -6-
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         MARKETING

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

         TECHNOLOGY

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

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

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         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 play-test staff and other Company employees.
Products are then submitted to groups of up to 50 external playtesters. This
product test process reduces implementation defects and provides design and
playability feedback in a timely manner for incorporation in the finished
product.

         Recent layoffs have significantly slowed the Company's product
development efforts. However, the company is continuing to maintain and update
the games it currently offers and is in the process of developing at least one
new massively multi-player game, which it expects to release by the end of this
year.

         COMPETITION

         Many companies provide Web sites targeted to audiences seeking various
forms of entertainment content. The Company competes with all of these companies
for visitor traffic, advertising dollars and electronic commerce. There has been
substantial consolidation in the online games market segment, and competition is
expected to intensify as ISPs and major portals seek to acquire free-standing
online game providers. To date, the Company's ability to compete has been
largely dependent upon the perceived


                                      -8-
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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    FlipSide/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.

         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.

                                      -9-
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         The Company's ability to compete successfully depends on many factors,
including the quality of the content provided by the Company and its
competitors, how easy the Company's services are to use compared to those of its
competitors, the success of its sales and marketing efforts and the performance
of its technology.

         GOVERNMENT REGULATION

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

         Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, online content regulation, user privacy, taxation and quality of
products and services. Moreover, the applicability to the Internet of existing
laws governing issues such as intellectual property ownership and infringement,
copyright, trademark, trade secret, obscenity, libel, employment and personal
privacy is uncertain and developing. Any new legislation or regulation, or the
application or interpretation of existing laws, may decrease the growth in the
use of the Internet, which could in turn decrease the demand for the Company's
services, increase 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 (the "CDA"), was enacted in the
United States to prohibit the transmission over the Internet of indecent,
obscene or offensive content. Although selected parts of the CDA have been
deemed unconstitutional, provisions protecting providers of Internet services
from claims related to third-party content remain effective. Under the CDA, a
provider of Internet services will generally not be treated as a publisher or
speaker of any information available on its service but provided by a
third-party content provider unless the provider of Internet services exerts
editorial control over the content or embraces the content as its own. The
Company's activities may not permit it, in every instance, to take advantage of
this safe harbor provision. Although the Company attempts to reduce its exposure
to this potential liability through, among other things, provisions in our
affiliate agreements, user policies and disclaimers, the enforceability and
effectiveness of such measures are uncertain.

                                      -10-
<PAGE>

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

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

         REGULATION OF SPONSORS OF CONTESTS AND SWEEPSTAKES. Contests and games
of chance are subject to the gambling, lottery and disclosure laws of various
jurisdictions in which the Company offers its contests and games. A game
sponsor, for example, cannot require the consumer to make a payment, buy its
product or provide a substantial benefit, collectively called "consideration,"
as a condition of entering its game of chance, or in some instances, its contest
of skill. If consideration were interpreted differently in a particular
jurisdiction, the Company may find it necessary to eliminate, modify or cancel
components of our products that could result in additional development costs
and/or the possible loss of revenue.

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

         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 based, in part, upon its ability to
obtain registration information about its users and to use this information for
targeted advertising. If new regulations are adopted that limit or eliminate the
Company's ability to use this information, its business, results of operations
and financial

                                      -11-
<PAGE>

condition could be materially adversely affected. Even in the absence of these
regulations, the FTC has begun investigations into the privacy practices of
companies that collect information on the Internet. The FTC's regulatory and
enforcement efforts alone may adversely affect the ability to collect
demographic and personal information from users, which similarly could have an
adverse effect on the Company's ability to provide highly targeted opportunities
for advertisers.

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

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

         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 current domain names may lose their


                                      -12-
<PAGE>

value, or the Company may have to obtain entirely new domain names in addition
to or in lieu of its current domain names if reform efforts result in a
restructuring in the current system.

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

         EMPLOYEES

         As of March 17, 2001, the Company had 21 full-time employees. None of
the Company's employees is a party to any collective bargaining agreements or a
member of a labor union. The Company has not experienced any work stoppages and
believes that its relations with its employees are good.

                                  RISK FACTORS

         The following factors should be reviewed carefully, in conjunction with
the other information in this Form 10-KSB/A 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/A and presented elsewhere by our management from time to time.
See "Note Regarding Forward-Looking Statements."

COMPANY RISKS
-------------

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

         We have experienced significant losses since our inception. Our losses
have primarily resulted from overhead and other costs incurred in our
development and expansion. For the years ended December 31, 2000 and 1999, we
incurred net losses of approximately $5.6 million and $11.7 million,
respectively. At December 31, 2000, we had an accumulated deficit of
approximately $43.2 million. Our market share may grow more slowly than we
anticipate or may even decrease in the future. In addition, our expenses may
increase faster than we expect. As a result, we may continue to generate
substantial losses for the foreseeable future, and the rate at which we incur
these losses may increase from current levels. We cannot predict the extent of
future losses or whether we will ever be able to achieve or sustain profitable
operations. As of December 31, 2000, the Company had cash and cash equivalents
of $0.4 million.

                                      -13-
<PAGE>

         For the first three months of 2001, the Company has maintained
approximately the same amount of cash as at December 31, 2000. This has been
accomplished primarily by reducing expenses and carrying and increasing trade
payables. The Company's cash flow, however, depends upon numerous factors beyond
its control, including the rates and volume of Internet advertising and the
pay-for-play gaming market, which have both declined in recent months. If our
cash flow from Internet advertising and/or the pay-for-play gaming market
continues to decrease, the Company's future liquidity will be adversely
affected.

         Furthermore, although the Company's cash flow has remained neutral so
far this year, its liabilities have been steadily increasing. Consequently,
although the Company continues to have cash and cash equivalents of
approximately $0.4 million, its auditors have raised substantial doubt about the
Company's ability to continue as a going concern. If the Company does not
generate sufficient revenues, it may have to raise additional capital, which
will result in substantial dilution to the Company's current shareholders.
Moreover, as a result of its low stock price and the probable delisting of our
common stock from The Nasdaq SmallCap Market(TM), the Company may not be able to
raise additional capital or may be able to raise capital only on materially
adverse terms.

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

         We derive a portion of our revenues from reciprocal advertising
arrangements, or "barter," under which we exchange advertising space on our Web
sites, or provide game content or other services for third-party Web sites,
predominantly for advertising space on other Web sites rather than for cash
payments. We expect that barter will continue to account for some of our
revenues in the foreseeable future. The Securities and Exchange Commission,
together with the Financial Accounting Standards Board, or FASB, have recently
begun to examine revenues recognized by Internet companies from barter
transactions. This review may result in limitations on revenues that may be
derived from these transactions. If such rules are implemented, our business and
financial results may suffer. We derived 13% of our advertising revenues from
barter for the year ended December 31, 2000.

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

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

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

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

                                      -14-
<PAGE>

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

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

         o    Our ability to attract and retain advertisers;

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

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

         o    Disruption or impairment of the Internet;

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

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

         o    Changes in government regulation of the Internet;

         o    General economic and market conditions;

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

         o    Market acceptance for our new product introductions and
              enhancements;

         o    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, you should not rely upon period-to-period
comparisons of our operating results as being indicative of our future results.

         Our recent expense reductions have limited our ability to grow and
develop new products, and our revenues, and some of our costs, will be much less
predictable. This is likely to result in significant


                                      -15-
<PAGE>

fluctuations in our quarterly results. Because of our limited operating history
and the emerging nature of our industry, we anticipate that investors will have
difficulty in accurately forecasting our results. It is possible that our
operating results in some quarters will be below market expectations. In this
event, the price of our common stock is likely to decline.

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

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

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

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

         o    Market acceptance of our existing and new products;

         o    Competing technological and market developments; and

         o    Costs of 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, or we may be required to obtain financing on terms
that are not favorable to us and our shareholders - particularly in light of the
probably delisting of our common stock from The Nasdaq SmallCap Market(TM). If
we are unable to obtain additional financing when needed, we may be required to
delay or scale back operations in order to meet our short-term cash
requirements, which could have a material adverse effect on our business,
financial condition and results of operations.

Because the market price of our common stock is currently so low, we have
recently contracted our operations.

         Although we have expanded our business through significant acquisitions
in the past, because the market price of our common stock is currently so low,
we have recently contracted our operations. Our current strategy places
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 the current market conditions may impose upon our operations.

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

         Our success will depend in part on the timely introduction of
successful new products.

                                      -16-
<PAGE>

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

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

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

         o    Delay sales of our products;

         o    Cause us to incur additional costs; and

         o    Adversely affect our reputation.

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

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

         o    Software acquisition and development costs;

         o    Promotion and marketing expenses; and

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

                                      -17-
<PAGE>

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

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

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

         o    Changes in consumer demographics;

         o    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.

         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.

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,


                                      -18-
<PAGE>

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.

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

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

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

         We intend to expand the distribution of our online products by seeking
out additional relationships with third-party providers of online or Internet
services in the United States and abroad. We


                                      -19-
<PAGE>

cannot predict whether we will be able to successfully negotiate additional
relationships with providers of online or Internet services or, if completed,
that such arrangements will generate significant revenues. Further, we are
subject to the risks that:

         o    Costs 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.

Our officers, directors and their affiliated entities exert significant
influence over ientertainment network.

         As of March 23, 2001, our executive officers, directors and their
affiliated entities owned approximately 42% of our outstanding shares of common
stock. As a result, such persons are in the position to significantly influence:

         o    The election of our directors; and

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

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

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

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

We do not intend to pay dividends to our shareholders.

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

                                      -20-
<PAGE>

INDUSTRY RISKS
--------------

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

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

         Increased competition could result in:

         o    Lower advertising rates;

         o    Lower profit margins;

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

         o    Reduced page views or advertising impressions; and

         o    Loss of market share.

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

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

         o    Longer operating histories;

         o    Greater name recognition in some markets;

         o    Larger customer bases; and

         o    Significantly greater financial, technical and marketing
              resources.

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

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

                                      -21-
<PAGE>

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

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

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.

         o    Although our product development team and massively multi-player
              games remain fully staffed and we believe that we have sufficient
              personnel to bring new products to market, the additional demands
              placed upon all of our staff as a result of recent reductions in
              our workforce may adversely affect our ability to do so.

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

         We derive a significant portion of our revenues from this segment from
a limited number of online products 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;

                                      -22-
<PAGE>

         o    Introduce products that are commercially viable; or

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

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

         This industry is characterized by:

         o    An increasing number of market entrants;

         o    Intense competition;

         o    Substantial capital requirements; and

         o    A high failure rate.

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

         The following are among the factors that could cause significant
fluctuations in our operating results:

         o    The number of users on, and the frequency of their use of, our Web
              sites;

         o    Our ability to attract and retain advertisers;

         o    Expiration or termination of our strategic relationships;

         o    Expiration or termination of partnerships with Web sites and
              Internet service providers, or ISPs, which may result from mergers
              or other strategic combinations as Internet businesses continue to
              consolidate;

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

         o    Our ability to successfully expand our online entertainment
              offerings beyond the games sector;

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

         o    Changes in our advertising rates or advertising rates in general,
              both on and off the Internet; and

         o    Changes in general economic and market conditions, including
              seasonal trends, that have an impact on the demand for Internet
              advertising.

                                      -23-
<PAGE>

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    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    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 that faces all of the same potential risks.

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

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

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

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

         o    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.

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

Intense competition may adversely affect our operating results.

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

         o    Product quality and features;

                                      -24-
<PAGE>

         o    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 unique user and
subscriber base for online game play. We may not be able to compete successfully
against current or future competitors.

STOCK AND MARKET RISKS
----------------------

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

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

         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;

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

         o    The delisting of our common stock from The Nasdaq SmallCap
              Market(TM) and trading in the over-the-markets such as the OTC
              Bulletin Board(R).

                                      -25-
<PAGE>

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

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

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

         Sales of shares of our common stock by existing shareholders could have
an adverse effect on our stock price. As of March 23, 2001, we had 15,914,311
shares of common stock outstanding, of which 15,314,311 are eligible for sale.
The remaining 600,000 shares are subject to Rule 144 restrictions (including a
one-year holding period that expires in June 2001); additionally, the holders of
these shares have the right to demand that the Company register their shares at
any time, subject to the right of the Company to delay such registration for 60
days under certain circumstances.

         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.

                                      -26-
<PAGE>

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

         As of December 31, 2000, we had outstanding:

         o    Warrants to purchase an aggregate of approximately 1,210,903
              shares of our common stock;

         o    4,910.844 shares of preferred stock that are convertible into up
              to 5,245,859 shares of our common stock.

         As of December 31, 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, 1,744,625 of which are outstanding;

         o    2,300,000 shares of our common stock in connection with our 1998
              Stock Plan, under which options to purchase 1,665,517 shares are
              outstanding;

         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.

The Nasdaq SmallCap Market(TM) delisted our common stock for failure to meet the
criteria necessary for continued quotation, which may impair our liquidity.

         In October 1999, The Nasdaq National Market(R) ceased quoting our
common stock for failure to meet the criteria necessary for continued quotation.
Since that time, our common stock has been quoted on the Nasdaq SmallCap
Market(TM).

         On January 5, 2001, the Company received a notice from Nasdaq(R)
indicating that the Company failed to comply with the annual meeting requirement
for continued listing set forth in Marketplace Rules 4350(e) and 4350(g), and
that its securities were, therefore, subject to delisting from The Nasdaq



                                      -27-
<PAGE>

SmallCap Market(TM). We subsequently communicated with the Nasdaq(R) staff, who
gave us until June 29, to demonstrate compliance. The Company currently intends
to hold its annual meeting for the years 2000 and 2001 on or about June 5, 2001.

         However, on December 27, 2000, the Company had received a notice from
Nasdaq(R) indicating that the Company failed to comply with the $1.00 minimum
bid requirement for continued listing set forth in Marketplace Rule
4310(c)(8)(B), and that its securities were, therefore, subject to delisting
from The Nasdaq SmallCap Market(TM) if it failed to demonstrate compliance
within a 90-day grace period. As of the close of business on March 23, 2001, our
minimum bid price was $0.1875 per share.

         Consequently, on March 28, 2001, the Company received a Nasdaq(R) Staff
Determination that the Company had not demonstrated its ability to comply with
the minimum bid price requirement within the 90-day grace period, and its
securities were accordingly delisted from The Nasdaq SmallCap Market(TM) at the
opening of business on April 5, 2001. The Company decided not to appeal this
determination. Following this delisting, trading in the Company's common stock
has been conducted in the over-the-counter markets such as the OTC Bulletin
Board(R).

         As a result of being delisted from The Nasdaq SmallCap Market(TM) and
trading in the over-the-counter markets, the liquidity of our stock could be
further impaired - not only in the number of securities that 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.

         Continued inclusion on The Nasdaq SmallCap Market(TM) would have
generally required that we maintain all of the following:

         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 or net income in the latest fiscal year or two
              out of the three latest fiscal years of at least $500,000;

         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 "round lot holders" (holders of 100 or more shares)
              of our common stock.

         With respect to the Company's status in relation to The Nasdaq SmallCap
Market(TM) standards, at the time of our delisting, we had the following:

         o    $1,731,000 in "net tangible assets" as of December 31, 2000;

         o    a minimum bid price of the common stock of $0.1875 per share on
              March 23, 2001;

         o    substantially more than 500,00 shares in the public float valued
              at substantially more than $1,000,000;

         o    two active market makers for our common stock; and

                                      -28-
<PAGE>

         o    well in excess of the required 300 round lot holders of our common
              stock.

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

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

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

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

         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.

                                      -29-
<PAGE>

LEGAL RISKS
-----------

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

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

         o    Trademark;

         o    Trade secret;

         o    Copyright;

         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 to:

         o    Enforce our intellectual property rights;

         o    Protect our trade secrets;

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

         o    Defend against claims of infringement of invalidity.

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

                                      -30-
<PAGE>

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

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

         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:

         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


                                      -31-
<PAGE>

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    Unexpected changes in regulatory requirements;

         o    Tariffs and other barriers;

         o    Potential political and economic instability;

         o    Linguistic and cultural differences;

         o    Differing technology standards; and

         o    Uncertain protection for intellectual property rights.

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

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

Item 2.  Description of Property

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

Item 3.  Legal Proceedings

         The Company is not currently involved in any material litigation.

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

         None.

                                      -32-
<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(TM) 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 previously traded on the Nasdaq National Market(R) under the ticker
symbol "IMGK," prior to which time there was no public market for the Company's
common stock.

         On January 5, 2001, the Company received a notice from Nasdaq(R)
indicating that the Company failed to comply with the annual meeting requirement
for continued listing set forth in Marketplace Rules 4350(e) and 4350(g), and
that its securities were, therefore, subject to delisting from The Nasdaq
SmallCap Market(TM). We subsequently communicated with the Nasdaq Staff, who
gave us until June 29, to demonstrate compliance. The Company currently intends
to hold its annual meeting for the years 2000 and 2001 on or about June 5, 2001.

         However, on December 27, 2000, the Company previously received a notice
from Nasdaq(R) indicating that the Company failed to comply with the $1.00
minimum bid requirement for continued listing set forth in Marketplace Rule
4310(c)(8)(B), and that its securities were, therefore, subject to delisting
from The Nasdaq SmallCap Market(TM) if it failed to demonstrate compliance
within a 90-day grace period. As of the close of business on March 23, 2001, our
minimum bid price was $0.1875 per share.

         Consequently, on March 28, 2001, the Company received a Nasdaq(R) Staff
Determination that the Company did not demonstrate its ability to comply with
the minimum bid price requirement within the 90-day grace period and that its
securities will be delisted from The Nasdaq SmallCap Market(TM) at the opening
of business on April 5, 2001. The Company does not intend to appeal this
determination, and expects that following this delisting, trading, if any, in
its common stock would thereafter be conducted in the over-the-counter markets
such as the OTC Bulletin Board(R).

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

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

         March 31, 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
         March 31, 2000                    $6.69               $1.81
         June 30, 2000                     $2.88               $1.00
         September 30, 2000                $2.25               $1.03
         December 31, 2000                 $1.60               $0.16

         On April 30, 2001, the closing price of the Company's common stock on
the OTC Bulletin Board(R) was $0.26 per share. The Company has approximately 161
holders of record of its common stock and estimates that it has approximately
3,900 beneficial holders.

                                      -33-
<PAGE>

         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 year ended
December 31, 2000 that were not registered under the Securities Act of 1933, as
amended, except that, in:

         o    June 2000, Vertical Financial Holdings purchased 600,000 shares of
              the Company's common stock for $600,000.

         The above transaction was a private transaction not involving a public
offering and was 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
these 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 in reliance upon an
exemption under the Securities Act.

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

OVERVIEW

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

         The Company is the preferred provider of online games for AT&T
WorldNet(R) and operates EarthLink's Games Arena and its own iEntertainment
Network proprietary games sites, as well as provides game channel content to
Juno, RoadRunner, and the Globe's Happy Puppy site. The Company has established
itself as a major provider of online gaming services for Internet service
providers ("ISPs"), Internet portals and online services by consistently
broadening its audience of users, traffic partner diversification, targeted site
development, and marketable advertising impressions. AT&T WorldNet(R) Service's
GameHub and Earthlink's The Games Arena, co-branded online gaming channels, have
been marketed by AT&T and Earthlink to new subscribers as a premium service
included with their subscription. The GameHub site and The Games Arena, as well
as Juno, RoadRunner and Happy Puppy game content sites offer 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, all co-brands and
game content channels offer chat rooms, and advertiser supported e-commerce
areas.

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

                                      -34-
<PAGE>

RESULTS OF OPERATIONS

Fiscal Year Ended December 31, 2000 Compared To Fiscal Year Ended December 31,
1999

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

                  (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"; and

                  (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 that is consistent with the cash received. In
2000, the Company derived 13% of its advertising revenue from reciprocal
advertising arrangements, or "barter."

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

         Net revenues increased by $2.7 million, or 62%, from $4.3 million in
1999 to $6.9 million in 2000. The increase in revenue was primarily due to
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(R), Earthlink, RoadRunner,
Juno, and the Globe, as well as the development of the Company's iEN site;
coupled with its full array of free game content.

                                      -35-
<PAGE>

         The following table summarizes the changes in revenue from 1999 to
2000:

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

Revenue for 1999                                            $ 4,260
Decrease in CD-ROM revenue                                    ( 499)
Decrease in Online revenue                                    ( 433)
Decrease in Royalty & Licensing                               ( 318)
Increase in Advertising & Other                               3,901
                                                            -------
Revenue for 2000                                            $ 6,911

         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 2000 decreased by $2.3 million, or 81%,
from $2.9 million in 1999 to $0.6 million in 2000. The decrease reflects the
virtual elimination of CD-ROM shipments.

         OPERATING EXPENSES. Operating expenses decreased $3.0 million, or 20%,
from $14.7 million in 1999 to $11.7 million in 2000. The decline was primarily
due to the exit from the CD-ROM business that resulted in decreased general and
administrative, and product development expenses, offset by increased sales and
marketing expenses related to fulfillment of obligations under the Company's
prize point program, as well as goodwill amortization and write off of impaired
long-lived assets, primarily the goodwill from the Company's 1999 acquisitions.

         The following table summarizes the changes in operating expenses from
1999 to 2000:

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

Operating Expenses for 1999                                   $ 14,659
Increase in Sales and Marketing                                    511
Decrease in Product Development                                ( 3,130)
Decrease in General and Administrative                         ( 2,428)
Increase in Goodwill Amortization                                  270
Increase in Impairment of long-lived assets                      1,787
                                                               -------
Operating Expenses for 2000                                    $11,669

         SALES AND MARKETING. Sales and marketing expenses increased 0.5
million, or 12%, from $4.4 million in 1999 to $4.9 million in 2000. Significant
decreases in personnel costs and advertising were more than offset by prize
fulfillment costs and the expense associated with barter advertising revenues.

         PRODUCT DEVELOPMENT. Product development expenses decreased by $3.1
million, or 63%, from $5.0 million in 1999 to $1.9 million in 2000, primarily
due 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. Expenses in
1999 included substantial write-offs of capitalized costs relating to abandoned
CD-ROM projects.

                                      -36-
<PAGE>

         GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased by $2.4 million, or 54%, from $3.9 million in 1999 to $1.5 million in
2000, primarily due to the savings recognized from exiting the CD-ROM business,
the consolidation of the Company's Florida and Texas operations to North
Carolina, and to the closure of the Company's European operations.

         GOODWILL AND AMORTIZATION. Goodwill and amortization increased $0.3
million, or 20%, from $1.3 million in 1999 to $1.6 million in 2000. This
increase resulted from a full year's amortization in 2000 of the MPG-Net
acquisition costs that were being amortized to income over a period of 36
months.

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

         OTHER EXPENSE. Other expense decreased by $4.0 million, or 100%, from
$4.0 million in 1999, compared to $0.0 million in 2000. This decrease was due to
the elimination of 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.

         INCOME TAX EXPENSE. The Company recorded $16,000 in income tax expense
in 2000, compared to $58,000 for the same period in 1999. 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.

         LIQUIDITY AND CAPITAL RESOURCES

         The Company's capital requirements have been, and will continue to be,
significant. To date, its cash requirements have exceeded its cash flow from
operations. The Company historically has satisfied cash requirements through
borrowings, the private sale of equity securities, and its initial public
offering. As of December 31, 2000, the Company had cash and cash equivalents of
$0.4 million.

         For the first three months of 2001, the Company has maintained
approximately the same amount of cash as at December 31, 2000. This has been
accomplished primarily by reducing expenses and carrying and increasing trade
payables. The Company's cash flow, however, depends upon numerous factors beyond
its control, including the rates and volume of Internet advertising and the
pay-for-play gaming market, which have both declined in recent months. If our
cash flows from Internet advertising and/or the pay-for-play gaming market
continue to decrease, the Company's future liquidity will be adversely affected.

                                      -37-
<PAGE>

         Furthermore, although the Company's cash flow has remained neutral so
far this year, its liabilities have been steadily increasing. Consequently,
although the Company continues to have cash and cash equivalents of
approximately $0.4 million, its auditors have raised substantial doubt about the
Company's ability to continue as a going concern. If the Company does not
generate sufficient revenues, it may have to raise additional capital, which
will result in substantial dilution to the Company's current shareholders.
Moreover, as a result of its low stock price and the probable delisting of our
common stock from The Nasdaq SmallCap Market(TM), the Company may not be able to
raise additional capital or may be able to raise capital only on materially
adverse terms.

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

                                                                       ($000)
                                                                       ------

Cash on hand, December 31, 1999                                       $ 3,092
Net loss                                                               (5,328)
Add:  non-cash charges and expenses                                     3,957
Changes in working capital                                             (1,022)
                                                                      -------
         Net Cash Used in Operations                                   (2,393)
Net software development costs                                           (566)
Net proceeds from issuing common stock                                    783
Other investing and financing activities                                 (539)
Effect of exchange rates on cash and cash equivalents
                                                                           60
                                                                      --------
Net change in cash                                                     (2,655)
                                                                      --------
Cash on hand, December 31, 2000                                       $   437

         Net cash used in operating activities totaled $2.4 million during 2000,
compared to $7.2 million during 1999. This decrease was primarily due to exiting
the CD-ROM business and increasing the focus on a pure Internet strategy during
2000, resulting in reduced operating cash requirements.

         Net cash used in investing activities totalled $1.0 million during 2000
compared to net cash provided by investing activities of $1.8 million during
1999. Net cash used in investing activities in 2000 resulted primarily from
software development costs related to WarBirds IIITM and to upgrades in the
Company's network capacity. Net cash provided by investing activities in 1999
was primarily the result of the net proceeds received by the Company from the
sale of its CD-ROM assets.

         Net cash provided by financing activities during 1999 resulted
primarily from the issuance of $0.8 million of the Company's common stock. Net
cash provided by financing activities amounted to $0.7 million in 2000, as
compared to net cash provided by financing activities of $5.6 million during
1999. 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 $2.4 million in proceeds from the issuance
of the Company's common stock and convertible preferred stock during 1999,
partially offset by the $0.4 million repayment of lines of credit and capital
lease obligations.

         RECENT ACCOUNTING PRONOUNCEMENTS

         iEntertainment Network recognizes Internet advertising revenue
generated through third-party agency representation on a net basis, after
deduction of agency commission expense in accordance with Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, issued in
December


                                      -38-
<PAGE>

1999. The recognition of revenue in this manner is consistent with the actual
cash expected to be received. This reporting approach, although it does reduce
the Company's reported revenues by the amount of the agency commission, has zero
impact on cash or earnings. In those instances where the Company's own internal
sales personnel sell advertising direct to the advertiser, there is no outside
sales commission; therefore, revenues are recognized on a gross basis that is
also consistent with the cash expected to be received.

         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 use of derivatives is minimal, management does not anticipate the
adoption of the new statement will have a significant effect on earnings or the
financial position of the Company.

Item 7.  Financial Statements

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

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

         None.

                                    PART III

Item 9:  Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(A) of the Exchange Act.

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

                                  Business Experience and Current     Director
                                  -------------------------------     --------
          Name            Age              Directorships                Since
          ----            ---              -------------                -----

       Jacob Agam          45     Chairman of Vertical Financial         8/99
                                  Holdings, a member of the
                                  Vertical Group, a private
                                  international merchant banking
                                  firm specializing in providing
                                  equity capital to mid-sized
                                  growth companies operating in a
                                  variety of industries,
                                  including technology; Chairman
                                  of the Board (since October
                                  1996) and Chief Executive
                                  Officer (since April 1998) of
                                  IAT Multimedia, Inc., a
                                  publicly traded marketer of
                                  personal computers and PC
                                  components and peripherals;
                                  Chairman of the Board of Gruppo
                                  Spigadoro NV, a privately held
                                  Dutch holding company engaged
                                  in the food and animal feed
                                  business (since August 1998).

                                      -39-
<PAGE>

                                  Business Experience and Current     Director
                                  -------------------------------     --------
          Name            Age              Directorships                Since
          ----            ---              -------------                -----

   Marc S. Goldfarb        36     Director of IAT Multimedia,           12/99
                                  Inc., a public company (since
                                  September 1999); President and
                                  Managing Director of Orida
                                  Capital USA, Inc., a consulting
                                  firm that is the U.S.
                                  representative of the Vertical
                                  Group (since August 1998);
                                  Partner at Bachner, Tally &
                                  Polevoy LLP in New York.

   W. Joseph McClelland    52     Vice President and a Member of         2/97
                                  the Board of GEC-Marconi
                                  Defense Systems Inc. (since
                                  1990), an Arlington,
                                  Virginia-based subsidiary of
                                  GEC-Marconi Ltd., which
                                  produces and sells electronic
                                  warfare equipment to government
                                  customers.

   Michael Pearce          39     Chief Executive Officer of the        12/99
                                  Company (since November 1999;
                                  Senior Vice President of Sales
                                  and Marketing at VocalTec
                                  Communications Inc., a public
                                  company specializing in
                                  Internet telephony (from
                                  1996-1998); Consultant to
                                  VocalTec (during 1999); Senior
                                  Vice President of Sales and
                                  Marketing for Ventana
                                  Communications, Inc., a
                                  publisher of software and
                                  computer reference books (from
                                  1995-1996).

   J. W. Stealey (1)       65     Chairman of the Board of               1/97
                                  Directors and Chief Executive
                                  Officer of the Company (from
                                  January 1995 to August 1999).

   Allan Kalbarczyk        47     Chief Financial Officer of the         N/A
                                  Company (since January 2001);
                                  prior to that Controller (since
                                  1995).
-------------------------
(1)  Mr. Stealey resigned as a Director of the Company on April 20, 2001.

         Pursuant to Section 16(a) of the Exchange Act, directors and executive
officers of the Company are required to file reports with the Securities and
Exchange Commission indicating their holdings of and transactions in the
Company's equity securities and to provide the Company with copies of these
reports. To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, there were no reports required under Section 16(a) of the
Exchange Act that were not timely filed during the fiscal year ended December
31, 2000.

Item 10.  Executive Compensation

         The following table sets forth all compensation paid by the Company for
services rendered to it in all capacities for the last three (3) fiscal years
ended December 31, 1998, December 31, 1999 and December 31, 2000 to the
Company's Chief Executive Officer, the Company's other highest-paid


                                      -40-
<PAGE>

executive officers who earned at least $100,000 in the respective fiscal year or
who otherwise would have been includable in such table on the basis of their
2000 (year) compensation but for the fact that they were no longer executive
officers of the Company at the end of 2000 (collectively, the "Named Officers").

<TABLE>
<CAPTION>

                           Summary Compensation Table

                                                  Annual Compensation                Long Term Compensation
                                                  ---------------------------------------------------------

                                                                                   Awards             Payouts
                                                                                ---------------------------------
                                                                                 Securities
                                                                                 Underlying           All Other
     Name and Principal Position           Year             Salary              Options/SARs         Compensation
     ---------------------------           ----             ------              ------------         ------------
<S>                                        <C>             <C>                  <C>                    <C>
                                                              $                                           $

Michael Pearce,                            2000            $132,000                  --                $25,000
Chief Executive Officer (1)

                                           1999               $1                  800,000                 --

                                           1998               --                     --                   --
---------------------------------------------------------------------------------------------------------------------

Robert L. Hart,                            2000            $144,607                  --                $11,000
Chief Financial Officer (2)

                                           1999            $ 36,143               205,000                 --

                                           1998               --                     --                   --
---------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Upon joining the Company as CEO in November 1999, Mr. Pearce received an
annual salary of $1.00. The Board of Directors granted Pearce an annual salary
of $144,000, which began in June 2000, as recognition of the company's operating
progress and perceived ongoing prospects.
(2) Mr. Hart resigned as Chief Financial Officer and Secretary on December 15,
2000 but remains a consultant to the Company.

No options were exercised by the Named Officers during 2000. The following table
summarizes all option grants during the year ended December 31, 2000 to the
Named Officers:

<TABLE>
<CAPTION>

                      Option/SAR Grants in Last Fiscal Year
                               (Individual Grants)

                                                                 Percentage of
                                                Number of            Total
                                               Securities         Options/SARs
                                               Underlying          Granted to
                                              Options/SARs        Employees in        Exercise or     Expiration
                   Name                         Granted            Fiscal Year        Base Price         Date
                   ----                         --------       ------------------     ----------         ----
                                                   (#)               (2000             ($/Share)

<S>                                              <C>                 <C>                 <C>             <C>
Michael Pearce,                                    --                  --                   --           --
Chief Executive Officer

Robert L. Hart,                                  60,000             6.7108%              $1.50         12/15/01
Chief Financial Officer
</TABLE>

                                      -41-
<PAGE>

         These amounts represent certain assumed rates of appreciation only.
Actual gains, if any, on stock option exercises are dependent on the future
performance of the Common Stock and overall stock market conditions. The amounts
reflected in this table may not be necessarily achieved.

         The following table sets forth certain information concerning the
number and value of exercised and unexercised options held by the Named Officers
as of December 31, 2000:

<TABLE>
<CAPTION>

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

                                                           Number of Securities
                             Shares                       Underlying Unexercised            Value of Unexercised
        Name               Acquired on      Value       Options/SARs at Fiscal Year     In-The-Money Options(1)/SARs
        ----                Exercise      Realized                End (#)                  at Fiscal Year End ($)
                               (#)           ($)        Exercisable     Unexercisable    Exercisable    Unexercisable
                               ---           ---        -----------     -------------    -----------    -------------

<S>                           <C>            <C>         <C>             <C>                <C>             <C>
Michael Pearce                 --            --          266,666         533,334            --              --

Robert Hart                    --            --          198,250            --              --              --
</TABLE>

-------------------
(1)      Options are considered "in-the-money" if the market value of shares
         covered thereby is greater than the option exercise price. Value is
         calculated based on the difference between the fair market value of the
         shares of Common Stock at December 31, 2000 ($0.25), as quoted on The
         Nasdaq Stock Market(R), and the exercise price of the options. The
         Company made no long-term incentive plan awards during the fiscal year
         ended December 31, 2000.

Compensation Philosophy

The Company's executive compensation program has three objectives:

         (1)      To align the interests of the executive officers with the
                  interests of the Company's shareholders by basing a
                  significant portion of the executive officers' potential total
                  compensation on the Company's performance;

         (2)      To attract and retain highly talented and productive executive
                  officers; and

         (3)      To provide incentives for superior performance by the
                  Company's executive officers.

         To achieve these objectives, the Company has developed a flexible
compensation program that consists of base salary, short-term incentive
compensation in the form of cash bonuses and long-term incentive compensation in
the form of equity. In addition to these elements of compensation, executive
officers participate in the Company's general benefit programs that are offered
to all employees.

         Each year, the Compensation Committee reviews the Company's executive
compensation program. In its review, the Compensation Committee studies the
compensation packages for executive officers of companies at a comparable stage
of development (the Company is currently in an early, risky stage of
development, calling for skilled management, but providing significant
opportunity via long-term equity compensation), and in the Company's geographic
area (the employment market in the Research Triangle area is extremely
competitive, with one of the lowest unemployment rates in the nation).

         The Compensation Committee assesses the competitiveness of the
Company's executive compensation program and reviews the Company's financial and
operational performance for the previous year, which was good in 1997 and the
first half of 1998, although it has struggled since. In its review, the
Compensation Committee does not refer directly to data for the companies whose
stocks are


                                      -42-
<PAGE>

included in the performance graph below, because it believes that they represent
too broad a spectrum of companies to be relevant in the context of executive
compensation.


Executive Officer Compensation Program

         Each element of the Company's executive officer compensation program is
discussed in more detail below.

         BASE SALARIES. The Compensation Committee reviews the base salaries of
the Company's executive officers at least annually. The base salaries for the
Company's executive officers for 2000 were established at the beginning of that
year, or when the executive joined the Company, in the case of executive
officers who joined the Company during the year. In addition to considering the
factors discussed above that provide the basis of the Company's executive
officer compensation philosophy generally, the Compensation Committee reviews
the responsibilities of the specific executive position and the experience and
knowledge of the individual in that position. The Compensation Committee also
measures individual performance based on a number of factors, including the
Company's historic and recent financial and operational performance, the
individual's contributions to that performance, the individual's performance
relative to other goals, and other contributions of the individual to the
Company's overall performance.

The Compensation Committee gives each of these factors relatively equal weight,
without confining its analysis to a strict mathematical formula. As is typical
of most corporations, the actual payment of an executive officer's base salary
is not conditioned on the achievement of any performance targets or goals.



         SHORT-TERM INCENTIVE COMPENSATION. The Compensation Committee intends
to motivate executive officers with short-term incentive compensation in the
form of cash bonuses for the achievement of individual or Company performance
goals. Because the Company has been in an early stage of development, it has not
historically paid cash bonuses. In 1998, however, the Company did pay some cash
bonuses to executive officers because of its successful growth during 1997. The
Compensation Committee does not follow a strict mathematical formula in
determining potential cash bonuses for executive officers, but establishes
general target bonus levels based in relatively equal measures on achievement of
Company financial goals, achievement of Company operational goals, Company stock
price performance, and individual performance goals.

Because of the dynamic nature of the Company's markets, these goals might change
during any fiscal year to better reflect the environment in which the Company
and its executive officers are operating, and to continue to provide the
executive officers appropriate short-term incentives.

         LONG-TERM INCENTIVE COMPENSATION. The Company's long-term incentive
compensation plan for its executive officers is based on the Company's stock
plans. The Compensation Committee believes that paying a portion of executive
officers' potential total compensation in the form of stock and stock options
achieves three important objectives:



         (1)      It aligns the interests of the Company's executive officers
                  directly with those of the Company's shareholders;

         (2)      It gives the Company's executive officers a significant
                  long-term interest in the Company's success; and

         (3)      It helps the Company hire, motivate and retain high quality
                  executive officers.

                                      -43-
<PAGE>

         In determining the number of shares or stock options to grant to an
executive officer, the Compensation Committee primarily considers the executive
officer's past performance, the executive officer's ability to influence the
Company's future performance, the degree to which giving the executive officer
long-term incentive might benefit the Company and its shareholders, and the
number of shares and options already beneficially owned by the executive
officer.

         Stock options generally have an exercise price equal to fair market
value on the date of grant, and vest over time based on continued employment.
The options granted to executive officers in October 1998 had five-year terms
and vested ratably over five years. Therefore, because each of the executive
officers to whom these grants were made have left the Company, the bulk of these
options did not vest and the underlying shares returned to the reserve that the
Company has available for future grants to other executive officers, employees
and consultants.

         OTHER BENEFITS. The Compensation Committee believes that the Company
must offer a competitive program of other benefits to attract and retain
executive officers. During 1998, the Company provided its executive officers the
substantially similar medical and other benefits to its executive officers as
those generally available to its other full-time employees. The Company also
provided Messrs. Stealey and Pickens with use of Company automobiles and paid
certain country club expenses on their behalf, in order to remain competitive
with compensation practices of other relevant companies.

Chief Executive Officer Compensation

         The Company bases the compensation paid to the Company's Chief
Executive Officer on the same elements and measurements of performance that it
uses to determine the compensation of the Company's other executive officers. In
particular, the Board of Directors approved Mr. Pearce's employment agreement
(as described in "Employment Agreements" above) and his base salary for 1999 and
2000, did not pay him any cash bonus during 1998 and granted him a significant
number of stock options to incentivize his future performance.

         Neither the material in this report, nor the Performance Graph below,
is soliciting material, is or will be deemed filed with the Securities and
Exchange Commission or is or will be incorporated by reference in any filing of
the Company under the Securities Act of 1933 or the Securities Exchange Act of
1934, whether made before or after the date of this proxy statement and
irrespective of any general incorporation language in such filing.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

         The following table sets forth certain information as of March 23, 2001
regarding shares of our common stock beneficially owned by: (i) each director;
(ii) director nominee; (iii) each executive officer named in the Summary
Compensation Table in this Proxy Statement; and (iv) all directors and officers
as a group. Except as otherwise indicated, the persons listed below have sole
voting and investment power with respect to all shares of common stock owned by
them, except to the extent that such power may be shared with a spouse.
Fractional share amounts are rounded off to the nearest whole number.

<TABLE>
<CAPTION>

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

<S>                                                          <C>                             <C>
J.W. Stealey (2)                                             3,847,117                       24%
Joseph McClelland                                               86,500                        *
Jacob Agam                                                       5,000                        *
Marc Goldfarb                                                   35,000                        *
Michael Pearce                                                 800,000 (4)                    *
Robert L. Hart (3)                                             265,000                        *
All directors and executive officers as a group(5)           5,038,617                       32%
(6 persons)
</TABLE>

                                      -44-
<PAGE>

----------------
* owns less than 1%

(1)      Based upon 15,914,311 shares of common stock outstanding on March 23,
         2001. The securities "beneficially owned" by an individual are
         determined in accordance with the definition of "beneficial ownership"
         set forth in the regulations of the Securities and Exchange Commission.
         Accordingly, they may include securities owned by or for, among others,
         the spouse and/or minor children of the individual and any other
         relative who resides in the home of such individual, as well as other
         securities as to which the individual has or shares voting or
         investment power or has the right to acquire under outstanding stock
         options within sixty (60) days. Beneficial ownership may be disclaimed
         as to certain of the securities.

(2)      Includes 243,750 shares subject to options exercisable within sixty
         (60) days and 236,389 shares subject to warrants exercisable within
         sixty (60) days. Excludes 125,000 shares owned by wife, Denise Stealey.
         Excludes 600,000 shares held in trusts for Mr. Stealey's children. Mr.
         Stealey has neither voting power nor dispositive power over the shares
         held in the trusts. Mr. Stealey disclaims beneficial ownership of the
         shares owned by his wife and held in trust for his children.

(3)      Mr. Hart resigned as Chief Financial Officer and Secretary on December
         15, 2000 but remains a consultant to the Company.

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

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


         The following table sets forth certain information as of March 23, 2001
regarding the only shareholders known to us to be the beneficial owners of more
than five percent (5%) of our common stock.

<TABLE>
<CAPTION>

                Name and Address of              Amount and Nature of
                -------------------              --------------------
                  Beneficial Owner               Beneficial Ownership         Percent of Class
                  ----------------               --------------------         ----------------

<S>                                                        <C>                     <C>
Elliott Bossen                                             1,036,480               7.04%
        c/o Argent Financial
        3100 Tower Blvd.
        Durham, NC  27707
Vertical Financial Holdings                              3,345,649(1)               21%
        c/o Orida Capital USA, Inc.
        70 East 55th Street, 24th Floor
        New York, New York  10022
RGC International Investors, LDC                         5,965,503(2)              37.5%
        c/o Rose Glen Capital Management, LP
        Three Bala Plaza East, Suite 200
        251 St. Asaphs Road
        Bala Cynwyd, Pennsylvania  19004

-------------------------------
(1)      Includes 1,698,171 shares owned by entities beneficially owned by
         Vertical Financial Holdings and 1,220,084 shares owned by other
         entities over which Vertical Financial Holdings has voting power
         pursuant to a proxy agreement.

(2)      Consists of 616,906 shares of the Company's Common Stock held by RCG
         and 5,348,597 shares of the Company's Common Stock into which RCG's
         shares of the Company's Series D Preferred Stock are convertible. The
         number of shares of Common Stock issuable upon conversion of the
         Company's Series D Preferred Stock is adjustable on a daily basis as
         set forth in the Company's Articles of Incorporation.
</TABLE>

Item 12.  Certain Relationships and Related Transactions

         The Company entered into a marketing agreement, dated January 3, 1995,
with Mr. Stealey, 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


                                      -45-
<PAGE>

such aircraft and to maintain Mr. Stealey's pilot license. This marketing
agreement was terminated in November 1999.

         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 waived all payment rights relating to his guaranties.

         In August 1999, the Company and Mr. Stealey (the Company's founder and
then Chairman and CEO), entered into an agreement: (1) providing for the
resignation of Mr. Stealey from his position as Chairman and CEO; (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 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
restriction to nonsolicitation of Company employees for 17 months thereafter.

         In November 1999, the Company effected a balance sheet reorganization
involving the following transactions, the following components of which were
consummated with affiliated parties:

         1.       Vertical Financial Holdings, a significant shareholder of the
                  Company, purchased 700,000 shares of common stock for
                  $700,000.

         2.       Jacob Agam, the Chairman of the Company's Board of Directors,
                  IS Chairman of Vertical Financial Holdings. J.W. Stealey, the
                  Company's founder, former CEO 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


                                      -46-
<PAGE>

                  and car lease payments totaling approximately $20,000) and
                  50,000 shares of the Company's common stock.

                  This payment was made on November 12, 1999. The Company also
                  agreed to convey to Mr. Stealey all trademarks and available
                  rights to the name Interactive Magic, Inc., pending
                  shareholder approval of the name change to iEntertainment
                  Network, Inc. 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.

         3.       The Company granted registration rights for the shares of
                  common stock underlying the Series D Preferred Stock and the
                  shares of common stock purchased in connection with the
                  reorganization. In addition, Mr. Stealey and Vertical
                  Financial Holdings agreed to vote all of their shares at the
                  next annual meeting in favor of the Series D Preferred Stock
                  financing and the convertibility of such shares into common
                  stock.

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

Item 13.  Exhibits and Reports on Form 8-K

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

                Exhibit

                1.01          Underwriting Agreement with Blue Stone Capital
                              Partners, L.P. (incorporated by reference as
                              Exhibit 1.01 to the Registrant's Registration
                              Statement on Form SB-2 as filed on May 28, 1998)

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

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

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

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

                4.04          Form of Representatives' Warrant Agreement,
                              including Form of Warrant Certificate
                              (incorporated by reference as Exhibit 4.04 to the
                              Registrant's Registration Statement on Form SB-2
                              as filed on May 28, 1998)

                                      -47-
<PAGE>

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

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

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

                10.03         Marketing Agreement, dated February 4, 1998,
                              between the Company and General Capital
                              (incorporated by reference as Exhibit 10.03 to the
                              Registrant's Registration Statement on Form SB-2
                              as filed on May 28, 1998)

                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
                              (incorporated by reference as Exhibit 10.04 to the
                              Registrant's Registration Statement on Form SB-2
                              as filed on May 28, 1998)

                10.05         Form of Shareholder Agreement between the Company
                              and each shareholder of Interactive Creations
                              Incorporated (incorporated by reference as Exhibit
                              10.05 to the Registrant's Registration Statement
                              on Form SB-2 as filed on May 28, 1998)

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

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

                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 (incorporated by
                              reference as Exhibit 10.09 to the Registrant's
                              Registration Statement on Form SB-2 as filed on
                              May 28, 1998)

                                      -48-
<PAGE>

                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
                              (incorporated by reference as Exhibit 10.10 to the
                              Registrant's Registration Statement on Form SB-2
                              as filed on May 28, 1998)

                10.11         Promissory Note, dated August 25, 1997, issued by
                              the Company to Branch Banking & Trust Company
                              (incorporated by reference as Exhibit 10.11 to the
                              Registrant's Registration Statement on Form SB-2
                              as filed on May 28, 1998)

                10.12         Guaranty Agreement, dated August 25, 1997, between
                              J.W. Stealey and Branch Banking & Trust Company
                              (incorporated by reference as Exhibit 10.12 to the
                              Registrant's Registration Statement on Form SB-2
                              as filed on May 28, 1998)

                10.13         Loan and Security Agreement, dated September 29,
                              1997, among the Company, iMagic Online Corporation
                              and Oberlin Capital, L.P. (incorporated by
                              reference as Exhibit 10.13 to the Registrant's
                              Registration Statement on Form SB-2 as filed on
                              May 28, 1998)

                10.14         Loan and Security Agreement, dated April 30, 1997,
                              between Greyrock Business Credit, a Division of
                              NationsCredit Commercial Corporation, and the
                              Company (incorporated by reference as Exhibit
                              10.14 to the Registrant's Registration Statement
                              on Form SB-2 as filed on May 28, 1998)

                10.15         Lease Agreement, dated December 4, 1995, as
                              amended February 7, 1996, by and between Southport
                              Business Park Limited Partnership and the Company
                              (incorporated by reference as Exhibit 10.15 to the
                              Registrant's Registration Statement on Form SB-2
                              as filed on May 28, 1998)

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

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

                10.18         Employment Agreement, dated March 25, 1996 between
                              the Company and William J. Kaluza (incorporated by
                              reference as Exhibit 10.18 to the Registrant's
                              Registration Statement on Form SB-2 as filed on
                              May 28, 1998)

                10.19         Employment Agreement, dated January 3, 1995,
                              between the Company and Joseph Rutledge, and form
                              of amendment thereto (incorporated by reference as
                              Exhibit 10.19 to the Registrant's Registration
                              Statement on Form SB-2 as filed on May 28, 1998)

                                      -49-
<PAGE>

                10.20         Employment Agreement, dated February 1, 1995,
                              between the Company and Raymond Rutledge, and form
                              of amendment thereto (incorporated by reference as
                              Exhibit 10.20 to the Registrant's Registration
                              Statement on Form SB-2 as filed on May 28, 1998)

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

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

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

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

                10.26         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 (incorporated
                              by reference as Exhibit 10.26 to the Registrant's
                              Registration Statement on Form SB-2 as filed on
                              May 28, 1998)

                10.27         Amendment No. 1 dated February 12, 1999 to the
                              Merger Agreement (incorporated by reference as
                              Exhibit 3.01(a) to the Registrant's Current Report
                              on Form 8-K as filed on February 22, 1999)

                10.28         Securities Purchase Agreement dated as of January
                              25, 1999 between the Company and RGC International
                              Investors LDC ("RGC") (incorporated by reference
                              as Exhibit 10.28 to the Registrant's Current
                              Report on Form 8-K as filed on January 29, 1999)

                10.29         Promissory Note dated January 26, 1999 issued by
                              the Company to RGC ("Note") (incorporated by
                              reference as Exhibit 10.29 to the Registrant's
                              Current Report on Form 8-K as filed on January 29,
                              1999)

                10.30         Registration Rights Agreement dated as of January
                              25, 1999 between the Company and RGC (incorporated
                              by reference as Exhibit 10.30 to the Registrant's
                              Current Report on Form 8-K as filed on January 29,
                              1999)

                10.31         Form of Warrant issuable by the Company pursuant
                              to the Note (incorporated by reference as Exhibit
                              10.31 to the Registrant's Current Report on Form
                              8-K as filed on January 29, 1999)

                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 (incorporated
                              by reference as Exhibit 10.33 to the Registrant's
                              Current Report on Form 8-K as filed on February
                              22, 1999)

                                      -50-
<PAGE>

                10.34         Registration Rights Agreement dated as of
                              February 12, 1999 by and among the Company,
                              Multiplayer Games Network, Inc. and Tantalus,
                              Inc. (incorporated by reference as Exhibit 10.34
                              to the Registrant's Current Report on Form 8-K as
                              filed on January 29, 1999)

                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
                              (incorporated by reference as Exhibit 10.35 to the
                              Registrant's Current Report on Form 8-K as filed
                              on January 29, 1999)

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

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

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

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

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

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

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

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

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

                                      -51-
<PAGE>

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

                23.1          Consent of Independent Auditors (incorporated by
                              reference as 23.1 to the Registrant's Form 10-KSB
                              as filed on April 2, 2001)


(c)      Reports on Form 8-K

         During the quarter ended December 31, 2000, the Registrant filed a
current report on Form 8-K under Items 5 and 7 on December 22, 2000.

                                      -52-
<PAGE>

                          IEntertainment Network, Inc.
                        Consolidated Financial Statements
                     Years ended December 31, 2000 and 1999

                                    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. as of December 31, 2000 and 1999, 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, 2000 and 1999, and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared assuming
that iEntertainment Network, Inc. will continue as a going concern. As more
fully described in Note 1, the Company has incurred significant operating losses
and requires additional capital to continue operations. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans as to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.


                                                          /s/ ERNST & YOUNG, LLP

February 28, 2001

<PAGE>


                          iEntertainment Network, Inc.

                           Consolidated Balance Sheets
                        (In thousands, except share data)


<TABLE>
<CAPTION>

                                                                                          December 31
                                                                                    2000              1999
                                                                              ------------------------------------
<S>                                                                               <C>              <C>
Assets
Current assets:
   Cash and cash equivalents                                                      $      437       $    3,092
   Trade receivables, net of allowances of $80 and $241 at December
      31, 2000 and 1999, respectively                                                    814              421
   Advance royalties, net                                                                  -               44
   Software development costs, net                                                       658               92
   Prepaid expenses and other                                                            169               94
                                                                              ------------------------------------
Total current assets                                                                   2,078            3,743

Property and equipment, net                                                              914              714

Noncurrent assets:
   Royalties receivable                                                                    -               80
   Goodwill, net of accumulated amortization of $4,661 and $1,332 at
      December 31, 2000 and 1999, respectively                                             -            3,329
   Other                                                                                  18               10
                                                                              ------------------------------------
Total noncurrent assets                                                                   18            3,419









                                                                              ------------------------------------
Total assets                                                                      $    3,010       $    7,876
                                                                              ====================================
</TABLE>


                                      F-2
<PAGE>


<TABLE>
<CAPTION>
                                                                                            December 31
                                                                                      2000              1999
                                                                                ------------------------------------
<S>                                                                                <C>              <C>
Liabilities, redeemable preferred stock and stockholders' equity Current
liabilities:
   Accounts payable and accrued expenses                                           $    1,181       $    2,258
   Royalties and commissions payable                                                        -              120
   Current portion of capital lease obligations                                            36               55
                                                                                ------------------------------------
Total current liabilities                                                               1,217            2,433

   Capital lease obligations, less current portion                                         43               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 at December
      31, 1999 (Note 10)                                                                    -            4,951

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 31, 2000 (Note 10)                 5,246                -
   Common stock, $.10 par value; 50,000,000 shares authorized; 15,914,311 and
      14,722,203 shares issued and outstanding at December 31, 2000 and 1999,
      respectively                                                                      1,591            1,472
   Additional paid-in capital                                                          38,157           36,672
   Accumulated deficit                                                                (43,188)         (37,565)
   Accumulated other comprehensive loss                                                   (56)            (116)
                                                                                ------------------------------------
Total stockholders' equity                                                              1,750              463
                                                                                ------------------------------------

Total liabilities, redeemable preferred stock and stockholders' equity             $    3,010       $    7,876
                                                                                ====================================
</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
                                                                                        2000             1999
                                                                                  -----------------------------------
<S>                                                                                   <C>              <C>
Net revenues:
   CD-ROM product sales                                                               $       111      $       610
   Online sales                                                                             1,426            1,859
   Advertising and contract revenue                                                         5,252            1,351
   Royalties and licenses                                                                     122              440
                                                                                  -----------------------------------
Total net revenues                                                                          6,911            4,260

Cost of revenues:
   Cost of products and services                                                              128            2,516
   Royalties and amortized software costs                                                     423              341
                                                                                  -----------------------------------
Total cost of revenues                                                                        551            2,857
                                                                                  -----------------------------------
Gross profit                                                                                6,360            1,403

Operating expenses:
   Sales and marketing                                                                      4,923            4,411
   Product development                                                                      1,856            4,987
   General and administrative                                                               1,501            3,929
   Goodwill amortization                                                                    1,602            1,332
   Impairment of long-lived assets                                                          1,787                -
                                                                                  -----------------------------------
Total operating expenses                                                                   11,669           14,659
                                                                                  -----------------------------------
Operating loss                                                                             (5,309)         (13,256)

Other (income) expense:
   Interest (income) expense - third parties                                                  (49)           4,649
   Interest expense - related parties                                                           -              130
   Other                                                                                       52             (768)
                                                                                  -----------------------------------
Total other expense                                                                             3            4,011
                                                                                  -----------------------------------
Loss before income taxes and extraordinary item                                            (5,312)         (17,267)
Income tax expense                                                                            (16)             (58)
                                                                                  -----------------------------------
Loss before extraordinary item                                                             (5,328)         (17,325)
Extraordinary gain on early extinguishment of debt                                              -            5,662
                                                                                  -----------------------------------
Net loss                                                                                   (5,328)         (11,663)
Accretion of Series D preferred stock                                                        (295)             (40)
                                                                                  -----------------------------------
Net loss available to common stockholders                                            $     (5,623)    $    (11,703)
                                                                                  ===================================

Basic and diluted loss per share:
   Loss before extraordinary item                                                    $     (0.37)     $     (1.51)
   Extraordinary gain                                                                           -            0.49
                                                                                  -----------------------------------
   Net loss per share                                                                $     (0.37)     $     (1.02)
                                                                                  ===================================
Weighted average shares used in computing basic and diluted loss per
    share                                                                              15,399,036      11,448,186
                                                                                  ===================================
</TABLE>


                                      F-4
<PAGE>

                          iEntertainment Network, Inc.

                 Consolidated Statements of Stockholders' Equity
                        (In thousands, except share data)


<TABLE>
<CAPTION>
                                                                       Series D Preferred Stock           Common Stock
                                                                   -----------------------------------------------------------
                                                                        Shares          Amount        Shares       Amount
                                                                   -----------------------------------------------------------
<S>                                                                    <C>            <C>           <C>          <C>
     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 8)              -                 -               -           -
        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
          8)                                                               -                 -       1,683,786         168
        Issuance of common stock (Note 10)                                 -                 -       2,150,000         215
        Issuance of redeemable convertible preferred stock for
          extinguishment of debenture (Note 10)                            -                 -               -           -
        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
        Exercise of stock options and issuance of shares for
          services                                                         -                 -         514,688          51
        Issuance of common stock (Note 10)                                 -                 -         600,000          60
        Issuance of warrants                                               -                 -               -           -
        Issuance of shares for services and settlement of
         indebtedness                                                      -                 -          77,420           8
        Compensation related to modification of options on
         termination                                                       -                 -               -           -
        Reclassification of Series D preferred stock into equity
         (Note 10)                                                     4,911             4,951               -           -
        Accretion of Series D preferred stock                              -               295               -           -
        Comprehensive loss:                                                                                  -
          Net loss                                                         -                 -               -           -
          Cumulative translation adjustment                                -                 -               -           -
        Total comprehensive loss                                           -                 -               -           -
                                                                   -----------------------------------------------------------
     Balance at December 31, 2000                                      4,911          $  5,246      15,914,311   $   1,591
                                                                   ===========================================================

</TABLE>



                                      F-5
<PAGE>

<TABLE>
<CAPTION>
                    Accumulated
      Additional       Other
       Paid-In     Comprehensive   Accumulated
       Capital         Loss          Deficit         Total
     -----------------------------------------------------------
<S>                 <C>              <C>           <C>
     $  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
            599                -             -            650
            488                -             -            548
             38                -             -             38
            292                -             -            300

             68                -             -             68

              -                -             -          4,951
              -                -          (295)             -

              -                -        (5,328)        (5,328)
              -               60             -             60
                                                ----------------
              -                -             -         (5,268)
     -----------------------------------------------------------
       $ 38,157     $        (56)    $ (43,188)    $    1,750
     ===========================================================
</TABLE>


See accompanying notes.



                                      F-6
<PAGE>

                          iEntertainment Network, Inc.

                      Consolidated Statements of Cash Flows
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                                      Year ended December 31
                                                                                      2000              1999
                                                                                ------------------------------------
<S>                                                                             <C>              <C>
Operating activities
Net loss                                                                              $ (5,328)       $ (11,663)
Adjustments to reconcile net loss to net cash used in operating
   activities:
     Noncash compensation expense                                                           79               48
     Issuance of common stock for services                                                 215               61
     Depreciation and amortization                                                         274              560
     Goodwill amortization                                                               1,602            1,332
     Impairment of long-lived assets                                                     1,787                -
     Extraordinary gain                                                                      -           (5,662)
     Gain on disposition of CD-ROM advance royalty assets                                    -             (855)
     Loss on disposal of equipment                                                           -              231
     Issuance of warrants                                                                    -              206
     Amortization of capitalized software development costs                                  -              948
     Noncash interest expense                                                                -            3,652
     Write-down of remaining CD-ROM assets                                                   -            2,240
     Changes in operating assets and liabilities:
       Trade and royalties receivable                                                     (313)           1,238
       Inventories                                                                           -              492
       Advance royalties                                                                    44             (519)
       Prepaid expenses and other current and noncurrent assets                            (83)              30
       Accounts payable and accrued expenses                                              (550)           1,029
       Royalties and commissions payable                                                  (120)            (648)
       Accrued interest                                                                      -               66
                                                                                ------------------------------------
Net cash used in operating activities                                                   (2,393)          (7,214)

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)
Purchase of property and equipment                                                        (476)            (213)
Software development costs                                                                (566)            (128)
                                                                                ------------------------------------
Net cash (used in) provided by investing activities                                     (1,042)           1,759
</TABLE>


                                      F-7
<PAGE>

                          iEntertainment Network, Inc.

                Consolidated Statements of Cash Flows (continued)
                                 (In Thousands)

<TABLE>
<CAPTION>

                                                                                          December 31
                                                                                    2000               1999
                                                                             ---------------------------------------
<S>                                                                                     <C>              <C>
Financing activities
Proceeds from issuance of common stock                                                  783              1,252

Proceeds from issuance of redeemable convertible preferred stock                          -              1,100
Proceeds from long-term debt                                                              -              3,660
Net payment on lines-of-credit                                                            -               (348)
Payments on capital lease obligations                                                   (63)               (38)
                                                                             ---------------------------------------
Net cash provided by financing activities                                               720              5,626

Effect of currency exchange rate changes on cash and cash equivalents                    60                (22)
                                                                             ---------------------------------------
Net (decrease) increase in cash and cash equivalents                                 (2,655)               149
Cash and cash equivalents at beginning of year                                        3,092              2,943
                                                                             ---------------------------------------
Cash and cash equivalents at end of year                                         $      437         $    3,092
                                                                             =======================================

Supplemental disclosure of cash flow information
Cash paid for interest                                                            $      58         $     112
                                                                              ======================================
Cash paid for income taxes                                                        $       -         $      41
                                                                              ======================================

Noncash investing and financing activities
Issuance of common stock in settlement of liabilities                            $      527        $        -
                                                                              ======================================
Fixed assets acquired under capital lease                                        $       58        $        -
                                                                              ======================================
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 8)                                                                     $        -        $      390
                                                                              ======================================
Contingently issuable warrants provided to holder of convertible
    debenture (Note 8)                                                           $        -        $    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
                                                                              ======================================
</TABLE>

See accompanying notes.


                                      F-8
<PAGE>

                          iEntertainment Network, Inc.

                   Notes to Consolidated Financial Statements

                                December 31, 2000


1. Description of Business and Significant Accounting Policies

Description of Business

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

Consolidation

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

Basis of Presentation

The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company incurred net losses
of $5.6 million in 2000 and $11.7 million in 1999, had a limited amount of cash
as of December 31, 2000, and has been unable to consistently generate positive
cash flows. These factors indicate that the Company's continuation as a going
concern is dependent upon its ability to obtain adequate financing necessary to
continue development and growth of its products and services and to satisfy its
obligations and ultimately to achieve profitable operations. In this regard,
management will be required to raise additional financing in the near future.
However, there can be no assurances that management will be successful in
executing its plans to fund operations.



                                      F-9
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)




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

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 provided, 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 1999 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, 2000 and 1999 was $195,000 and
$692,000, respectively, and is reflected in accounts payable and accrued
expenses in the consolidated balance sheets. In the first quarter of 2000, the
Company settled outstanding liabilities with its two largest CD-ROM distributors
by paying $250,000 in cash and issuing common stock valued at $300,000. The
Company recognized a gain of $265,000 related to these settlements, which is
included in general and administrative expense in the December 31, 2000
consolidated statement of operations.

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-10
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)




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

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.

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 greater of straight-line over the
term of the contract or the contractual royalty rate based on actual net
advertising revenues. Management continuously evaluates the future realization
of advance royalties, and charges to cost of revenues any amount that management
deems unlikely to be realized through gaming revenues at the contractual royalty
rate. At December 31, 2000 and 1999, there were no reserves for advance
royalties.

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 (Note 3).

Goodwill

The Company had classified as goodwill the cost in excess of fair value of net
assets acquired in purchase transactions. Goodwill was being amortized on a
straight-line basis over two to three years. On an ongoing basis, the Company
assessed the recoverability of its goodwill by determining its ability to
generate future cash flows sufficient to recover the unamortized balance over
the remaining useful life. During fiscal year 2000, the Company determined
goodwill to be unrecoverable based on undiscounted future cash flows and
unamortized balances were deemed impaired and written-off (Note 4).


                                      F-11
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



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

Software Development Costs

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

Fair Value of Financial Instruments

The carrying values of trade and royalties receivable, accounts payable and
accrued expenses, lines of credit and redeemable convertible preferred stock
approximate fair values at December 31, 2000 and 1999.

Revenue Recognition

Revenue from pay-for-play 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 recorded barter revenue and expense under the criteria established by
the Emerging Issues Task Force Issue No. 99-17 "Accounting for Advertising
Barter Transaction" of $588,000 and $48,000 for the years ended December 31,
2000 and 1999, respectively. Barter expense is included in sales and marketing
expenses in the consolidated statements of operations. The Company's advertising
contracts do not guarantee a minimum number of impressions to be delivered.


                                      F-12
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



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

Revenue Recognition (continued)

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 adopted the provisions of SAB No. 101
effective January 1, 2001 and retroactively applied the presentation guidance,
thereby revising its 1999 reporting to present its advertising revenues net of
administrative fees.

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

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.


                                      F-13
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



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

Allowance for Doubtful Accounts

The accounts receivable allowances at December 31, 2000 and 1999 include a
reserve for doubtful accounts, which management records based on historical
experience and current evaluation of potential collectibility issues. The
Company does not require collateral for unpaid balances. Credit losses have
historically been within management's expectations.

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 $2,624,000 and $1,582,000 for the years ended December 31, 2000
and 1999, respectively.

Use of Estimates

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

Foreign Currency Translation

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


                                      F-14
<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 Accounting Principles Board
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 (Note 10). 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.

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. The
Company plans to adopt the new statement effective January 1, 2001. 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
consolidated financial position of the Company.


                                      F-15
<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 ("APB") 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 was amortized on a straight-line
basis until December 31, 2000, when it was written-off (Note 4).

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, 1999:

                                                             Year ended
                                                            December 31
                                                                1999
                                                         -------------------

Net revenues                                                 $     4,354
Loss before extraordinary item                                   (17,785)
Net loss                                                         (12,123)
Net loss per share                                                (1.05)

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 was
amortized on a straight-line basis until December 31, 2000, when it was
written-off (Note 4).


                                      F-16
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)




3.  Property and Equipment

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

<TABLE>
<CAPTION>
                                                                                         December 31
                                                                                    2000              1999
                                                                             -------------------------------------

<S>                                                                             <C>               <C>
    Equipment                                                                   $     842         $   1,063
    Furniture and fixtures                                                            128               147
    Software                                                                          914               450
    Leasehold improvements                                                              5                56
                                                                             -------------------------------------
                                                                                    1,889             1,716
    Less accumulated depreciation and amortization                                   (975)           (1,002)
                                                                             -------------------------------------
                                                                                $     914         $     714
                                                                             =====================================
</TABLE>

Depreciation expense for the years ended December 31, 2000 and 1999,
respectively, was $274,000 and $560,000, including amortization of equipment
leased under capital leases of $62,000 and $19,000, respectively. During the
fourth quarter of 2000, the Company significantly reduced its workforce,
determined certain property and equipment was unnecessary for ongoing operations
and evaluated these assets for impairment. Based on an analysis of estimated
future cash flows, management property and equipment with a net book value of
$60,000 was impaired and written off as of December 31, 2000 (Note 4).

4.  Impairment of Long-Lived Assets

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


                                      F-17
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)




4.  Impairment of Long-Lived Assets (continued)

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

5.  Capitalized Software Development Costs

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

<TABLE>
<CAPTION>

                                                                                    2000             1999
                                                                             ------------------------------------
<S>                                                                             <C>               <C>
   Balance at beginning of year                                                 $      92         $     912
   Capitalized                                                                        658               128
   Amortized                                                                          (92)             (948)
                                                                             ------------------------------------
   Balance at end of year                                                       $     658         $      92
                                                                             ====================================
</TABLE>

6. Lines of Credit

During 1999, 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%.
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
year ended December 31, 1999 the Company incurred $57,000 relating to this
guarantee. 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.


                                      F-18
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)




7.  Accrued Liability for Prize Points

The Company has operated a prize point system for the users of its online games.
In 2000, prize points were redeemable for cash. In 2001, the Company revised its
prize point redemption policy such that prize points are no longer directly
redeemable for cash. The Company has recorded an accrued liability of $343,000
in accounts payable and accrued expenses on its December 31, 2000 balance sheet
based on management's best estimate of prize points that have not been redeemed.

8. 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)




8. 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)




8. 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. In connection with this
extinguishment, the contingently issuable warrants were terminated.

9. 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):

<TABLE>
<CAPTION>
                                                                                      December 31
                                                                                 2000              1999
                                                                           -----------------------------------
<S>                                                                            <C>               <C>
   Leased equipment                                                            $    221          $    164
   Leased furniture and fixtures                                                     53                53
                                                                           -----------------------------------
                                                                                    274               217
   Less:  accumulated amortization                                                 (168)             (106)
                                                                           -----------------------------------
                                                                               $    106          $    111
                                                                           ===================================
</TABLE>


                                      F-21
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)




9. 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):

<TABLE>
<CAPTION>
                                                                                 Capital           Operating
                                                                                 Leases              Leases
                                                                           ---------------------------------------

<S>                                                                             <C>                 <C>
     2001                                                                       $    44             $   108
     2002                                                                            35                  52
     2003                                                                            11                  51
     2004                                                                             -                  13
                                                                           ---------------------------------------
     Total future minimum lease payments                                             90             $   224
                                                                                               ===================
     Less: amounts representing interest                                            (11)
                                                                           --------------------
     Present value of future minimum lease payments                                  79
     Less: current portion                                                          (36)
                                                                           --------------------
                                                                                $    43
                                                                           ====================
</TABLE>


Total rent expense incurred was approximately $255,000 and $518,000 for the
years ended December 31, 2000 and 1999, respectively.

10. Stockholders' Equity and Redeemable Convertible Preferred Stock

Recapitalization

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.


                                      F-22
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)




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

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 6).

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.

Series D Redeemable Convertible Preferred Stock

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

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 are
outstanding.

Liquidation Preferences

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

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.

                                      F-23
<PAGE>

                           Entertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)




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

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.

A registration statement was filed and became effective in March 2000 which
removed the redemption feature that was outside the control of the Company.
Accordingly, the Company reclassified the Series D preferred stock to permanent
equity during the first quarter of 2000.

The Series D preferred stockholders are entitled to a 6% annual return on the
stated value of the preferred stock, upon liquidation, conversion, and
redemption within control of the Company. Accordingly, the Company has recorded
this return as accretion to the stated value of the preferred stock and a charge
to accumulated deficit. For the years ended December 31, 2000 and 1999, the
recorded accretion was 295,000 and $40,000, respectively. Accumulated accretion
at December 31, 2000 and 1999 was $335,000 and $40,000, respectively.

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.


                                      F-24
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)




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

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 additional securities having senior or equal
rights; (3) an increase in the authorized number of shares of Series D
Preferred; (4) an increase in the par value of the common stock; or (5) any
action that would result in certain taxes being imposed on the Series D
Preferred.

11. Stock Options, Stock Plans and Warrants

Employee Stock Options and Stock Plans

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

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



                                      F-25
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)




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

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

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

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

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.


                                      F-26
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)




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

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.

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, 1998                                 1,011,835        218,383       2,016,819        $  2.91
   Options authorized for grant                                       -      1,000,000               -           -
   Options granted                                           (1,296,500)    (1,602,446)      2,898,946           2.07
   Options exercised                                                  -              -        (180,407)          1.96
   Options canceled                                             517,081        464,483        (981,564)          4.26
                                                           --------------------------------------------------------------
Balances at December 31, 1999                                   232,416         80,420       3,753,794           1.95
   Options authorized for grant                                       -        500,000               -           -
   Options granted                                             (338,132)      (555,955)        894,087           1.76
   Options exercised                                                  -              -        (514,688)          1.28
   Options canceled                                             437,701        285,350        (723,051)          3.32
                                                           --------------------------------------------------------------
Balances at December 31, 2000                                   331,985        309,815       3,410,142        $  1.82
                                                           ==============================================================

</TABLE>


                                      F-27
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)


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

The following summarizes information about the Company's stock options
outstanding at December 31, 2000:
<TABLE>
<CAPTION>
                                             Options Outstanding                         Options Exercisable
                              -------------------------------------------------    --------------------------------
                                                    Weighted
                                                    Average        Weighted
                                                   Remaining        Average                            Weighted
                                   Number         Contractual      Exercise             Number          Average
  Range of Exercise Prices       Outstanding    Life (in Years)     Price           Exercisable    Exercise Price
-------------------------------------------------------------------------------    ---------------------------------
<S>                                  <C>              <C>          <C>                   <C>           <C>
        $0.938 - $1.063              919,074          2.50         $ 1.00                898,449       $   1.00
        $1.093 - $1.093            1,212,738          3.48           1.09                595,904           1.09
        $1.125 - $4.125              901,925          2.96           2.45                751,150           2.44
        $4.250 - $6.000              376,405          2.71           4.81                359,755           4.83
                              -------------------------------------------------    ---------------------------------
                                   3,410,142          2.99         $ 1.83              2,605,258       $   1.96
                              =================================================    =================================
</TABLE>

The following summarizes information about the Company's stock options
outstanding at December 31, 1999:

<TABLE>
<CAPTION>
                                             Options Outstanding
                              -------------------------------------------------
                                                    Weighted
                                                    Average        Weighted
                                                   Remaining        Average
                                   Number         Contractual      Exercise
  Range of Exercise Prices       Outstanding    Life (in Years)     Price
-------------------------------------------------------------------------------
<S>                                  <C>              <C>          <C>
            $1.000                 1,032,250          3.37         $ 1.000
        $1.063 - $1.093            1,427,500          4.96         $ 1.093
        $1.125 - $4.125              730,906          4.15         $ 2.777
        $4.250 - $6.000              545,138          3.27         $ 4.889
                              -------------------------------------------------
                                   3,735,794          4.12         $ 1.949
                              =================================================
</TABLE>

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
                                                      2000             1999
                                                  --------------- -------------

   Expected dividend yield                                 0%               0%
   Risk-free interest rate                               6.2%             5.9%
   Expected volatility                                   185%             141%
   Expected life (in years from vesting)                 1.8              4.1

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 $1.58 and $1.37 per share
for 2000 and 1999, respectively.



                                      F-28
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)




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

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):

<TABLE>
<CAPTION>

                                                                                    Year ended December 31
                                                                                   2000                1999
                                                                            ------------------- --------------------
<S>                                                                         <C>                   <C>
   Net loss available to common stockholders as reported                    $        (5,623)      $    (11,703)
   Pro forma compensation expense                                                    (1,161)            (2,434)
                                                                            ------------------- --------------------
   Pro forma net loss                                                         $      (6,784)      $    (14,137)
                                                                            =================== ====================

   Net loss available to common stockholders per share:
     Historical                                                               $     (0.37)        $     (1.02)
     Pro forma (for SFAS 123 disclosure purposes)                             $     (0.44)        $     (1.23)
</TABLE>

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 following summarizes the activity of warrants:
                                                                   Warrants
                                                                 Outstanding
                                                             -----------------

Balance at December 31, 1998                                        647,963
   Issued                                                           564,998
   Exercised                                                        (27,058)
                                                             -----------------
Balance at December 31, 1999                                      1,185,903
   Issued                                                            25,000
                                                             -----------------
Balance at December 31, 2000                                      1,210,903
                                                             =================



                                      F-29
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)




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

Stock Warrants (continued)

All of the Company's outstanding warrants at December 31, 2000 were exercisable
at prices ranging from $1.00 to $9.60 per share.

12.  Common Stock Reserved for Future Issuance

The Company has reserved authorized shares of Common Stock for future issuance
as follows at December 31, 2000:

   Outstanding incentive stock options                           3,410,142
   Possible future issuance under stock option plan                641,800
   Stock purchase warrants                                       1,210,903
   Series D Redeemable Convertible Preferred Stock               5,245,858
                                                              --------------
                                                                10,508,703
                                                              ==============

13. Income Taxes

At December 31, 2000, the Company has a cumulative domestic federal net
operating loss carryforward available to offset future taxable income of
approximately $37 million which begins to expire in the year 2011. State tax
losses of approximately $37 million will begin to expire in 2001. The Company
also has $980,000 of research credits to carryforward for use against future
domestic federal income taxes. U.S. tax laws impose limitations on the use of
net operating losses and credits following certain changes in ownership. If such
a change occurs, the limitations could reduce the amount of these benefits that
would be available to offset future taxable income each year, starting with the
year of ownership change.

                                      F-30
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)




13. Income Taxes (continued)

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):

<TABLE>
<CAPTION>

                                                                                          December 31
                                                                                     2000             1999
                                                                               -----------------------------------
<S>                                                                             <C>              <C>
    Deferred tax assets:
       Net operating loss carryforwards                                         $     14,457     $       10,947
       Sales and accounts receivable reserves                                           (240)               309
       Accrued salaries                                                                   89                  7
       Other reserves                                                                     46                (49)
       Accrued interest to related party                                                  74                 57
       Depreciation                                                                       13                 18
       Research and development credit carryforward                                      980                608
                                                                               -----------------------------------
    Total deferred tax assets                                                         15,419             11,897

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

    Less:
       Valuation allowance                                                            15,359             11,837
                                                                               -----------------------------------
    Total net deferred taxes                                                    $         -      $            -
                                                                               ===================================
</TABLE>

The Company has recorded a valuation allowance for the full amount of its
deferred income tax assets as of December 31, 2000 and 1999, based on
management's evaluation of the criteria set forth in SFAS No. 109.


                                      F-31
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)




13. Income Taxes (continued)

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



                                                    December 31
                                               2000              1999
                                          ----------------------------------
    Pretax loss:
       United States                       $    (5,156)      $   (14,951)
       Foreign                                       4            (2,316)
                                          ----------------------------------
                                           $    (5,152)      $   (17,267)
                                          ==================================

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

                                                   December 31
                                              2000             1999
                                        -----------------------------------
     Current:
        Federal                              $    -            $    -
        Foreign                                  16                58
        State                                     -                 -
                                        -----------------------------------
     Total current expense                   $   16            $   58
                                        ===================================

14. 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, 2000 and 1999.



                                      F-32
<PAGE>

                          iEntertainment Network, Inc.

             Notes to Consolidated Financial Statements (continued)



15. Significant Customers

Revenues from one significant customer those represented 29% or more of net
revenues during 2000. Additionally, one customer comprised 49% of accounts
receivable at December 31, 2000 and one customer comprised 16% of accounts
receivable at December 31, 1999.

16. Geographic Information

In addition to domestic sales, the Company sells its products through its
subsidiaries to international customers. These sales amounted to 1% and 7% of
net revenues during the years ended December 31, 2000 and 1999, respectively.

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

                                                   Year ended December 31
                                                    2000              1999
                                              ----------------------------------
Net revenue:
   United States                                $    6,807         $    3,939
   Europe and other                                    104                321
                                              ----------------------------------
                                                $    6,911         $    4,260
                                              ==================================

                                                         December 31
                                                    2000              1999
                                              ----------------------------------
Long-lived assets:
   United States                                $      914         $      678
   United Kingdom and Germany                            -                 36
                                              ----------------------------------
                                                $      914         $      714
                                              ==================================

17.  Commitments and Contingencies

In 2000, the Company entered into a software licensing agreement to obtain
certain rights to a computer software game. If certain criteria in the agreement
are met by April 1, 2001, the Company would be obligated to spend a minimum of
$250,000 promoting and marketing this game after its development. If these
milestones are not reached by April 1, 2001, the Company has the right to
terminate the agreement and all of its obligations. It is presently unknown if
the milestones will be reached.

18.  Subsequent Event (unaudited)

The Company received notice from Nasdaq on March 28, 2001, that its common stock
failed to demonstrate its ability to maintain a minimum bid price of $1.00 as
required by The Nasdaq SmallCap Market. Unless the Company appeals the decision,
on April 5, 2001, the Company's common stock will be delisted from The Nasdaq
SmallCap Market and trading in the Company's common stock would thereafter be
conducted in the over-the-counter markets such as the OTC Bulletin Board.

                                      F-33
<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:  May 1, 2001                               By: /s/ Allan F. Kalbarcyzk
                                                      -----------------------
                                                  Name:  Allan F. Kalbarcyzk
                                                  Title: Chief Financial Officer

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

<TABLE>
<CAPTION>


         SIGNATURE                                     TITLE                                   DATE

<S>                                                                                            <C>
    /s/ Michael Pearce             Chief Executive Officer (Principal Executive            May 1, 2001
    ------------------             Officer) and Director
      Michael Pearce

  /s/ Allan F. Kalbarcyzk          Chief Financial Officer (Principal Financial            May 1, 2001
  -----------------------          Officer and Principal Accounting Officer)
    Allan F. Kalbarcyzk

      /s/ Jacob Agam               Chairman of the Board                                   May 1, 2001
      --------------
        Jacob Agam

 /s/ W. Joseph McClelland          Director                                                May 1, 2001
 ------------------------
   W. Joseph McClelland

   /s/ Marc S. Goldfarb            Director                                                May 1, 2001
   --------------------
     Marc S. Goldfarb
</TABLE>