<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB
(Mark One)

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

     For the fiscal year ended December 31, 2002

                                       OR

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

                        Commission file number 000-32319

                             ESSENTIAL REALITY, INC.
                             ------------------------
                 (Name of small business issuer in its charter)

<TABLE>
<CAPTION>
                       NEVADA                                                   33-0851302
                       ------                                                   ----------
<S>                                                                 <C>
  (State or other jurisdiction of incorporation or                 (I.R.S. Employer Identification No.)
                    organization)
</TABLE>


             49 WEST 27TH STREET, SUITE 7E, NEW YORK, NEW YORK 10001
           -----------------------------------------------------------
          (Address of principal executive offices, including zip code)

                                 (212) 244-3200
                                 --------------
                (Issuer's telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act:  NONE

Securities registered under Section 12(g) of the Exchange Act:

                     COMMON STOCK, PAR VALUE $.001 PER SHARE
                     ---------------------------------------
                                (Title of Class)

         Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days. Yes [ ] No [X ]

         Check if no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B is contained in this form,  and no disclosure  will be contained,
to the best of the  registrant's  knowledge,  in definitive proxy or information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendments to this Form 10-KSB. [X]

         State issuer's revenues for its most recent fiscal year:  $112,602

         Based upon the closing  price of the issuer's  Common Stock on June 17,
2003,  the  aggregate  market  value  of the  shares  of  Common  Stock  held by
non-affiliates  of the issuer was  $2,811,616.  Solely for the  purposes of this
calculation,  shares  held by  directors  and  officers  of the issuer have been
excluded. Such exclusion should not be deemed a determination or an admission by
the issuer that such individuals are, in fact, affiliates of the issuer.

         As of March 31,  2003,  there were  18,223,110  shares of the  issuer's
Common Stock issued and outstanding.

                    DOCUMENTS INCORPORATED BY REFERENCE: None

<PAGE>

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                 PAGE NO.
                                     PART I
<S>               <C>                                                                               <C>
Item 1.           Description of Business...................................................         3

Item 2.           Description of Property...................................................         19

Item 3.           Legal Proceedings.........................................................         19

Item 4.           Submission of Matters to a Vote of Security Holders.......................         20

                                     PART II
Item 5.           Market for Common Equity and Related Stockholder Matters..................         20

Item 6.           Management's Discussion and Analysis or Plan of Operation.................         21

Item 7.           Financial Statements......................................................         33

Item 8.           Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosure.......................................         33

                                    PART III
Item 9.           Directors and Executive Officers of the Registrant........................         34

Item 10.          Executive Compensation....................................................         39

Item 11.          Security Ownership of Certain Beneficial Owners and
                  Management and Related Stockholder Matters... ............................         40

Item 12.          Certain Relationships and Related Transactions............................         42

Item 13.          Exhibits, List and Reports on Form 8-K....................................         44

Item 14.          Controls and Procedures...................................................         45

Signatures..................................................................................         46

Section 302 Certifications..................................................................         47
</TABLE>

                                       2

<PAGE>


CERTAIN INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS FILING WITH
THE SECURITIES AND EXCHANGE COMMISSION ON FORM 10-KSB THAT IS NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS, WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, THAT ARE BASED ON MANAGEMENT'S
BELIEFS, CERTAIN ASSUMPTIONS AND CURRENT EXPECTATIONS. THESE STATEMENTS MAY BE
IDENTIFIED BY THEIR USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS THE WORDS
"EXPECTS," "PROJECTS," "ANTICIPATES," "INTENDS" AND OTHER SIMILAR WORDS. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE RISKS AND
UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, GENERAL ECONOMIC, BUSINESS AND
MARKET CONDITIONS, COMPETITIVE PRICING PRESSURES, TIMELY DEVELOPMENT AND
ACCEPTANCE OF NEW PRODUCTS, AND THE HIGHLY COMPETITIVE MARKET IN WHICH WE
OPERATE. CERTAIN OF THESE RISKS AND UNCERTAINTIES ARE DISCUSSED MORE FULLY IN
PART II, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - FACTORS
AFFECTING OPERATING RESULTS" AND ELSEWHERE IN THIS REPORT. THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN ARE MADE AS OF THE DATE HEREOF AND WE, EXCEPT AS MAY
BE REQUIRED BY LAW, DO NOT UNDERTAKE ANY OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF FUTURE EVENTS, NEW
INFORMATION OR OTHERWISE.

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

BACKGROUND

         Essential Reality,  Inc., a Nevada corporation  formerly known as JPAL,
Inc. was  incorporated  on March 31, 1999.  Our original line of business was to
provide vacation rental properties and services for the Year 2000 New Year's Eve
celebration in Las Vegas. Afterwards, we continued as an Internet-based provider
of vacation  rental  properties  and  services.  In August  2001,  we  suspended
operations and the  development of our website,  in order to focus our attention
on our business combination with Essential Reality, LLC.

         Essential  Reality,  LLC  was  organized  in  1999  as a  developer  of
real-time tracking and sensory technologies. From its formation through the date
of its dissolution as a result of the business  combination,  it was involved in
research and development,  marketing,  entering into strategic relationships and
hiring  key  employees  in  connection  with  the  final  production,  sale  and
distribution of the P5(TM).  The P5(TM), a virtual  controller,  is a glove-like
peripheral  device that enables users to control the action on a screen  through
simple hand movements, rather than complicated keystroke and mouse combinations.
This product is based on patented, and several patent-pending, technologies that
address  technological  limitations  of  current  devices,  such  as the  mouse,
hand-held game  controllers  and joysticks.  The P5(TM) is engineered to capture
five-finger bend  sensitivity  enabling  gesture  recognition,  combined with an
optical tracking  technology that captures the movement of the hand in 3D space,
without the use of a mouse,  joystick,  keyboard or the like. For example,  if a
user is trying to open a door while playing an adventure  game,  the P5TM allows
the  user to make the  hand  motion  of  opening  a door  and see the door  open
simultaneously  with the  motion,  as opposed to the user  pressing a button and
seeing the door open  immediately  thereafter.  To date,  the P5(TM) is the only
product that we have developed and marketed.

         On June 20, 2002, we  consummated  the business  combination  and began
operating Essential Reality, LLC's line of business exclusively.  The purpose of
the  transaction  was to allow us to acquire  and carry on  Essential  Reality's
business as a public  company,  thereby  enhancing the business'  visibility and
providing a means through the public markets to additional sources of capital.

         We  have  focused  on  combining   our  patented  and  patent   pending
technologies into products that enhance the interaction between human beings and
personal computers,  game consoles,  computer tablets and other related devices,
collectively  known as computer  platforms.  Our first product,  the P5(TM),  is

                                       3

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currently  available for sale to retailers and is directly  offered to consumers
for sale on our website as well as the website of one of the game developers for
which the P5(TM) is currently  enabled.  Many of our retail vendors received the
P5(TM) the week of November 4, 2002.

         We believe the P5(TM) is suitable for multiple applications including:

     o    ELECTRONIC  GAMING - games  produced  for play on personal  computers,
          game consoles and location-based entertainment sites;

     o    COMMERCIAL  APPLICATIONS  - such as animation,  computer  aided design
          (CAD), simulation training, disability and education; and

     o    PERSONAL APPLICATIONS - Internet browsing and navigation,  and general
          computer interaction.

         Since the advent of the mouse, relatively little has changed in the way
of computer input devices, despite the fact that computers and applications have
changed   dramatically,    growing   increasingly   complex   and   specialized.
Applications, particularly in the electronic gaming and commercial markets, have
migrated   from   flat    two-dimensional    (2D)   interfaces   to   intuitive,
three-dimensional  (3D)  environments.  However,  input  devices  continue to be
dominated  by  2D  products  including  mouse  controllers  and  gaming-specific
peripherals such as joysticks,  steering wheels, proprietary console controllers
and the like.

         The  P5(TM)  is  based  on  our  patented  and  several  patent-pending
technologies,  one of which was  incorporated  in the "Power  Glove."  The Power
Glove  was  introduced  to  the  market  in the  late  1980s  as an  alternative
controller for use only with the 8-bit Nintendo  Entertainment  System,  part of
the first  generation  of game  consoles  sold to the mass  market.  The product
eventually sold approximately one million units in the United States, Europe and
Japan.  Subsequent to a decline in consumer demand for  first-generation  gaming
consoles in the early 1990s, such Nintendo system ceased sales.  Therefore,  the
Power Glove technology was not used nor further  developed,  awaiting the return
of computer platforms and applications that could benefit from its utility.

         With  the  significant  increase  in sales of  computer  platforms  and
applications in the late 1990s,  Essential  Reality,  LLC engaged  developers in
1999 to create a peripheral device based on Essential Reality, LLC's belief that
the  consumer  and  commercial   markets  were  ripe  for  a  product  with  the
capabilities  of  the  P5(TM).   The  P5(TM)  has  been  engineered  to  capture
five-finger bend  sensitivity  enabling  gesture  recognition,  combined with an
optical  tracking  technology  that will  capture the movement of the hand in 3D
space with six  degrees of freedom (X, Y, Z, yaw,  pitch and roll),  without the
use of the mouse, joystick, keyboard or the like.

         The P5(TM) is a  lightweight  and  comfortable  peripheral,  which is a
Universal  Serial Bus (USB) based  product  that will allow for direct "plug and
play" in personal computers as well as the Sony PlayStation2 game console. There
are approximately 27 million computer  peripherals that are  USB-compatible  and
the growth of these  products  is  anticipated  to reach over 400 million by the
year 2003.

         In  bringing  the P5(TM) to market,  we have  proven our  expertise  in
innovating and developing  products  applicable to the mass market.  Due to less
than expected sales of the P5(TM),  however,  we have recently changed our focus
and  now  aim  to  become  a  leading   developer  and  distributor  of  unique,
technology-based  consumer  electronics,  gaming  products  and  consumer  youth
products  targeted  to  youths in the mass  market.  We see our  products  being
divisible  into  three  lines of  business,  aligned  along  broad  product  and
technical  categories,  as  described  below.  In order  to  achieve  sales  and
distribution  synergies,  we expect  that all  lines of  business  will  produce
youth-oriented,   mass  market  products  sold


                                       4
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through the same  distribution  channels.  However,  each line of  business  may
employ different product development strategies to achieve market share.

         P5(TM)  TECHNOLOGIES.  Through  December 31, 2002,  the P5 was the only
         line of  business.  This line of  business  will  continue  to focus on
         combining our patented and patent  pending  technologies  into products
         that  enhance  the  interaction   between  human  beings  and  personal
         computers,  game consoles,  computer tablets and other related devices,
         collectively  known as  computer  platforms.  This focus stems from our
         expertise  in  high-tech  fields of sensing  and  tracking.  Due to the
         highly innovative capabilities of these technologies,  we believe there
         are numerous  market  opportunities  for  products  based on the P5(TM)
         technologies.  Our goal is to enter  markets with  additional  products
         priced from $79 to $149.  We will also  continue  to seek  distribution
         channels   for  the   P5(TM),   as  well   as   strategic   partnership
         opportunities, both domestically and internationally.

         CONSUMER  ELECTRONICS.  We will search for unmet needs in mass  markets
         where our expertise in technology can  significantly  enhance the value
         of unique electronic products. That is, we hope to create value for our
         target market by selling  innovative  technologies at new price points.
         We aim to sell  products  of  sophistication  and value for $19 to $79,
         depending on the cost of the technology involved.  The innovations that
         will drive this division may be technical, functional, or cost-related.
         We will  opportunistically  scan the  market  for  products  that could
         benefit  from our  skills  in  increasing  the  functionality  of basic
         technologies,  or designing complex technologies for manufacturing with
         lower cost solutions.

         CONSUMER  YOUTH  PRODUCTS.  We  expect  that  the  product  development
         strategy for this segment of our business will be highly opportunistic.
         We intend to search for unique  products  that can meet  popular  price
         points  (from  $5.99  to  $29.99  retail).   In  some  cases,   product
         development may be driven by entertainment  and brand licensing,  where
         we can add a technical  innovation  that will clearly  distinguish  the
         product  among  the  masses  of other  popular  priced  consumer  youth
         products and games with electronic components.  As such, the success of
         our  strategy  rests on our  ability to discover  low-cost  methods for
         applying and manufacturing innovative technologies.

BUSINESS STRATEGY

         Through December 31, 2002 our strategy had been to establish  ourselves
as a leading  developer  of  real-time  tracking  and  sensory  technologies  by
establishing and fostering demand for our initial product,  the P5(TM), in three
distinct  markets  -  electronic   gaming,   commercial   markets  and  personal
applications both domestically and internationally. As of December 31, 2002, the
Company only sold products in the electronic  gaming  markets.  We have promoted
content  integration  and development  across  numerous  markets through various
initiatives such as providing free software development kits (SDKs),  allocating
resources for content  integration  initiatives,  and bundling  product with new
content that is  P5(TM)-enabled.  By leveraging the unique  functionality of the
P5(TM)  at a mass  market  price  point,  we  have  attempted  to  differentiate
ourselves from our competitors.

         Through research and development, we will attempt to determine the best
ways to maximize the scope of applications for our optical tracking, bending and
sense  motion   technologies   and  the  most   effective   products  for  those
applications. We hope to work with software developers in creating programs that
can best take advantage of our proprietary technologies.  We also intend to work
with hardware  engineers to determine the best composition of equipment to sense
and capture the remote bending of an object.  We may seek to license some or all
of our products and  technologies.  In addition to research and  development and
consultation  with  developers  and  engineers,  other  ways in which we



                                       5
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hope to accomplish our goals are through continuing  consumer  interest,  public
relations and targeted marketing.

         Currently we are focusing on leveraging our core competency in research
and development,  and believe we will be able to distinguish our products in the
market by adding  technological  innovations to unique  concepts at competitive,
mass market price points.  We plan to expand our retail sales force around these
products to grow our reputation  among retailers as a reliable source of unique,
value-added products that the youth market demands. In this way, we believe that
we can expand our retail  distribution  channels  and  increase our market share
accordingly.

         Historically, our revenue streams have been generated from retail sales
and  direct  sales  of the  P5(TM). Because of the limited life of the P5tm, the
company does not expect to earn significant revenue from it but from diverse and
related  products.  With the expansion of our business focus we believe that any
additional revenue streams will diversify our customer base and reduce operating
risk  by  making  us  less  dependent  on  one  specific  product.

INDUSTRY OVERVIEW

MARKET SIZING AND KEY DRIVERS

         Electronic Gaming. We operate as part of the global video game console,
peripheral,  and software  industry,  which is  currently  estimated at over $28
billion  worldwide  and over $9.4 billion in the U.S.,  based on estimates  from
Global  Information Inc. The global electronic  gaming peripheral  segment alone
generated  approximately  $4.2 billion in sales in 2001 and is expected to reach
$5.8 billion in 2003.  Gaming software sales in the U.S.,  which are expected to
drive demand for gaming-related peripherals,  grew to $1.42 billion in 2002 from
$1.36  billion in 2000,  despite the overall  decline in a variety of technology
segments.  Key drivers affecting the growth of this industry have been the broad
acceptance of next  generation  game  platforms  with faster  processing  power,
advances in technology that make games more realistic and  interactive,  greater
memory,  online  capabilities  and DVD media  formats  - all of which  offer new
opportunities  to electronic  entertainment  software  companies and peripherals
manufacturers.

         Commercial Markets.  Our future sales of the P5(TM) will also be driven
by the growth and changes in the computer-aided design (CAD), engineering (CAE),
and manufacturing  (CAM) as well as 3D animation software markets.  According to
Penton Digital Media Research, the 3D CAD market is expected to grow by over 34%
annually  to reach $2.3  billion in 2005.  In the 3D content  creation  segment,
which includes the tools used in 3D content  applications in film, game, Web and
design segments, the world-wide market is estimated to be $384 million,  growing
25%  annually  and  expected  to reach over $1.17  billion by 2005.  Key drivers
affecting these markets include improvements in data sharing, storage of complex
CAD files and  increased  design  collaboration  over the Internet  throughout a
product's lifecycle.

Consumer  Electronics.  The  consumer  electronics  segment of the toy  industry
generated  $23  billion  in sales in 2000,  according  to the Toy  Manufacturers
Association.  With our new focus on the  technology-based  consumer  electronics
market, we hope to capture a portion of this market share.

EVOLVING TRENDS

Current trends in the peripheral industry include:

     o    Increased complexity of peripheral devices, including tactile feedback
          and 3D capabilities;

     o    Wireless  communication  between  peripherals and devices;



                                       6
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     o    Increased   precision   that  is  enabling   more  robust   commercial
          applications in CAD and robotics;

     o    Game production cycles are getting shorter,  requiring 3D tool vendors
          to deliver better, more integrated tools to software developers;

     o    Decreases in component  prices and  innovations  in product design and
          construction;  and o Development of more natural  interaction  between
          man and machine.

Moreover,  we believe that the following  trends may impact the  development  of
consumer electronics and consumer youth products.  We believe that our technical
competency and market awareness could allow us to capitalize on these trends and
capture market share:

     o    Increasing processing power at decreasing costs;

     o    Taking  advantage  of  component  cost  efficiencies,   combined  with
          innovations in product design and construction;

     o    Increasing miniaturization components and products;

     o    Increasing  demand for  popular  price  point  products;

     o    Multiple,  growing  populations of users  dedicated to specific gaming
          platforms  (e.g.  PlayStation2,  Gameboy  Advance);  and

     o    Increasing  consumer and commercial demand for wireless  communication
          between peripherals and devices.

PRODUCT OVERVIEW

THE P5(TM)
         The  P5(TM)  is  designed  as  a  low-cost  and  intuitive  man-machine
interface  for both 2D and 3D  software  applications.  The  P5(TM)  serves as a
peripheral  to  personal  computers,  game  consoles  and  other  USB-compatible
platforms.

FIGURE 1: THE P5(TM) GLOVE AND OPTICAL TRACKER
BEND-SENSOR CAPABILITIES


                               [GRAPHIC OMITTED]

                             [CAPTIONS FOR GRAPHIC]

ADJUSTABLE GRIPS FOR                           IR TRANSPARANT
DIFFERENT FINGER SIZES                         ANTI-REFLECTIVE, ANTI-
                                               SCRATCH LENS
PATENTED BEND
SENSOR TECHNOLOGY                              SPACE TO REST GLOVE
FOR HIGH FIDELITY                              WHEN NOT IN USE
MOVEMENTS
                                               MINI-DIN CONNECTOR
PATENT-PENDING                                 FOR GLOVE
LED OPTICAL
TRACKING SYSTEM                                WEIGHTED WITH
                                               BUMP FEET TO
                                               PREVENT MOVEMENT
                                               ON ANY SURFACE

         The P5(TM)  consists of a  hand-worn  glove-like  device with  embedded
electronics.  The  product  utilizes  our  patented  bend sensor  technology  to
accurately  determine  the bend of the user's five  fingers.


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The sensing of the finger bend is accomplished via conductive inks with variable
electrical  resistance,  detected  by  position  changes of the  fingers  from a
pre-set baseline. The P5(TM) is capable of gesture recognition based on specific
placement of thumb/finger  digits and can detect whether or not your fingers are
in the same position as previously recorded.

MOTION-CAPTURE CAPABILITIES

         The P5(TM) also tracks the relative position of the hand in space using
a patent-pending  optical tracking technology.  This "triangulation  technology"
tracks  a  hand's  starting  position  and  movement.  The  term  "triangulation
technology"  refers to the way in which the coordinates of a specific point in a
three dimensional  environment is determined.  "Triangulation" is a mathematical
term that  describes  the use of two separate  cameras which track one point and
determine its exact position in a three dimensional environment.

         The P5(TM)  supports X, Y, Z, "yaw"  (defined as movement along a plane
parallel  to the ground) , "pitch"  (defined  as movement  along an axis that is
parallel  to the top of the hand and  perpendicular  to the wrist,  such that it
would  enter the wrist  below the thumb and exit  below the little  finger)  and
"roll"  (defined as  rotation of the hand about an axis  parallel to the ground,
entering the hand at the tip of the middle finger and running  through the wrist
parallel  to the forearm  positioning).  Refer to Figure 2 below for a graphical
depiction of the specific hand movements that the P5(TM) is able to track.

         The tracking  technology  utilizes  glove-mounted light emitting diodes
(LEDs) to enable a complete  six-degrees-of-freedom  positioning  solution.  The
P5(TM) uses  passive  LEDs,  which means that it  transmits a beam of light that
causes  the  optical  tracker to alert the  software  program to take the action
specified by the user's  motion.  Active LEDs transmit a beam of light  together
with the information that causes the program to take the action specified.
FIGURE 2: X, Y, Z, YAW, PITCH AND ROLL DIAGRAM

                                [GRAPHIC OMITTED]

COMPATIBILITY

         The first generation  P5(TM) was initially  designed for  compatibility
with the following personal computer  operating  systems:  Microsoft Windows 95,
98, ME, XP and 2000,  as well as the Apple Mac OS9 and OS10. In addition we have
recently  completed,  but not yet released,  the  necessary  drivers to


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make the P5(TM) compatible with the Linux operating  system.  The P5(TM) is also
compatible with the Sony PlayStation2 game console.

INTEGRATION

         Our  technology  allows  software  developers  to easily  integrate the
P5(TM) into new and  existing  applications.  Although  the P5(TM)  emulates the
mouse and the joystick right  out-of-the-box in certain computer  platforms,  in
order to fully  penetrate our target  markets,  the  applications  must have the
appropriate technological capabilities to support the P5(TM), which is primarily
a matter of having application  drivers  (instructions  which translate commands
into an  action  or  movement  with the  P5(TM))  written  for  existing  or new
applications.

         We have utilized our content development strategy to encourage software
developers to integrate our code. Currently,  we pay developers a license fee to
integrate  the P5TM  into  their  software  programs.  We have  agreements  with
multiple  software  developers  and the P5TM is bundled with PC-based games from
these  developers.  The three  initial  games are  "Hitman 2",  "Tigerhunt"  and
"Beachhead 2002." In addition, we have begun to make "game patches" available on
our web site that users can  download  free-of-charge  to  "P5-enable"  existing
popular games they might  already own.  These  agreements  allow us to penetrate
existing populations of users through direct-marketing  campaigns in partnership
with the developers,  as well as provide  reciprocal links to retail partner web
sites for users to purchase  the  underlying  game for a revenue  override.  Two
popular game patches were launched in December 2002 and March 2003,  for Serious
Sam  (published by Take 2  Interactive)  and Black and White  (published by Lion
Head  Studios),  respectively.  Direct  e-mail  campaigns  commenced  during the
week-ending  December 13th,  2002, to over 500,000  registered  players of these
games.  We will  continue to add to this  library of "game  patches" in order to
continue to provide users with more P5 TM content.

         It is our hope that additional  software  developers will seek licenses
for the right to  incorporate  the P5TM into their  future  software  offerings.
Additionally,  we may seek to assist software publishers in developing games and
other programs that can best take advantage of the P5TM's capabilities.

PRICING STRATEGY

         We established an initial manufacturer's  suggested retail price (MSRP)
of $149 for the P5(TM),  which  includes  the  two-game  electronic  game bundle
(Hitman 2 and Tigerhunt) and a demonstration version of Beachhead 2002. However,
initial  sales of the P5TM have been slower than  anticipated  due, in part,  to
general  retail  conditions and weaker than expected sales of PC's, PC games and
the peripherals associated therewith.  Accordingly, we have temporarily adjusted
our  pricing  strategy,   offering   consumers  a  $20   "sell-through"   rebate
(automatically  deducted  at the point of sale) in an effort to  improve  slower
than expected  sell-through  from  retailers to end users.  Some  retailers have
lowered the price of the P5(TM) to as low as $79. While sales of the P5(TM) have
increased,  in the event that we manufacture additional P5(TM)'s we will need to
do so at a dramatically  lower per unit cost in order to reduce the retail cost.
There can be no assurance that we will be able to do this.

ADDITIONAL PRODUCTS

         With  respect  to our new lines of  business,  we  believe  we have the
ability  to  deliver  new  technologies  to  various  segments  of the  consumer
electronics and gaming markets at lower than customary price points.  There is a
general  relationship  between  the amount of  technology  in a product  and its
price. Moving forward, we believe there is an opportunity to apply our knowledge
to  exploit  the



                                       9
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general  technology-price  relationship that we see in the electronics-based toy
and gaming markets. We plan to apply this strategy in an opportunistic  fashion,
developing only those products where we believe our  value-added  technology and
popular price points will provide a clear distinction in the marketplace To date
we have signed an exclusive  distribution agreement with the domestic agent of a
foreign  manufacturer of various toy products that grants us the exclusive right
to market,  sell and distribute certain of their products,  including  infra-red
and remote control mini cars in the United States, Canada, Latin America, Puerto
Rico,  Australia,  New Zealand and Europe.  We have  started to receive  initial
purchase orders from certain retail outlets for the purchase of these products.

TARGET MARKETS

         With  respect to the P5(TM) we had  pinpointed  three  potential  broad
market  opportunities:  electronic  gaming,  commercial  applications  and other
computer interactions.  We initially focused on the electronic gaming market and
began generating retail sales of the P5(TM) during the week of November 4, 2002.
We are currently  seeking  partnerships  with established  software and hardware
manufacturers  to assist us with the commercial  applications  market as well as
the broader computer  applications market, which include Internet navigation and
general computer interaction.

ELECTRONIC GAMING MARKET

         According  to NPD  Group,  Inc.,  U.S.  sales of video  game  hardware,
software and accessories,  such as hand controllers,  jumped 43% to $9.4 billion
in  2001  from  $6.6  billion  in  2000.  During  the  same  period,   sales  of
computer-game  software rose 4.4% to $1.42 billion from $1.36  billion.  Much of
this growth is due largely to the  successful  launch of the Sony  PlayStation2,
Microsoft  Xbox and the Nintendo  GameCube;  and the growth in the popularity of
games  produced by such  leading  developers  as  Electronic  Arts,  Activision,
TakeTwo  Interactive and Infogames.  The electronic gaming industry had prompted
the need for significant developments in the man-machine interface with computer
platforms.  The desire for more realistic  scenes and interaction has led to the
majority of electronic  games being developed with 3D  environments.  Thus, this
market  presents an  opportunity  for an improved  interface  device  capable of
meeting the interaction and intuitive manipulation needs of today's users. Input
devices play an important  role in extending the overall video game  experience.
As users seek more compelling gaming experiences, they often look to peripherals
as a way to deepen the feeling of immersion in the game.

         As games  have  evolved,  peripheral  devices  have been  developed  to
accommodate the actions of the user. Games are generally categorized by the type
of action taking place. Mouse controllers, joysticks and other devices have been
developed to meet specific needs:  "Simulators"  such as flying or driving games
have spawned  steering  wheels and joysticks that emulate the real tools used by
pilots or drivers.  "First-person shooter" games require `fast-twitch' response:
the  ability to turn and look  rapidly  around a room,  and the  ability to fire
rapidly at a target.  Mouse controllers with multiple  programmable buttons have
been developed to replace the many keystrokes required to move through the game.
Similarly,  roller balls in mouse  controllers  using different  technologies to
increase the  accuracy of the pointer have been  developed to enable quick turns
and spins within these gaming environments.  "Strategy" and "role-playing" games
put the user in the role of a character  that walks  through an  environment  to
explore  areas and pick up  objects.  Again,  mouse  controllers  with  specific
buttons and ball  designs are targeted at these game users to  facilitate  their
game play.

         Ultimately,  none of the devices  designed for these game types provide
the optimal functionality that a 3D environment requires, namely, the ability to
move in a natural  manner and  replicate


                                       10
<PAGE>


that  movement  in  a  character  or  action  within  the  application   itself.
Furthermore,  traditional  game  controllers  do not offer the control and speed
(reaction time) that gamers require.  For this reason,  3D gamers have typically
settled  for  game  pads  and/or  a  combination   of  the  keyboard  and  mouse
controllers, which remain today's most common computer input devices.

COMMERCIAL SOFTWARE APPLICATIONS

         Professionals  use  3D  visualization  tools  in a  wide  range  of CAD
applications.   Architects,  game  designers,   product  designers,   mechanical
designers, construction engineers and animators all use PC-based design software
to create,  manipulate  and animate in 3D. This market's needs are distinct from
those of the gaming  market in that the users seek to create 3D objects,  rather
than simply  manipulate them,  which  traditionally  requires a  time-consuming,
multi-action process.

         While the tasks that are enabled by certain devices (i.e., drawing with
digitizing  tablets) are useful, the software in general has proven consistently
frustrating to its user base, primarily because it is so difficult to learn. The
primary need in the  professional  market is to enable the designers to do their
jobs  without  much  wasted  time  in  learning  and   implementing  a  program.
Architects,  for example,  want to solve  architectural  problems,  not computer
problems.  It is expected that  demonstration of the effectiveness of the P5(TM)
to this market through  associations  with leading  software  manufacturers  and
trade groups could lead to rapid adoption of our product.

         We  believe  there are  opportunities  for us to partner  with  leading
software  firms in this  industry  to provide  the  interface  device  that will
rapidly  address  this  market's  needs.  Applications  for this  market  can be
distilled into four segments based upon the software used and the  functionality
requirements. These segments are the Architecture,  Engineering and Construction
(AEC),  Mechanical  Engineering  (ME,  or  MCAD  for  Mechanical  Computer-Aided
Design),  the  Game  Developer  and the  Film/Video  markets.  Software  vendors
operating  in  these  markets  include  AutoDesk,  Dassault  Systems  and  Agile
Software.

         According  to Cadence  Magazine,  the AEC market  alone is comprised of
roughly  300,000  architects,  engineers  and  construction  professionals  that
utilize CAD systems for 2D drafting  and 3D modeling  and  visualization.  It is
estimated  that 60% of this market  works  primarily  in 2D,  though the leading
architects have identified a need for software to move beyond today's limited 3D
modeling to the development of `live'  parametric models that would allow faster
and easier  establishment  of design  intent and  support  all phases of project
development.  The ME market  includes  designers of machinery,  equipment or any
other product that requires  computer  schematics for production.  The ME market
utilizes CAD systems and 3D design software for the creation and manipulation of
objects.  This market is estimated  at over 3 million  users and is growing at a
rate of  approximately  10% a year.  This recent growth spurt is a result of the
move from expensive  Unix-based  platforms to PCs, making it more affordable for
users to purchase and deploy CAD systems.

         Game  developers  use 3D animation  programs in the creation of both PC
and console games.  3D design  programs are used in a range of commercial  video
productions,  everything  from high-end film creation  including  movies such as
"Toy Story," to much simpler 3D-logo design on the evening news. The software is
run  primarily  on  Macintosh  and  Windows  platforms  and  all  use  high-end,
USB-compatible  systems as a matter of  necessity.  Other  markets for 3D design
include  Web design  and  education,  geographic  mapping,  imaging,  scientific
visualization, augmented reality and medicine.


                                       11
<PAGE>


OTHER COMPUTER INTERACTIONS

         The  development  of 3D Internet and user  interface  environments  are
closely tied to the proliferation of graphics-related hardware. Graphics-related
hardware includes advanced video cards,  video RAM, and 3D accelerator cards, as
well as  graphics  capabilities  built into the main  processor.  Such  hardware
affects the online  experience in that it governs the resolution of Web graphics
and the speed at which they render. In addition,  some interactive  environments
outside of the browser, such as a 3D software engine,  require high-end hardware
acceleration.  Currently,  very few Web ventures outside of the gaming world use
such environments.  However,  3D graphics  capabilities once limited to high-end
systems have become commonplace in consumer PCs.

         The P5(TM)  replicates  the existing  mouse or joystick  commands built
into  current PC  applications.  However,  with the  awareness  of the  enhanced
capabilities  of the P5(TM),  a developer  will be able to create  entirely  new
experiences  (commands,  gestures,  etc.) and user  interfaces  for existing and
future applications.

         We believe that the expansion of broadband use will drive developers to
produce  content for the average  Internet user. This will enable web developers
to incorporate  real-looking  objects into e-commerce sites, create desktops and
browsers,  which  look like real  rooms and  require  manipulation  through a 3D
space,  and ultimately  change the entire Internet  experience for the user. The
P5(TM)  will  enable  all users to work  intuitively  within  this  environment.
According  to a  Broadband  Report  from  eMarketer,  there  is  expected  to be
approximately 90 million broadband  households  world-wide by the end of 2004, a
350% increase from the 20 million recorded in 2000.

         Through the use of our software  development kits,  software  companies
develop  the games and  other  potential  applications  which  benefit  from our
products.  Currently,  we do not consult  with or otherwise  participate  in the
development of these games and other software products.  We seek to maximize the
ability of users to benefit from these software  titles and programs by allowing
the utilization of the P5TM in conjunction therewith.

YOUTH CONSUMER MARKETS

         The youth consumer products business, which taps into both the consumer
electronics  and toy  industries,  sells  approximately  $23  billion  per  year
according  to  Toy   Manufacturers   Association.   Consumers   purchase  gaming
peripherals  and  consumer  electronics  on a  regular  basis  and have  shown a
willingness  to buy those  products  with  more  sophisticated  electronics  and
technologies.  We intend to develop the Consumer  Electronics and Consumer Youth
Products   portions  of  our  business  to  attract  the  youth  market  to  our
technology-price segment of the industry.

UNDERDEVELOPED MARKET NICHE

         There are various  underdeveloped  price point  segments in the gaming,
consumer electronics, and youth consumer markets, particularly for products with
sophisticated  technologies.  By  differentiating  our  products  with a  unique
technology-price  equation,  we  believe  we can offer a variety  of  compelling
products in the market.

                                       12

<PAGE>


RESEARCH & PRODUCT DEVELOPMENT

         We will continue to consider future product  development  that may take
the initial P5(TM) through several stages of evolution. However, due the initial
sales generated by the P5(TM), we are now seeking to develop other products that
will  utilize one or more of our  technologies.  We believe the  combination  of
future  generations of the P5(TM) and the creation of new products will increase
the commercial opportunities for us in both existing and new markets.

         Our patent pending optical tracker offers a highly functional, low-cost
alternative to current tracking technologies, which we believe will enable us to
expand our  product  mix.  We hope to  develop  additional  products  that would
include areas where current products are hindered by sub-optimal remote tracking
functionality and costly factors. By combining  innovative sensory  technologies
with these  optical  tracking  advancements,  we have the  potential  to quickly
diversify beyond our current offering.

         For the years ended December 31, 2002 and 2001 we spent  $1,037,396 and
$1579,129,  respectively,  on  product  development,  none of  which  was  borne
directly by customers.

DEVELOPMENT COMPANY

         We have  developed our first  product,  and hope to develop  additional
products,  partially by working with arrangement between us and a Canadian based
entity that currently employs a team of technicians who had dedicated most their
time working on our products. The development company is headed by an individual
who has extensive  experience in design and development of consumer  electronics
and virtual reality hardware and software.

INTELLECTUAL PROPERTY

         We have  been  awarded  one  U.S.  patent  regarding  our  bend  sensor
technology,  which expires on August 10, 2009. We also have two patents  pending
for (i)  our  shadow-based  optical  tracking  technology  and  (ii) a  wearable
electronic interface device that emits an optical signal for use in tracking six
degrees of motion,  and have filed a provisional  patent  regarding  proprietary
software that converts 8-bit analog data stream to a more precise 12-bit digital
data stream for improved motion tracking  accuracy and intend on filing a patent
in a timely fashion.

         The integration of these  technologies  into the P5(TM),  combined with
proprietary  software,  firmware and drivers, has resulted in what we believe to
be a  superior  product  that can be offered at a mass  market  price  point not
previously achieved in the market.

         As we develop new  technologies,  we expect to continue to aggressively
file new patent applications.

SALES & MARKETING

We have utilized numerous sales and marketing  channels in an attempt to build a
brand and  capture a mass market for the  P5(TM),  as well as our other  planned
products.  We have sold the P5(TM) into  multiple  channels,  including  but not
limited  to  domestic  and  international  retail,  e-commerce  outlets,  direct
marketing and OEM/private label  partnerships.  In addition to those units which
were shipped to retailers or sold directly to end users,  we expected to receive
additional orders for the P5(TM),  based on positive media reviews,  strong word
of mouth,  games being designed to be compatible with the P5(TM) and discussions
with



                                       13
<PAGE>


multiple  software  developers  who  had  indicated an interest in making future
software  offerings  compatible  with the P5TM. However, to date sales have been
lower  than  expected  so  we  have adjusted our business model. We have offered
consumers a $20 "sell-through" rebate (deducted immediately at point of sale) in
an  effort  to  improve  slower than expected sell-through from retailers to end
users.  Other  contemplated  adjustments  to  our  business  model  include  a
restructured  manufacturing schedule, as well as deferral of marketing programs,
licensing  contracts  and product development expenditures. Additionally, due to
lower  than  expected  sales  we  reserved the inventory to the lower of cost or
market  at a per unit price of $10 for the year ended December 31, 2002 Included
in  the  statement  of  operations  in  2002  is  $1,883,207  impairment  of net
realizable  value  related  to  this  inventory.

         We  plan  to  sell  our  new  products   through  these  channels  both
domestically and internationally.  As we expand our product lines, we may employ
more direct  marketing via the Internet to soft launch our products and test our
pricing  strategies.  These practices are less costly and can ultimately provide
higher-margin returns than a large-scale media campaign.

         In addition to direct discussions with key retailers globally,  we have
agreements with commissioned sales representatives receiving 4% commission, that
are responsible for sales into regionally-headquartered retailers throughout the
United States.  These retailers  include national chains such as Wal-Mart,  Best
Buy, CompUSA,  Gamestop,  Electronics Boutique, J&R Music World, Toys `R Us, and
KoB  Toys.  We are also in  discussion  with  geographically-based  distributors
around  the  world  that  would  be  responsible  for  sales,  distribution  and
fulfillment  in each of their  respective  markets.We  continue to solicit other
retailers and/or distributors, both domestically and internationally, for P5(TM)
volume commitments and to pave the way for future product placements.

CONTENT-BUNDLING STRATEGY

         In order to achieve product sell through, we have offered and intend to
offer  specific  electronic  gaming and/or  non-gaming  bundles with the P5(TM).
These  bundles have enhanced  gesture  recognition  functionality  made possible
through the use of the P5(TM).  To date,  we have  bundled  three games with the
initial  launch of the P5TM in November 2002. We also have an agreement in place
which allows one of these game developers to sell the P5TM directly to consumers
through  their own website.  We expected to receive  bi-weekly  payments for all
such sales.

         With respect to other  third-party  products bundled with our products,
we seek to maintain the relationship  with the end customer and, as such, act as
the primary obligor.  We assume  responsibility  for customer  acceptance of all
features of the product,  as well as returns.  As such, we will record the gross
amount of the purchase price of the P5TM as revenue and will reflect the related
royalty to be paid to the third party vendor as a component of cost of sales.

MEDIA COVERAGE / CONSUMER AWARENESS

         The P5(TM) has gained  considerable  media  acclaim.  As of the date of
this report,  the P5(TM) has appeared in over 125 print/online  publications and
on over 25 television, radio and online segments. The P5(TM) has been covered by
publications including THE NEW YORK TIMES, CNN, WIRED MAGAZINE, POPULAR SCIENCE,
MAC WORLD, MACADDICT, KIPLINGERS, THE HISTORY CHANNEL, KTLA'S CURT THE CYBERGUY,
DISCOVERY CHANNEL (CANADA), NEWSWEEK (JAPAN) and LIVE WITH REGIS AND KELLY.

         This type of media  coverage is  invaluable  for raising  awareness and
stimulating end-user demand, particularly with new concepts. We aim to build off
the  relationships  we have built through


                                       14
<PAGE>


the release of the P5(TM) to win press coverage for futuRE  products.  There can
be no assurance, however, that we will be successful in our efforts.

BUSINESS DEVELOPMENT

         We have been working to execute a  comprehensive  business  development
plan designed to stimulate  demand for our P5(TM) produCT in electronic  gaming,
commercial markets and other applications.  In addition to those games which are
already P5TM  enabled,  we have signed  letters of intent with various  software
development  firms  to  incorporate  the  P5(TM)  into  applications   including
electronic gamiNG and commercial markets. These letters of intent, however, only
represent expressions of interest and are not binding commitments.  There can be
no  assurance  that any  definitive  agreements  with  such  developers  will be
finalized  or  that  we will  realize  any  revenues  from  such  relationships.
Additionally,  we are in the process of identifying  additional products for our
new lines of business as well as  potential  development  opportunities  for our
existing  technologies.   There  can  be  no  assurances,  however,  that  these
additional  products will be identified or that we will be able to  successfully
develop and sell these products.

         Prior to our  business  combination,  Essential  Reality,  LLC  offered
software  development kits (SDKs) to the developer  community,  and in less than
one month received in excess of 450 SDK  applications  from game  developers and
numerous commercial software developers, including in the areas of 3D Animation,
CAD, education and research, Internet/multimedia,  military and other commercial
markets.  As of December 31, 2002, we made the SDKs available on our website for
free downloading, and to date there have been over 600 downloads. However, there
can be no assurance that any developers will want to integrate or create content
that is P5(TM) compatible.

         The non-gaming SDK  applications  have come from an array of commercial
software  developers in the areas of: 3D animation/CAD,  education and research,
Internet/Multimedia,  Military and other vertical markets. We intend to continue
to assist developers in using the SDKs to enhance their applications.

         We  have  entered  into  agreements  with  Eidos,  Infogames,  Lionhead
Studios, Croteam, Ubisoft and others to gain access to underlying source code to
enhance games for P5(TM) functionality.  Two popular game patches, which enabled
games for use with the P5(TM),  were  launched in December  2002 and March 2003,
for Serious Sam (published by Take 2 Interactive) and Black and White (published
by Lion Head Studios) respectively.  We continue to seek relationships with both
PC and console content providers to develop new games, enhance current games and
explore potential non-gaming  applications.  However,  there can be no assurance
that our efforts will result in increased  sales or  development  of  additional
content compatible with the P5(TM).

         In December  2000,  Essential  Reality,  LLC entered  into a consulting
agreement with BusinessDevelopment.com, LLC (BDC) pursuant to which BDC provides
general consulting and business  development  services to Essential Reality LLC,
and now to us,  in return  for a monthly  cash  retainer.  See Item 12  "Certain
Relationships and Related  Transactions" below. Such services consist of forming
revenue-generating  opportunities,  including  without  limitation  distribution
agreements,  licensing  agreements,  joint  ventures,  strategic  alliances  and
partnerships.  The  amount of the  retainer  originally  was  $6,000  per month,
increased to as much as $15,000 per month from July 2002 to  September  2002 and
is  currently  $7,500 per month.  The  consulting  expense  for the years  ended
December 31, 2002 and 2001 were $203,479 and $242,000 respectively.


                                       15
<PAGE>




         In addition to the monthly  retainer,  we also are  obligated to pay to
BDC a  potential  revenue  share of up to four  percent  (4.0%) on  transactions
facilitated by BDC.  Either BDC or we may cancel this agreement with thirty (30)
days prior notice.

         In March 2000,  Essential  Reality,  LLC entered into a Settlement  and
Release Agreement with Rose Ganguzza, a consultant to Essential Reality, LLC, on
behalf of herself and Hollywood  Productions,  Ltd.,  which  requires  Essential
Reality,  LLC to pay to Rose Ganguzza,  a royalty of $0.25 for each of the first
150,000 units of the P5TM sold. As partial  consideration for entering into such
agreement,  the other parties released Essential  Reality,  LLC from any and all
claims they may have against Essential Reality, LLC relating to the Power Glove,
a predecessor  product  developed by a third party pursuant to the patent we now
own. The royalty expense for the year ended December 31, 2002 was $153.

MANUFACTURING

         We utilized V-Tech Communications Ltd. as our manufacturing partner for
the P5(TM).  V-Tech is one of Southeast Asia's leadiNG manufacturers of consumer
electronics,  toys and other  mass  market  devices  under its own name and on a
private   label   basis   for  some  of  the   world's   foremost   electronics,
telecommunications   and  retail   concerns.   V-Tech  works  with  us  under  a
"work-for-hire" agreement on, amongst other things,  establishing  manufacturing
schemes,  developing  quality control  procedures,  arranging (and in some cases
executing)   vendor   agreements   with  our  preferred   vendors,   identifying
cost-reduction  opportunities,  and preparing for the integration of our machine
tooling for production.  In addition, we have identified  alternative sources of
manufacturing to complement or back-up our arrangements with V-Tech. The initial
unit  cost for the  P5(TM)  is  approximately  $45.  Implementation  of two ASIC
designs mAY potentially yield further cost reductions. However, we are currently
evaluating the  feasibility of  implementing  potential cost  reductions for the
P5(TM).  Regardless,  we do not intend to produce  additional  P5(TM)'s until we
sell  our  existing  inventory  and  we  iNTend  on  using  smaller  independent
manufacturing facilities in Asia for any additional products we develop.

         Certain  key  components  used in the  manufacture  of the P5(TM)  were
purchased  directly by V-Tech from single or limited  sourcES that specialize in
these   components.   Single-sourced   components   included   certain   of  our
application-specific  integrated circuits,  sensors (also known as bend sensors)
and other components.  Due to the precise nature of these components,  there are
relatively few companies capable of manufacturing the same or similar components
at a  competitive  price.  We have closely  monitored the  relationship  between
V-Tech  and  these   suppliers  to  ensure  timely   performance,   payment  and
satisfaction of all obligations.

PRODUCT DEVELOPERS AND SUPPLIERS

         As of July 1, 2001,  Essential  Reality,  LLC entered into an agreement
with VR Yad  Development  Group,  Ltd.,("VR  Yad") a third-party  developer with
expertise in virtual reality systems,  for the creation and design of all of our
products and software.  Through this arrangement,  VR Yad worked exclusively for
Essential Reality, LLC (and following the business  combination,  for us) and is
reimbursed  for their services at cost.  This  agreement  remains in force until
terminated  by either  party,  upon not less than thirty  days'  notice.  We had
previously  reimbursed them  approximately  up to $40,000 per month for salaries
and benefits, plus expenses. To date, the only product that VR Yad has developed
for us is the P5(TM),  however we continue to utilize their services fOR product
development in connection with new products as well as evaluating potential cost
reductions  for the P5(TM) which may BE  implemented in the event we manufacture
additional  units. VR Yad is entitled to a royalty of 1.0% of net sales,  and an
additional  0.5%  royalty  because  it  timely  completed  all  portions  of its
development  work.



                                       16
<PAGE>



These  royalties  are not  payable  until we  actually  collect  the  associated
revenue,  but are payable  indefinitely.  The royalty expense for the year ended
December 31, 2002 is $917.  During the period of  engagement  by us, and for two
years  after  termination  of  the  relationship,  VR  Yad  is  prohibited  from
developing,  manufacturing,  marketing  or selling  any  product  similar to the
products it develops  for us. We expect to utilize the services of VR Yad in the
development of our additional products,  however, we have identified alternative
sources  of  development  capability  in the  event a  change  of  developer  is
necessary.

         As of  July  1,  2001,  Essential  Reality,  LLC  entered  into  a loan
agreement with VR Yad pursuant to which Essential Reality, LLC agreed to loan VR
Yad up to  $2,000,000  modified  June  10,  2002  to  $2,700,000.  The  loan  is
non-interest  bearing,  is payable  two years  after the date of the loan and is
collateralized  by all  personal  property of VR Yad. As of December  31,  2002,
approximately  $452,121 of this loan  remains  outstanding  and will be remitted
through  research and  development  credits from the  Canadian  government.  The
Company  has  recorded a reserve  of $52,121  against  this  balance  due to the
potential  for  reduced  research  and  development  credits  from the  Canadian
government.

         In January 2001,  Essential  Reality,  LLC entered into a memorandum of
understanding  with Apjay Technologies for the development of certain components
of the P5TM. Pursuant to the memorandum of understanding, we are required to pay
royalties  of 1% of P5TM's  net sales to Apjay  Technologies  indefinitely.  The
Company was required to pay a royalty  advance of $50,000,  of which $15,000 has
previously  been  paid  and  $35,000  of  which  is  now  due  because  we  have
incorporated the component developed pursuant to the memorandum of understanding
into  the  P5TM.   No   subsequent   agreement  has  been  executed  with  Apjay
Technologies.

         In  July  2000,  Essential  Reality,  LLC  entered  into  a  consulting
agreement  with MC Squared  Incorporated  to help manage the  relationship  with
product developers.  This consulting  agreement replaced a previous  Development
Agreement  executed between  Essential  Reality,  LLC and MC Squared in November
1999. In connection with these agreements we paid MC Squared $250,000. We are no
longer making payments to MC Squared. In September 2000 the consulting agreement
terminated and the development process was managed by us internally.  MC Squared
is a  company  owned by a person  related  to  certain  members  of our Board of
Directors.  Pursuant to such agreement, we are required to pay royalties of 1.8%
on net sales of the P5TM and 9% of the license fee  collected by us with respect
to P5TM,  indefinitely.As  of December  31,  2002  $1,098 is due MC Squared.  MC
Squared has sued us in  connection  with these  agreements.  See "Risk Factors -
Current  Litigation  May Have an Adverse  Affect on Our Financial  Condition and
Results of Operations."

COMPETITION

         The P5(TM) faces competition in the electronic gaming peripheral market
from high-end mouse controller and joystiCK  manufacturers  such as Logitech and
Microsoft.  While several  peripherals  provide high levels of  precision,  user
programmability  and in some cases a limited amount of tactile feedback,  we are
not aware of any peripherals  that offer the combination of tracking and gesture
recognition that is found in the P5(TM).

         Companies such as Immersion, Gyration, Fifth Dimension Technologies and
Ascension   Technologies   provide   various   higher-priced   peripherals   and
motion-capture  products for commercial  applications.  These  entities  produce
systems  for  relatively  complex  commercial  applications.   Prices  of  these
competing  products typically run in excess of $1,000 and can exceed $10,000 for
advanced models.




                                       17
<PAGE>




We believe the P5(TM) possesses unique competitive advantages due in part to (i)
the  functionality  derived from its patented aND  patent-pending  technologies,
(ii) its ease of integration and (iii) its mass market price point.

         Moving  forward,  we anticipate  extensive  competition in the consumer
electronics  and youth consumer  products  markets.  We plan to distinguish  any
products  we may have by adding  innovative  technologies  at price  points that
offer exceptional value.

EMPLOYEES

         As of December 31, 2002 we had 8 full-time  salaried  employees  and no
part-time  employee.  We have since decided to streamline our management team in
an effort to maximize our resources as we begin to focus on the  distribution of
the P5TM  beyond its  limited  retail  presence  as well as the  development  of
additional products. We believe that the revised structure will create a smaller
but more sharply focused management team. We currently have 2 full-time salaried
employees and 1 consultant.  We believe that our relationship with our employees
is  satisfactory.  We plan  on  adding  additional  staff  in  areas  of  senior
management and product development.

WEBSITE DISCLOSURE

         The public may read and copy any  materials we file with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W.,  Washington,  D.C. 20549.
The public may also obtain  information on the operation of the Public Reference
Room by calling the SEC at  1-800-SEC-0330.  The SEC  maintains an internet site
that contains reports, proxy and information  statements,  and other information
regarding the Company and other issuers that file electronically with the SEC at
HTTP://WWW.SEC.GOV.


ITEM 2.  DESCRIPTION OF PROPERTY.

         We currently  lease from a  third-party  landlord  approximately  4,300
square feet of office space at 49 West 27th Street, New York, New York 10001, at
a price of $10,570 per month.  The lease  provides  for annual  increases in the
monthly  rent to a maximum  monthly  rental price of $11,575 and  terminates  on
November 30, 2006. Due to our recent  reduction in personnel,  we are rethinking
our needs for space and considering some alternatives.

ITEM 3.  LEGAL PROCEEDINGS.

         On November  21,  2002,  a complaint  was filed by MC Squared in United
States District Court for the Southern  District of New York against us, Humbert
Powell,  Chairman of our Board of  Directors,  Steven  Francesco,  our  ex-Chief
Executive  Officer,  David Devor,  an officer and Brian Jedwab,  a member of our
Board of  Directors,  alleging  breach of a  development  agreement  between  us
(originally Essential Reality, LLC) and MC Squared.  Specifically, the complaint
alleges  a  failure  by us to  provide  a design  credit  to MC  Squared  on the
packaging for the P5(TM). The complaint seeks specific  performance and a recall
of all  P5(TM)  products  shipped  to date  withouT  the  design  credits on the
packaging. We have submitted an answer with counterclaims and have made a motion
to dismiss this complaint. A decision on the motion is pending.


                                       18
<PAGE>




         On January 21, 2003 a complaint was filed by RDA International, Inc. in
the  Supreme  Court  of  the  State  of  New  York against us seeking payment of
$203,264  or  work, labor and services performed in connection with advertising,
marketing and multimedia programs for the P5(TM).This amount has been accrued at
December  31,  2002.

         On February 28, 2003, a complaint was filed by Aaron  Gavios,  a former
employee of ours, in The United States District Court for the Southern  District
of New York against us, Humbert Powell,  Chairman of our Board of Directors and
Brian Jedwab, a member of our Board of Directors, alleging breach of a contract.
Specifically,  the  complaint  alleges  failure to provide  for  severance  pay,
failure to provide stock options and failure to reimburse for  automobile  lease
totaling $120,000, plus interest and legal fees.

         On April 16, 2003, a complaint was filed by Ziff Davis Media,  Inc. in
the Supreme Court of the State of New York against the Company (originally,  ER,
LLC) seeking payment of $27,443.17 for print advertising for the P5(TM).

         We  believe  we have  valid  defenses  to these  claims  and  intend to
vigorously defend ourselves;  however, there can be no assurance that we will be
successful.  The costs  associated  with these  litigations,  including the time
required to defend  ourselves,  as well as the potential cost should there be an
adverse judgment against us, may have a material adverse effect on our financial
condition and results of operation.


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

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION

         Our common stock has been eligible for trading on the  Over-the-Counter
Bulletin Board ("Bulletin  Board") since April 19, 2001. To the extent we do not
timely file our reports  with the SEC our common stock may no longer be eligible
for trading on the  Bulletin  Board.  On June 26,  2002,  the ticker  symbol was
changed from JPAL to ESSR. The following table sets out the high and low closing
bid prices of our common  stock  during the periods  indicated  as quoted on the
Bulletin  Board.  Prices reflect  inter-dealer  prices,  without retail mark-up,
mark-down or commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>

                                                     HIGH          LOW
                                                     ----          ---
<S>                                                 <C>           <C>
                2001
                Second Quarter *                    $1.00         $0.26
                Third Quarter                       $7.00         $1.00
                Fourth Quarter                      $6.05         $2.97

                2002
                First Quarter                       $4.30         $4.05
                Second Quarter                      $4.05         $2.25
                Third Quarter                       $3.22         $1.41
                Fourth Quarter                      $1.95         $0.80
</TABLE>



                                       19
<PAGE>

     o    Restated for 5 for 1 stock split effective July 2, 2001.



 CHANGE IN SECURITIES

         On November 6, 2002,  the Company  issued 50,000 shares of common stock
valued at approximately $70,000 to a consultant for legal services.

         On March 12, 2003, the Company sold 100,000 shares of Common Stock to a
private investor for $1.00 per share totaling $100,000.


HOLDERS

         As of June 21, 2003, we had 101 holders of record of our common stock.

DIVIDEND POLICY

         We have never declared or paid dividends on our common stock and do not
anticipate  declaring  or paying any cash  dividends  on our common stock in the
near future.  We plan to retain any future  earnings for the  development of our
business. The payment of future dividends will be at the discretion of our board
of directors  and will depend upon our,  among other  things,  future  earnings,
capital requirements, financial condition and general business conditions.

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

OVERVIEW

         On June 20, 2002, Essential Reality,  LLC, a Delaware Limited Liability
Company ("ER LLC"),  completed a business  combination with JPAL, Inc., a Nevada
corporation and an SEC registrant  ("JPAL") pursuant to an Amended  Contribution
Agreement  between  ER  LLC  and  JPAL,   whereby  all  of  the  members  of  ER
LLCcontributed  their membership  interests in ER LLC to the Company in exchange
for an  aggregate  of  16,874,784  shares of the  Company's  common  stock  (the
"Transaction").  Concurrent  with  the  Transaction,  the  shareholders  of JPAL
canceled  7,564,326  of their  shares  of JPAL  common  stock and were left with
1,080,934 shares of common stock  representing  6.02% of the Company.  Following
the  Transaction,  JPAL  changed  its  name  to  Essential  Reality,  Inc.
".

         In connection with the Transaction, (i) holders of certain bridge notes
issued  by  the  Registrant  received,  as  additional  consideration,  two-year
warrants ("Bridge Warrants") to purchase up to an aggregate of 840,000 shares of
Common  Stock and  15,000  shares of Common  Stock  (collectively,  the  "Bridge
Warrant   Shares"),   at  a  purchase  price  of  $1.90  and  $1.30  per  share,
respectively,  (ii) holders of certain  bridge  notes  issued by the  Registrant
exchanged them for  convertible  promissory  notes of the



                                       20
<PAGE>




Company ("Convertible Notes"), which were convertible for a period of six months
at a conversion  price of $1.90 into an  aggregate  of 263,158  shares of Common
Stock (the  "Convertible  Note Shares"),  and (iii) the Company issued  warrants
("Additional  Warrants")  to purchase up to an  aggregate  of 331,211  shares of
Common Stock (the "Additional  Warrant Shares") at a purchase price of $1.30 per
share.

         When the offer expired,  a total of $250,000 of the  outstanding  notes
had been tendered for  conversion  into 217,391  common  shares.  The holders of
these  shares were  granted the  following  registration  rights (1) the Company
became obligated to file a registration statement covering 60% of the underlying
shares of common stock and (2)  piggyback  registration  rights were granted for
the remaining 40% of the shares granted.

         The Transaction was accounted for as a capitalization in which ER
LLC is the accounting acquirer and JPAL is the legal acquirer. The management of
ER LLC remained as the  management  of the Company.  Since the  Transaction  was
accounted  for as a  capitalization  and not a  business  combination,  no
goodwill has been  recorded in  connection  with the  Transaction  and the costs
incurred  in  connection  with the  Transaction  have  been  accounted  for as a
reduction of additional paid-in capital. As a result of the capitalization,
(i) the historical  financial statements of the Company for periods prior to the
date of the  Transaction are the historical  financial  statements of JPAL, and,
therefore,  JPAL's historical financial statements are no longer presented; (ii)
all  references  to the  financial  statements  of the  "Company"  apply  to the
historical  financial  statements of ER LLC prior to the  Transaction and to the
financial statements of the Company subsequent to the Transaction; and (iii) any
reference to the Company applies solely to ER LLC and Essential Reality, Inc.

         Founded in 1999,  ER LLC was a  developer  of  real-time  tracking  and
sensory  technologies.  We are focusing on  combining  these  technologies  into
products  that  enhance  the  interaction  between  human  beings  and  computer
platforms,  with  initial  emphasis on a product  called the P5(TM).  The P5(TM)
enables three-dimensional movement of the cursor as well as pitch, yaw and roll.
The user movinG his hand and/or bending his fingers controls the P5(TM).

         The Company began product shipments in October of 2002, and has not yet
generated  significant  revenue,  but continues to incur significant losses from
operations.  Inventory sold with the right of price  protection  and/or right of
return is reported as  inventory on  consignment  in  accordance  with the below
stated accounting policy for revenue  recognition.  The attainment of profitable
operations  are  dependent  upon future  events,  including  obtaining  adequate
financing to fulfill our future development activities, and achieving a level of
revenue  adequate to support its cost structure.  There can be no assurance that
such future events shall occur.

CRITICAL ACCOUNTING POLICIES

We have identified the following as critical accounting policies:

         PRODUCT  DEVELOPMENT  -  Product  development  costs  include  expenses
incurred  by the  Company to research  and  develop  the P5TM  product.  Product
development  costs  are  expensed  until  such time as it is  determined  that a
product is technologically  feasible.  Product development costs are capitalized
from such date until such time as product development is substantially complete.
Product  development  costs  capitalized will be amortized on the  straight-line
basis  over the  lesser of the  estimated  useful  life of the  product or three
years.



                                       21
<PAGE>

         REVENUE  RECOGNITION  - The  Company  recognizes  under  SAB 101  gross
revenue when the earnings process is complete, as evidenced by an agreement with
the  customer,  transfer  of title and the  rights and risks of  ownership  have
passed  to the  customer,  the  product  is  delivered,  the  price is fixed and
determinable,  and collection of the resulting receivable is reasonably assured.
Because the Company  allows many of its  distributors  price  protection  and/or
right of return, recognition of revenue in the accompanying financial statements
has been deferred until the  distributors  sell the  merchandise and the cash is
collected by the Company.  Inventory at distributors is reported as consigned in
the balance sheet.

         In cases  where  sales are made to certain  distributors  and title has
transferred, risks of ownership has passed and collection is assured, sales have
been recorded and an account  receivable has been recorded.  The Company records
an  allowance  for  uncollectible  accounts on a  customer-by-customer  basis as
appropriate.

         The Company may bundle product offerings from third-party vendors along
with the P5 product or may sell the P5 independently. The software is incidental
to the product as a whole and according to FASB 86,  Accounting for the Costs of
Computer Software To Be Sold, Leased or Marketed,  all revenue will be allocated
to the P5. As such,  the Company  will record the gross  amount of the  purchase
price of the P5 product as revenue  and will  reflect  the royalty to be paid to
the third-party vendor as a component of cost of sales.

         INVENTORY  - Inventory  is valued at the lower of cost or market,  with
cost being determined on the first in-first out basis. The inventory  represents
high-technology  parts that maybe subject to rapid  technology  obsolescence and
which are sold in a highly competitive industry. If the actual product demand or
selling prices are less favorable than we estimate,  the company  establishes an
allowance account based on net realizable values.  Inventory sold with the right
of  price  protection  and or  right of  return  is  reported  as  inventory  on
consignment.

RESULTS OF OPERATIONS

THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001

REVENUE.   For  the  year  ended  December  31,  2002,  the  Company  recognized
product-related  revenues  in the amount of  $112,602 as compared to no revenues
for the year ended December 31, 2001. The increase in our revenue  resulted from
the launch of our first  product,  the P5TM, in November  2002.  Revenue will be
deferred  in  accordance  with the above  stated  accounting  policy for revenue
recognition until certain events have been resolved.

COST  OF  REVENUE.  For  the  year ended December 31, 2002, cost revenue totaled
$304,023  compared  to  $  $0  for  the  year ended December 31, 2001.This was a
development  stage  company  through September 30, 2002. The increase in cost of
revenue resulted from the Company transitioning from a development stage company
to  an  operating  company  effective  October  1,  2002.

OPERATING  EXPENSES.  For the year ended December 31, 2002,  operating  expenses
totaled $7,507,066  compared to $3,131,444 for the year ended December 31, 2001.
The  increase in  operating  expenses  resulted  from the  increase in sales and
marketing,  general and  administrative  expenses  and stock based  compensation
which more than offset the decrease in product development as described below.

Product  development  expense.  For the year ended  December  31,  2002  product
development  expense  decreased from  $1,579,129 to $1,037,396 a net decrease of
$541,733 as compared to the year ended  December  31,  2001.  The  decrease  was
primarily  due to a decrease  of  approximately  $315,435  in fees paid to third
party  developers,   which  includes  materials  used  in  the  development  and
manufacturing  of


                                       22
<PAGE>


our P5(TM)  product,  and $260,000 in  capitalized  product  development  costs.
Included in product  development costs are $33,700,  aND $55,000 for years ended
December 31, 2002 and 2001, respectively,  paid to Abrams Gentile Entertainment,
Inc. owned by certain of our shareholders.

Sales and  marketing  expense.  For the year ended  December  31, 2002 sales and
marketing  expense  increased  from  $716,674 to  $1,711,894,  a net increase of
$995,220 as compared to the year ended December 31, 2001. The increases in sales
and  marketing  expense  is  primarily  due to  $296,429  in  marketing  related
salaries, $86,235 in trade shows and related travel, $289,400 in advertising and
$308,515 in consulting.

General  and  administrative  expenses.  For the year ended  December  31,  2002
general and administrative expenses increased from $823,791 to $1,924,823, a net
increase of  $1,027,220  as compared to the year ended  December 31,  2001.  The
increase in general and administrative  expenses is primarily due to an increase
of approximately $426,902 in salaries and benefits,  increase in consulting fees
$173,529,  increase in insurance of $115,331,  increase in professional  fees of
$261,115,  and  increase in office  expense of $30,486.  Included in general and
administrative  expenses  are  costs  incurred  of  approximately  $203,479  and
$242,000  for the years  ended  December  31,  2002 and 2001,  respectively,  by
Business  Development.com  Inc. and Hymax Group, LLC, companies that are related
to certain  members of LCG Capital Group.  Such costs include  consulting  fees,
employee  salaries,  occupancy,  telephone and computer  leases.  In the case of
employee  salaries,  costs were  allocated to us based on the time each employee
conducted business specific to us. In the case of the other expenses,  costs are
allocated  based  on a  percentage  of  resources  used by us.  In our  opinion,
allocated expenses incurred from related parties approximate fair market value.

         Stock  based  compensation  for the year ended  December  31,  2002 was
$880,885 as compared to -0- for the year ended  December 31, 2001.  The non-cash
charge was related to  amortization of deferred  compensation  for stock options
issued to employees, directors, advisors and consultants.

OTHER  INCOME(EXPENSE)  Interest  income for the year ended  December  31, 2002,
decreased  from $20,465 to $17,025,  a net decrease of $3,440 as compared to the
year ended  December  31, 2001.  Interest  earned from the note  receivable  for
Essential Reality, LLC's members' capital was $2,536 for the year ended December
31, 2002 compared to $20,465 for the year ended  December 31, 2001.  The balance
was due to lower cash balances during 2002.

         Interest  expense for the year ended  December 31, 2002  increased from
$20,565 to  $1,173,944,  a net  increased of  $1,153,439 as compared to the year
ended December 31, 2001. In 2002,  interest expense related  primarily to bridge
loans (Notes Payable) of $171,396, a non cash charge of $402,173, resulting from
the beneficial  conversion feature on July 17, 2002 and $579,870,  was primarily
due to the warrants and the  convertible  notes issued at the time of the merger
and  subsequent  financing  during  2002,  described in  "Liquidity  and Capital
Resources" below.

         Net loss for the years ended December 31, 2002 and 2001 were $8,853,480
and $3,131,484, respectively.

                                       23

<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

            Since its  inception  through  December 31, 2002 we had  accumulated
deficit  of  $13,625,722  and  expect  to  continue  to  incur  losses  for  the
foreseeable  future.  We have financed our operations  primarily  through bridge
loans and private placements described in the overview.

            For the year  ended  December  31,  2002 net cash used in  operating
activities  increased from $2,629,163 to $6,598,959 a net increase of $3,960,796
as compared to the year ended December 31, 2001.  Net cash and cash  equivalents
used in operations  for the year ended  December 31, 2002  consisted of net loss
from  continuing  operations  of  $8,853,480  less non cash items of  $3,413,200
consisting  primarily reserve for  collectibility of notes 102,121,  reserve for
inventory  obsolescence  of  $1,363,361,   non-cash  compensation  of  $880,885,
amortization  of  deferred  interest  of  $208,302,  and  decrease  in  deferred
financing costs of $217,755, increase in inventories of $1,667,890,  increase in
notes  receivable  of  $502,121,  increase  in account  receivable  of  $38,679,
increase in other assets of $61,157 and net increase in liabilities of $893,413.

            Net cash used in investing  activities  for the year ended  December
31,  2002  increased  from  $30,949 to  $693,495 a net  increase  of $662,546 as
compared to the year ended  December 31, 2001.  The increase  primarily  for the
purchase of capitalized software, website and equipment.

            Net  cash  provided  by  financing  activities  for the  year  ended
December 31, 2002  increased  from  $2,442,070  to  $7,467,449 a net increase of
$5,025,379  as  compared  to the year ended  December  31,  2001.  primarily  as
follows:

 The Company completed a private placement which generated cash proceeds
of $6,083,076 net of costs  associated  with the Offering of $988,103,  of which
$217,755 was prepaid as of December 31, 2001.

            We  received  proceeds from bridge loans of $1,825,000  for
prior to the closing of June 20, 2002. Bridge loans outstanding prior to closing
of the  transaction  and Offering  amounted to  $3,325,000.  Upon closing of the
Offering,  $250,000 of the bridge  loans were  converted  to 480,000  membership
units of ER LLC and we repaid an additional $1,100,000 of the bridge loans. Upon
closing of the  transaction the remaining  bridge loans and accrued  interest in
the amount of $2,378,431 were  eliminated and the Company assumed  $1,717,070 of
notes payable to third party lenders.  Proceeds of notes receivable  $82,971 and
repayment of advances from related companies of $5,705.

            On November 20, 2002, We  received  $500,000 partial bridge
financing  (the  "Financing")  from  a  subscription  agreement  for  $1,000,000
consisting of a six month 8% Secured Convertible Debenture  (the"Debenture") due
on May 20, 2003. The Debenture is convertible into units at a price of $1.00 per
unit,  each such unit  consisting  of one share of Common Stock and a warrant to
purchase 0.20 shares of Common Stock at an exercise  price of $0.20 per warrant,
or $1.00 for a whole  warrant.  The Black  Scholes value of the warrants and the
beneficial  conversion  feature will be  amortized to interest  expense over the
life of the debt.  The Financing is intended to assist the Company with its cash
flow as it  seeks to  raise  additional  financing  through  the sale of  equity
securities.  An  additional  $500,000  was  received  in  connection  with  this
subscription  in the first half of 2003 and the  company  issued  additional  8%
Secured Convertible Debentures.

            We  anticipates  that,  based on its  proposed  plans  and
assumptions relating to the implementation of its business plan, cash on hand as
of December  31,  2002  together  with  projected  revenue,  it will have a cash
shortfall of approximately $600,000 as of May 31, 2003. Should the Company not
raise additional capital and generate the projected revenue, the company expects
to  adjust


                                       24
<PAGE>



its  business  plan and cash burn rate such that cash on hand as of December 31,
2002, and the cash proceeds of the bridge loans and private  placement  received
in the amount of $662,500  through May 1, of 2003 will be  sufficient to satisfy
operations through May 31 ,2003. Thereafter, the Company will require additional
funding in order to reach the point of  self-sufficiency.  The Company  hopes to
raise the additional  cash from the exercise of certain  warrants and/or through
additional  offerings of its  securities.  The Company is unable to project cash
requirements  through December 31, 2003 until it more fully determines the level
of projected  revenue from the sale of future  products and the ability to raise
additional funds through public offerings or private placements.

POTENTIAL PRIVATE PLACEMENT

         We  will   require   substantial   funding  to  continue   our  website
development,  marketing,  sales, and administrative  activities.  We have raised
funds in the past  through  the sale of  securities,  and may raise funds in the
future   through   public   offerings  or  private   placements  of  securities,
collaborative arrangements or from other sources.

         However,  there can be no  assurance  that we will be able to raise any
additional  funds. If additional  funding is not available to us when needed, we
may be required to cease operations.

         Because we were not able to raise the necessary capital to generate the
projected  revenue by December 31, 2002,  we adjusted our business plan and cash
burn rate for the first quarter of 2003 by terminating  five key executives with
annual salaries totaling $1,030,000.

         We have an Investment  Banking/Advisory Agreement with First Securities
USA, Inc. through its SBI USA division as the exclusive  financial advisor,  for
six months  starting  March 10, 2003 in  connection  with the  management  of an
offering of "PIPE" (Private Investment In Public Equity) equity securities, on a
best  efforts  basis up to $5  million  dollars  with a  minimum  of $3  million
dollars.  The private placement will be structured as a transaction  exempt from
section 5 of the  Securities  Act of 1933 and shall  comply with section 4(2) of
the  Securities  Act and  Regulation  D. We will  pay the  Investment  Banker  a
retainer of $25,000 in shares of our common  stock.  In addition,  we will pay a
commission  in  cash  equal  to 10%  of  the  aggregate  gross  proceeds  of the
securities  sold,  as well as warrants to the purchase of a number of securities
equal to 10% of the number of  securities  sold in the  private  placement.  The
warrants  will be  excercisable  for five years at a price  equal to 110% of the
offering  price per  security.  We will also pay all fees of the  counsel to the
Investment Banker not to exceed $5,000.

         We believe that if we are be able to consummate  the private  placement
we should have sufficient funds to cover our operating expenses for at least the
next twelve months.  We will pursue  opportunities to finance our operations and
satisfy our cash requirements with a combination of debt financing, stock sales,
and, in the longer term, revenue from operations. Among the options available to
and being considered by management to ensure we have sufficient  working capital
for the  next  twelve  months  are a)  plans  to  continually  reduce  or  delay
expenditures,  b) plans to increase cash flow through acquisitions,  c) plans to
borrow  money using the assets and cash flow of  potential  acquisitions  and/or
existing  equity  investees and d) plans to increase  ownership  equity  through
various funding vehicles including  convertible  debentures,  private placements
and registration of shares for sale to the public.

         There can be no assurance  that any of these  options,  if they were to
occur, would provide sufficient working capital to us.


                                       25
<PAGE>




         During 2003 we will provide  severance pay  for the five executives in
the amount of  $201,000.  Certain  payments  are  contingent  upon us  obtaining
installment financing of at least $1 million, excluding bridge loans.

         In  February  we issued to Steven T.  Francesco  former  CEO,  a 5 year
warrant to purchase 250,000 shares of common stock at an exercise price of $0.75
per share. He may join the Company's  advisory board and receive an additional 5
year warrant to purchase  50,000 shares of common stock at an exercise  price of
$0.75 per share.  The  Black-  Scholes  value of the  warrants  feature  will be
amortized to stock based compensation over the life of the warrant.

         Certain  executives will have one year from the date of their severance
agreements to exercise  their stock  options in the amount of 161,667  shares or
have them forfeited.

Commitments

                               Payments Due By Period
                          ----------------------------------------
                            Less Than   1 to       4 to     After
                            Total       One year   3 Years  5 years  5 years
                          ------------  ---------- -------  -------- --------
Long-term debt             $ 0           $   0     $  0     S   -    S   -
Employment Contract -
Mr. Devore                   0               0        0         -        -

Other Employment Contracts
- Non Officers               0               0        0         -        -

Capital Lease Obligations    -               -        -         -        -

Operating Lease              0               0        0         -        -
                          ------------  ---------- -------  -------- --------
Total Cash Commitments    $  0          $   0      $  0     $    -   $   -
                          ============  ========== =======  ======== ========


RECENT ISSUED ACCOUNTING PRONOUNCEMENTS

         On June 29,  2001,  the  Financial  Accounting  Standards  Board (FASB)
issued SFAS No. 142,  "Goodwill and Intangible  Assets." SFAS No. 142 eliminated
the  amortization  of goodwill  and certain  other  intangibles  and requires an
impairment test of their carrying value. An initial  impairment test of goodwill
and certain other  intangibles must be completed in the year of adoption with at
least an annual  impairment  test  thereafter.  On January 1, 2002,  the Company
adopted SFAS No. 142. The Company completed the initial  impairment tests in the
first  quarter of 2002,  which did not result in an  impairment  of  goodwill or
other intangibles.

         In June  2001,  the FASB  issued  SFAS No.  143  "Accounting  for Asset
Retirement  Obligations".  SFAS  No.  143  addresses  financial  accounting  and
reporting for obligations  and costs  associated with the retirement of tangible
long-lived  assets. The Company is required to implement SFAS No. 143 on January
1, 2003, and management  does not expect its adoption to have a material  impact
on the Company's results of operations or financial position.

         In August  2001,  the FASB  issued SFAS No.  144,  "Accounting  for the
Impairment  or  Disposal  of  Long-Lived  Assets",  effective  for fiscal  years
beginning after December 15, 2001.  Under SFAS No. 144 assets held for sale will
be included in discontinued  operations if the operations and cash flows will be
or have been eliminated from the ongoing operations of the entity and the entity
will not have any  significant  continuing  involvement in the operations of the
component.The  Company  adopted SFAS No. 144 on January 1, 2002. The adoption of
SFAS  No.144  did  not  have a  material  impact  on the  Company's  results  of
operations or financial position.

         In  April  2002,  the FASB  issued  SFAS No.  145  "Rescission  of FASB
Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical
Corrections".  This statement eliminates the automatic classification of gain or
loss on extinguishment  of debt as an extraordinary  item of income and requires
that such gain or loss be evaluated for extraordinary  classification  under the
criteria  of  Accounting   Principles   Board  No.  30  "Reporting   Results  of
Operations". This statement also requires sales-leaseback accounting for certain
lease   modifications   that  have   economic   effects   that  are  similar  to
sales-leaseback  transactions,  and makes various other technical corrections to
existing  pronouncements.  This  statement will be effective for the Company for
the year ending  December 31, 2003. The adoption of this statement will not have
a material effect on our results of operations or financial position.


                                       26
<PAGE>



         In July 2002, the Financial  Accounting Standards Board issued SFAS No.
146,  "Accounting for Costs Associated with Exit or Disposal  Activities."  SFAS
No. 146 will  supersede  Emerging  Issues Task Force Issue No. 94-3,  "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity  (including Certain Costs Incurred in a  Restructuring)."  SFAS No. 146
requires that costs  associated with an exit or disposal plan be recognized when
incurred  rather than at the date of a commitment  to an exit or disposal  plan.
SFAS  No.146  is to be  applied  prospectively  to exit or  disposal  activities
initiated after December 31, 2002.

         In October 2002, the FASB issued  Statement No. 147,  "Acquisitions  of
Certain Financial  Institutions - an amendment of FASB Statements No. 72 and 144
and  FASB  Interpretation  No.  9,"  which  removes  acquisitions  of  financial
institutions  from  the  scope of both  Statement  72 and  Interpretation  9 and
requires that those  transactions be accounted for in accordance with Statements
No. 141,  "Business  Combinations,"  and No. 142, "Goodwill and Other Intangible
Assets." In addition,  this Statement  amends SFAS No. 144,  "Accounting for the
Impairment or Disposal of Long-Lived  Assets," to include in its scope long-term
customer-relationship  intangible  assets  of  financial  institutions  such  as
depositor- and  borrower-relationship  intangible  assets and credit  cardholder
intangible  assets.  The  requirements  relating to  acquisitions  of  financial
institutions are effective for acquisitions for which the date of acquisition is
on or after  October 1, 2002.  The  provisions  related  to  accounting  for the
impairment  or disposal of certain  long-term  customer-relationship  intangible
assets are effective on October 1, 2002.  The adoption of this Statement did not
have a  material  impact to the  Company's  financial  position  or  results  of
operations as the Company has not engaged in either of these activities.

            In  November   2002,   the  FASB  issued   Interpretation   No.  45,
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect  Guarantees  of  Indebtedness  of  Others,  an  Interpretation  of  ASB
Statements  No. 5, 57, and 107 and  Rescission  of FASB  Interpretation  No. 34"
("FIN No. 45"). The  interpretation  requires that upon issuance of a guarantee,
the entity must  recognize a liability  for the fair value of the  obligation it
assumes under that obligation.  This  interpretation  is intended to improve the
comparability  of  financial  reporting by requiring  identical  accounting  for
guarantees issued with separately identified consideration and guarantees issued
without  separately  identified  consideration.  For the  company,  the  initial
recognition, measurement provision and disclosure requirements of FIN No. 45 are
applicable to guarantees issued or modified after December 31, 2002. The company
is currently evaluating what impact, if any, adoption of FIN No. 45 will have on
its consolidated  financial  position,  consolidated  results of operations,  or
liquidity.

            In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," which amends FASB Statement
No. 123,  "Accounting  for  Stock-Based  Compensation,"  to provide  alternative
methods of transition  for a voluntary  change to the fair value based method of
accounting for stock-based employee  compensation.  In addition,  this Statement
amends  the  disclosure  requirements  of  Statement  123 to  require  prominent
disclosures in both annual and interim financial  statements about the method of
accounting for stock-based  employee  compensation  and the effect of the method
used  on  reported  results.  The  transition  guidance  and  annual  disclosure
provisions of Statement 148 are effective for fiscal years ending after December
15, 2002,  with earlier  application  permitted  in certain  circumstances.  The
interim  disclosure  provisions are effective for financial  reports  containing
financial  statements for interim periods beginning after December 15, 2002. The
adoption  of this  statement  did not have a  material  impact on the  Company's
financial  position or results of  operations  as the Company has not elected to
change to the fair value based method of  accounting  for  stock-based  employee
compensation.

                                       27

<PAGE>


         In January 2003, the FASB issued  Interpretation No. 46, "Consolidation
of Variable Interest Entities."  Interpretation 46 changes the criteria by which
one company includes another entity in its  consolidated  financial  statements.
Previously,  the  criteria  were  based  on  control  through  voting  interest.
Interpretation  46 requires a variable  interest  entity to be consolidated by a
company if that  company  is subject to a majority  of the risk of loss from the
variable interest  entity's  activities or entitled to receive a majority of the
entity's  residual  returns  or both.  A company  that  consolidates  a variable
interest  entity  is  called  the  primary   beneficiary  of  that  entity.  The
consolidation  requirements of  Interpretation  46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older  entities in the first  fiscal year or interim  period  beginning
after  June  15,  2003.  Certain  of the  disclosure  requirements  apply in all
financial  statements  issued  after  January 31, 2003,  regardless  of when the
variable  interest  entity  was  established.  The  Company  does not expect the
adoption  to have a  material  impact to the  Company's  financial  position  or
results of operations.

         During April 2003,  the FASB issued SFAS 149 - "Amendment  of Statement
133 on Derivative  Instruments and Hedging Activities,"  effective for contracts
entered  into or modified  after June 30,  2003,  except as stated below and for
hedging  relationships  designated  after June 30, 2003. In addition,  except as
stated below, all provisions of this Statement should be applied  prospectively.
The  provisions of this  Statement  that relate to Statement 133  Implementation
Issues that have been effective for fiscal quarters that began prior to June 15,
2003,  should  continue  to be  applied  in  accordance  with  their  respective
effective dates. In addition, paragraphs 7(a) and 23(a), which relate to forward
purchases or sales of when-issued securities or other securities that do not yet
exist,  should be applied to both existing  contracts and new contracts  entered
into after June 30, 2003. The Company does not participate in such transactions,
however,  is evaluating the effect of this new  pronouncement,  if any, and will
adopt FASB 149 within the prescribed time.

         During May 2003,  the FASB  issued SFAS 150 -  "Accounting  for Certain
Financial  Instruments  with  Characteristics  of both  Liabilities and Equity,"
effective for financial instruments entered into or modified after May 31, 2003,
and  otherwise  is  effective  at the  beginning  of the  first  interim  period
beginning after June 15, 2003. This Statement  establishes  standards for how an
issuer   classifies   and   measures   certain   financial    instruments   with
characteristics  of both  liabilities  and equity.  It  requires  that an issuer
classify  a  freestanding  financial  instrument  that is within  its scope as a
liability (or an asset in some  circumstances).  Many of those  instruments were
previously  classified as equity.  Some of the  provisions of this Statement are
consistent with the current definition of liabilities in FASB Concepts Statement
No. 6, Elements of Financial Statements. The Company is evaluating the effect of
this new pronouncement and will adopt FASB 150 within the prescribed time.


FACTORS THAT MAY AFFECT FUTURE RESULTS


A LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT.

         Prior  to our  business  combination  with  ER  LLC,  their  operations
consisted  primarily of organizational  activities and product  development.  In
addition,  our consumer  electronics  and youth  product  divisions are still in
their initial stages. Accordingly,  there is very limited operating history upon
which an evaluation of our prospects and future  performance can be based. There
can be no assurance that we will be able to develop our products as we envision,
raise additional capital to develop our business,  generate revenues or become a
viable  business.  Our  prospects  must be considered in the light


                                       28
<PAGE>


of the risks, uncertainties, expenses and difficulties frequently encountered by
companies in their early stages of development.

DUE TO OUR OPERATING  REQUIREMENTS AND LESS THAN EXPECTED  REVENUES,  WE REQUIRE
ADDITIONAL FINANCING OR WE WILL BE UNABLE TO CONTINUE AS A GOING CONCERN.

         ER LLC had no revenues prior to its business  combination with us since
its products  had not yet been  offered to the public.  We have begun to receive
limited cash proceeds from sales of the P5(TM),  but sales have been slower than
we  anticipated  due, in part, TO general  economic  conditions  and weaker than
expected sales of PC's, PC games and the peripherals  associated  therewith.  We
have not sold any other products in our other  divisions.  We anticipate that we
will need to raise  additional  capital  in the  immediate  future  to  continue
business operations;  however, there can be no assurance that such financing, or
any additional  financing,  will be available to us when needed, on commercially
reasonable  terms or at all. Any inability to obtain  additional  financing when
needed could have a material  adverse effect on us,  requiring us to curtail and
possibly cease our operations.


WE EXPECT TO INCUR  OPERATING  LOSSES AND NEGATIVE CASH FLOW FOR THE FORESEEABLE
FUTURE.

         We have  incurred  and  expect to incur  significant  net losses and to
experience  negative cash flow for the foreseeable  future. The auditors opinion
attached hereto indicates  substantial  doubt about our ability to continue as a
going concern.  Our success depends on the further  development of our products,
establishing and  strengthening  our lines of business,  as well as establishing
distribution  channels  for  our  products  and  relationships  with  retailers.
Accordingly,  we intend to continue making significant  capital  expenditures to
market,  promote,  manufacture and develop our products and execute our business
model. As a result of such  expenditures,  we will need to generate  significant
revenues to achieve  profitability.  There can be no assurance that we will ever
achieve revenues or profitable operations.


WE NEED TO HIRE ADDITIONAL  PERSONNEL AND MANAGE OUR GROWTH EFFECTIVELY IN ORDER
TO BECOME A SUCCESSFUL COMPANY.

         We believe that our growth through the development  and  implementation
of our  business  plan will  result in an increase  in  responsibilities  on our
management  team and will place added  pressures on our  operating and financial
resources.  We  will  also  need  to  hire  additional  management,   sales  and
operational personnel.  There can be no assurance that we will have the funds to
hire such personnel or that they will otherwise be available to hire to allow us
to manage our business.  In addition, to manage this anticipated growth, we must
implement systems and train, manage and integrate our employees as we expand our
employee  base. We cannot assure you that we have made adequate  allowances  for
the costs and risks associated with this growth, that our procedures or controls
will be adequate to support our operations,  or that our management will be able
to  successfully  offer and expand our products.  If we are unable to manage our
growth effectively, our business could be materially adversely affected.

3D  ENVIRONMENTS,  ON WHICH WE HAVE  BASED OUR  FIRST  PRODUCT  LAUNCH,  MAY NOT
ACHIEVE SIGNIFICANT MARKET ACCEPTANCE.

         Our sales  efforts  with  respect  to the  P5(TM)  have not and may not
generate  sufficient  revenues  to  recover  development  aND  marketing  costs,
especially if games using the 3D environment do not reach a significant level of
market  acceptance.  We  have  devoted  significant  development  and  marketing



                                       29
<PAGE>



resources on designing the P5(TM) for USB-compatible systems. If such systems do
not achieve wiDE  acceptance  by consumers or such  manufacturers  are unable to
ship a significant  number of such units in a timely fashion we will  experience
lower than expected sales. If we cannot develop  sufficient sales for the P5(TM)
or  other  products  we may  sell,  we will nOT be able to  continue  as a going
concern.

THE EFFECTS OF A HIGHLY  COMPETITIVE  PERIPHERAL  INPUT DEVICE MARKET MAY HAVE A
MATERIAL ADVERSE EFFECT ON OR RESULTS OF OPERATIONS.

         The market for peripheral input devices,  including mice and joysticks,
is very competitive.  In addition,  Microsoft,  Sony and Nintendo, who currently
dominate the  interactive  entertainment  hardware and  software  industry,  may
determine  to  develop  their  own  3D  peripheral  port  device  or  limit  the
functionality of input devices utilizing their USB ports, and have the financial
resources to withstand  significant price competition and to implement extensive
advertising  campaigns.  Many of our  competitors  have far  greater  financial,
technical,  personnel and other resources than we do, and many are able to carry
larger inventories and adopt more aggressive  pricing policies.  Prolonged price
competition or reduced operating margins could cause profits associated with the
P5(TM) TO decrease significantly.

INCREASED  COMPETITION  FOR LIMITED  SHELF SPACE AND  PROMOTIONAL  SUPPORT  FROM
RETAILERS  COULD  AFFECT THE  SUCCESS OF OUR  BUSINESS  AND  REQUIRE US TO INCUR
GREATER EXPENSES TO MARKET OUR PRODUCTS.

         Retailers typically have limited shelf space and promotional resources,
and  competition  is  intense  among an  increasing  number of newly  introduced
interactive  entertainment  software  products  and related  items for  adequate
levels of shelf space and  promotional  support.  Competition  for retail  shelf
space is expected to increase,  which may require us to increase  our  marketing
expenditures.  Competitors  with more  extensive  lines,  popular  products  and
financial  resources  frequently have greater  bargaining  power with retailers.
Accordingly, we may not be able to achieve the levels of support and shelf space
that such competitors receive.

PRODUCT RETURNS THAT EXCEED OUR ACCRUALS OR PRODUCTS  DELIVERED BUT NOT SOLD MAY
SIGNIFICANTLY IMPACT OUR FINANCIAL RESULTS.

         As a manufacturer of consumer  products,  we are exposed to the risk of
product returns,  either through the exercise by customers of contractual return
rights or as a result of our  assistance in balancing  inventories  of retailers
and  distributors,  as well as the risk of products  delivered to retailers  not
being sold to  consumers.  A portion  of our net sales may  result in  increased
inventory at our distributors and resellers,  which could lead to reduced orders
by these  customers in future  periods.  Overstocking  by our  distributors  and
retailers  may lead to higher  than normal  returns or a deduction  based on the
amount of product not sold. The difficulty in predicting  future sales increases
the risk that new  product  introductions,  price  reductions  or other  factors
affecting the electronic  consumer  products  market would result in significant
product returns.  In addition,  we may introduce product upgrades,  enhancements
and improved  packaging,  and thus may experience  higher rates of return on our
older products.

WE ARE UNDER THE CONTROL OF CERTAIN SHAREHOLDERS, WHICH COULD PREVENT THE TAKING
OF CERTAIN ACTIONS WHICH MAY BE BENEFICIAL TO THE OTHER SHAREHOLDERS.

         LCG  Capital  Group,  LLC,  one of the  original  members of  Essential
Reality,  LLC who received  shares of our common stock  pursuant to our business
combination  with Essential  Reality,  LLC, may be deemed to beneficially  own a
substantial  majority of our common stock by virtue of a voting  agreement  with
certain  other of our other  shareholders.  Consequently,  LCG will  control the
outcome  of



                                       30
<PAGE>



substantially all matters submitted to a vote of our security holders, including
but not limited to the  selection of members to our Board of  Directors  and the
adoption of measures that could delay or prevent a change in control or impede a
merger,  takeover or other business  combination we may  potentially be involved
in. LCG is controlled by Winchester  Capital Group,  LLC, which is controlled by
Michael Alpert.

OUR  COMMON  STOCK IS  SUBJECT TO PENNY  STOCK  REGULATION,  WHICH MAY LIMIT THE
LIQUIDITY  OF OUR COMMON STOCK AND THE ABILITY OF OUR  SHAREHOLDERS  TO SELL OUR
SHARES.

         Our common stock is subject to  regulations  of the SEC relating to the
market for penny stocks.  These regulations  generally require that a disclosure
schedule  explaining  the penny stock market and the risks  associated  with the
penny stock market be delivered to purchasers of penny stocks and impose various
sales practice  requirements on broker-dealers  who sell penny stocks to persons
other than  established  customers and  accredited  investors.  The  regulations
applicable  to penny  stocks may  severely  limit the market  liquidity  for our
securities and could reduce our shareholder's  ability to sell our securities in
the market.

IF WE ARE NOT CURRENT IN OUR  PERIODIC  FILINGS  WITH THE SEC, WE COULD LOSE OUR
ELIGIBILITY TO TRADE OUR SECURITIES ON THE OTC BULLETIN BOARD,  WHICH WOULD HAVE
AN ADVERSE AFFECT ON OUR ABILITY TO RAISE ADDITIONAL FUNDS.

         We are  required to file  annual and  quarterly  reports  with the SEC,
pursuant to the  Securities  Exchange  Act of 1934,  as  amended,  and the rules
promulgated  there under. To the extent we do not timely file such reports,  our
securities  may no longer be permitted  to be traded on the OTC Bulletin  Board,
and would then be listed on the "pink sheets." Such action would have an adverse
affect  on our  ability  to raise  additional  funds in the  future  since  many
potential  investors will not invest in companies whose securities are traded on
the "pink sheets."

ITEM 7.  FINANCIAL STATEMENTS.

See our financial statements beginning on page F-1.

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

         Effective  March  13  ,2003  ("Termination  Date")  we  terminated  our
relationship  with  Deloitte  &  Touche  LLP  ("D&T")  the  Company's  principal
independent  accountant.  On such date the Company engaged Stonefield Josephson,
Inc.  ("Stonefield")  to  serve  as  the  Company's  new  principal  independent
accountant.During  the  two most recent years and through December 31, 2002, the
Registrant  has not consulted with Stinefield Josephson, Inc. on items regarding
the  application  of  accounting  ptinciples  to a specified transaction, either
completed  or  proposed, or the type of audit opinion which might be rendered on
the  Registrant`s  financial  statemente.  Our  Audit  Committee  and  Board  of
Directors  participated  in  and approved the decision relating to the change in
independent  auditors'  from  D&T  to  Stonefield.

         During the two fiscal years ended  December 31, 2001 and any subsequent
interim  period through March 13, 2003 there were no  disagreements  between us,
Essential  Reality  LLC  and  D&T on any  matter  of  accounting  principles  or
practices, financial statement disclosure or auditing scope or procedure, which,
if not resolved to their satisfaction,  would have caused them to make reference
to the subject  matter of the  disagreement  in  connection  with their  report,
except for material weaknesses in internal control.


                                       31
<PAGE>


PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Pursuant to the terms of our  business  combination  with ER LLC,  upon
consummation  of the  transaction,  each of the officers and directors of ER LLC
became our officers  and  directors.  We have since  decided to  streamline  our
management  team in an effort to maximize our  resources as we begin to focus on
the  distribution  of the P5TM beyond its limited retail presence as well as the
development of additional  products.  We believe that the revised structure will
create a smaller but more sharply focused management team.

EXECUTIVE OFFICERS AND OTHER SIGNIFICANT EMPLOYEES

         Set  forth  below  for  each  of  our  executive   officers  and  other
significant  employees and consultants is his name,  age,  positions and offices
held with us, and his principal  occupations during the past five years. We plan
on hiring  additional  management  personnel  in the future,  including  but not
limited to a full-time  President,  Chief Executive  Officer and Chief Financial
Officer.
<TABLE>
<CAPTION>

       NAME                         AGE                     TITLE
       ----                         ---                     -----
<S>                                  <C>
Humbert B. Powell, III               63                    Chairman of the Board

John Gentile                         45                    Interim President and Chief Operating Officer

George Mellides                      62                    Acting Chief Financial Officer

David Devor                          40                    Vice President, Marketing & Sales
</TABLE>


                                       32

<PAGE>


HUMBERT B. POWELL, III, CHAIRMAN OF THE BOARD
Mr. Powell had been ER LLC's acting Chief  Executive  Officer and had worked for
us in the same capacity  following the consummation of our business  combination
with ER LLC until July 1, 2002. Since July 1, 2002, he has served as Chairman of
our Board of Directors.  Mr. Powell also has been a Managing Director at Sanders
Morris Harris,  a regional  investment-banking  firm  headquartered  in Houston,
Texas,  with a branch in New York City,  where he resides,  since November 1996.
Mr.  Powell  served as  Chairman  of  Marleau,  Lemire USA and Vice  Chairman of
Marleau, Lemire Securities,  Inc. between 1994 and 1996. Prior to his employment
with Marleau,  Lemire he served as a Senior  Managing  Director in the Corporate
Finance   Department   of  Bear  Stearns  &  Co.,   from  1984  to  1994,   with
responsibilities  for  the  investment  banking  effort  both  domestically  and
internationally. Prior to his employment with Bear Stearns, Mr. Powell served as
a Senior Vice President and Director of E.F. Hutton & Co., where he was employed
in  various  capacities  for 18 years.  He is also a Director  of Lawman  Armour
Corp.,  Bikers  Dream Inc.,  World Water  Corp.,  and a trustee of  Salem-Teikyo
University.

JOHN GENTILE, INTERIM PRESIDENT AND CHIEF OPERATING OFFICER
Mr.  Gentile has served as our Interim  President  and Chief  Operating  Officer
since  December  31,  2002.  Mr.  Gentile has also served as President of Abrams
Gentile  Entertainment  (AG),  a New  York-based  entertainment  technology  and
marketing  firm since its  inception in 1986.  He also is a principal  and board
member of T-INK Technologies,  Inc.(TM), a company founded in December 2000 that
develops and markets high tech conductive inks for both interactive consumer and
industrial applications. Mr. Gentile, along with his brother Anthony, holds many
patents and trademarks for technology and toy applications, as well as technical
and process  technologies  they have  created for joint  ventures  with  Hasbro,
Kenner and Mattel, which collectively generated over a billion dollars of retail
sales.  Prior to AG, he was a founder and Chief Executive  Officer of The Instar
Group from 1973 to 1986,  an  entertainment  design  firm where he created  many
successful  campaigns and film design for Paramount Pictures,  Universal Studios
and Columbia Pictures.

GEORGE MELLIDES, ACTING CHIEF FINANCIAL OFFICER
Mr.  Mellides has served as our Acting Chief  Financial  Officer since March 24,
2003.  Previously,  from May 2000 to February 2003, Mr. Mellides served as Chief
Financial Officer of James Barclay Alan, a small-cap Investment Banking Company.
From January 1999 to April 2000 he served as Chief  Financial  Officer of Dreman
Value  Management,  Investment  Advisors and from January 1996 through  December
1998 he served as Chief Financial Officer of Laidlaw Global Securities.

DAVID DEVOR, VICE PRESIDENT, SALES & MARKETING
Mr. Devor had been with ER LLC since  November 1999, and since November 2001 has
been our Vice President of Marketing,  responsible for marketing and branding of
our  products.  Prior to  joining  ER LLC,  Mr.  Devor  managed  private  equity
investments  from February  1991 to October 1999 through his principal  position
with Devor Capital  Investments LLC, which is an investment firm specializing in
high-tech  companies,  with  a  primary  focus  on  interactive   entertainment,
electronic  gaming  and  Internet-related  opportunities.  Prior to  that,  from
October 1983 to January  1991,  Mr.  Devor  founded and managed a large chain of
home entertainment  furnishings centers. On February 27, 1996, Mr. Devor pleaded
guilty to the crime of offering a false  instrument  for  filing.  He received a
three-year conditional discharge,  paid $10,000, and was obligated to perform 40
hours of community service.

John Gentile,  our interim President,  Chief Operating Officer and Director,  is
the brother of Anthony  Gentile,  another  Director of ours.  There are no other
family relationships among our directors and executive officers.


                                       33
<PAGE>



BOARD OF DIRECTORS
Set forth below for each of the five  members of our Board of  Directors  is his
name,  age,  the term during  which he has served as one of our  directors,  his
principal   occupations   during  the  past  five   years  and  any   additional
directorships he has held in publicly-held companies.

MARC A. FRIES, age 34
Mr. Fries has been the President of The Raynor Group ("Raynor"),  an established
national  sales and  marketing  firm in the  office  furniture  industry,  since
February 1998. Mr. Fries is responsible for the  development and  implementation
of sales strategies for each of the distribution channels Raynor services. These
channels  include big box retail,  mail order,  Internet sales,  national buying
groups,  regional distributors and independent dealers. Mr. Fries has headed the
licensed product division at Raynor since its inception two years ago. Currently
this division is launching its  Technomesh(TM)  seating and accessories  product
line under license  agreements with National  Football League Properties and the
National Hockey League.  Raynor is in the process of signing agreements with the
National Basketball Association and the NCAA Collegiate Licensing Committee. Mr.
Fries has been responsible for all product development  including design, global
sourcing and  manufacturing  for Raynor.  He has been instrumental in developing
its  marketing  plan and  coordinating  sales and  distribution  with key retail
partners across the country.  Prior to being appointed  President of Raynor, Mr.
Fries was the National  Sales  Manager  responsible  for Raynor's  outside sales
force.  Mr.  Fries  began his career in sales with Raynor in October  1990.  Mr.
Fries received his Bachelor of Arts in Economics from Yeshiva  University in New
York.

BRIAN D. JEDWAB, ESQ., AGE 32
Mr. Jedwab has served as general  counsel to Hymax Group,  LLC, a private equity
investment  company with  investments in numerous public and private  companies,
primarily Internet and technology related,  since 1997. In such capacity, he has
been   responsible   for  the  direction   and   management  of  all  legal  and
administrative  affairs. Mr. Jedwab has practiced law in the areas of commercial
litigation and real estate, is a member of the Bar of the States of New York and
New  Jersey and is a member of the New York State Bar  Association.  Mr.  Jedwab
received  his B.A. in History cum laude from Queens  College and received a J.D.
from the Benjamin N. Cardozo School of Law.

ANTHONY GENTILE, AGE 45
Mr. Gentile has served as  Vice-President  of AG since its inception in 1986. He
also is a principal and Board member of T-INK Technologies,  Inc.(TM), a company
founded in December 2000 that develops and markets high tech conductive inks for
both interactive consumer and industrial  applications.  Mr. Gentile, along with
his brother  John,  holds many patents and  trademarks  for  technology  and toy
applications,  as well as technical and process  technologies  they have created
for joint ventures with Hasbro,  Kenner,  and Mattel,  which  collectively  have
generated over a billion dollars of retail sales.  Prior to AG, he was a founder
and  Vice-President  of The  Instar  Group from 1973 to 1986,  an  entertainment
design  firm where he created  many  successful  campaigns  and film  design for
Paramount Pictures, Universal Studios and Columbia Pictures.

For Humbert B. Powell,  III's and John  Gentile's  information,  see  "Executive
Officers and Other Significant Employees" above.

COMMITTEES

In June  2002,  our Board of  Directors  established  an audit  committee  and a
compensation committee.  The Board has assigned certain  responsibilities to the
committees and the committees  approve actions and



                                       34
<PAGE>


make  recommendations  to the Board.  The audit  committee  works with the chief
financial officer and outside auditors,  in connection with various auditing and
accounting  matters,  including the  recommendation  of auditors,  the scope and
accuracy of the annual audits, fees to be paid to the auditors, the independence
of the auditors, and our internal controls and accounting practices. The members
of the audit committee  currently are Humbert B. Powell, III (Chairman) and Marc
Fries. The compensation committee reviews the budget and recommends, reviews and
oversees  the  salaries,  benefits  and stock  option  plans for our  employees,
consultants,  directors and other individuals  compensated by us. The members of
the  compensation  committee  currently are Humbert B. Powell,  III  (Chairman),
Brian D. Jedwab and Anthony Gentile.  The Board and its committees currently are
examining the impact of the  Sarbanes-Oxley  Act of 2002 on their  structure and
operations.  Our  Board of  Directors  may  from  time to time  establish  other
committees to facilitate our management.

ADVISORY BOARD
In January  2001,  ER, LLC  established  an  advisory  board for the  purpose of
providing  it with  strategic  advice.  The members of the  advisory  board meet
periodically   with  and  advise  our  employees,   customers  and   third-party
consultants.  Set  forth  below  for each  member  is his or her  name,  age and
principal occupations during the past five years.

PAUL EIBELER, AGE 45
Mr.  Eibeler is the  President of Take-Two  Interactive,  an  integrated  global
developer,  marketer,  distributor,  and publisher of interactive  entertainment
software  games and  accessories  for the Sony  PlayStation2,  Nintendo  64, and
Microsoft  Xbox.  He has  been  with  Take-Two  interactive,  since  July  2000.
Previously,  Mr. Eibeler held various consulting  positions for Microsoft's Xbox
launch team, W-Trade Inc. and Essential  Reality,  LLC from January 1999 to June
2000.  Mr.  Eibeler  also  served  as  Acclaim  Entertainment's  executive  vice
president  and  General  Manager  from June 1996 to  January  1999.  Mr.  Eibler
graduated from Loyola University in 1978.

JOSHUA I. SMITH, AGE 61
Mr. Smith is an internationally  distinguished  entrepreneur and lecturer. Since
1998, Mr. Smith has been Chairman and Managing Partner of The Coaching Group. In
that capacity he is the "coach," senior advisor/consultant,  to the CEO's of the
portfolio companies and assumes active roles with these companies which includes
serving as Chairman or Vice  Chairman of the Board,  Board  member,  or Advisory
Board  member.  Previously  he was  Founder,  Chairman  and  CEO  of the  MAXIMA
Corporation,  a 20 year-old firm that  achieved a national  reputation as one of
the top African  American  owned firms in the United  States.  In addition,  Mr.
Smith  presently  serves  on the  Boards  of  Directors  for  Caterpillar,  Inc.
(CAT-NYSE), FedEx Corp (FDX-NYSE) and Allstate Corporation (ALL-NYSE).

GLENN WONG, AGE 45
Mr.  Wong has been the  principal  of  Catalyst  Solutions  Ltd.,  a  consulting
company, since February 2001. Mr. Wong provided strategic consulting services to
Mike's  Hard  Lemonade(TM),  the number one hard  lemonade in the US and Canada.
Previously,  Mr. Wong served as President & General  Manager for Electronic Arts
(Canada),  Inc.,  the world's  largest  video game studio,  from January 1998 to
January  2001.  In this  capacity,  he oversaw  development  of the full line of
interactive  computer and video game entertainment  software for Electronic Arts
studios in Burnaby,  BC and Bellevue,  WA. Prior to joining  Electronic Arts, he
was  President of Rogers Cable TV for British  Columbia  from  November  1995 to
January  1998,  where  he  concentrated  his  efforts  on the  quickly  changing
environment of the cable and telecommunications industry. From 1993 to 1995, Mr.
Wong served as President and Chief Executive Officer of B.C.  Hothouse,  Ltd., a
Canadian produce company. Mr. Wong also served as Vice President of Marketing at
Nabob  Foods  from  January  1984 to  January  1993,  where he  oversaw  several
successful



                                       35
<PAGE>



campaigns  and  received  his first AMA  "Marketer  of the Year"  Award and "Top
Marketer" from Strategy Magazine.  He began his professional career in 1980 as a
Brand  Manager at Procter  and Gamble  Inc.  Mr.  Wong has served on a number of
boards including the Insurance  Corporation of B.C., Canadian Cable Labs, Mohawk
Oil Ltd.,  and the Dragon Boat Festival  Society.  Mr. Wong  graduated  from the
University of British  Columbia in 1980 with a Bachelor of Commerce and Business
Administration.

DAVID H. STARR, AGE 51
Mr.  Starr is  currently  the Managing  Director of NRW  Holdings,  a voice over
implementations  company.  Prior to NRW, Mr.  Starr served as Chief  Information
Officer for 3COM  Corporation  for two years,  where he was responsible for over
800  information  technology  professionals  in 43 countries and was involved in
managing the Palm and U.S. Robotics spin-offs.  From May 1993 to August 1999, he
served  as  Chief  Information   Officer  at  Knight  Ridder,   Reader's  Digest
Association and the ITT Corporation,  and also has held senior officer titles at
Mastercard  International,  Citicorp and Price  Waterhouse.  His published works
have  appeared  in CIO  Magazine  and he has been a guest  lecturer  at  various
universities  and  professional  networks,  including  MIT. Mr. Starr has and/or
currently  sits on the Boards of  Directors  of Best Buy  Corporation,  BoysHope
GirlsHope, ePurpose,  GenerationPix,  AdvisorTeam and NRW Corporation. Mr. Starr
holds an MBA from  Harvard  University  and  received  his  Bachelor  of Arts in
Physics in 1972 from Florida State University.

MARVIN IGELMAN, AGE 40
From 1995 through  March 2002,  Mr.  Igelman was  President  and CEO of BrandEra
Inc., a publicly  traded company that owned and operated a  business-to-business
destination  for the marketing  communications  industry.  Since April 2002, Mr.
Igelman  has been a  director  of  National  Construction  Inc.,  a  multi-trade
industrial  construction and maintenance  contracting services company primarily
servicing  Eastern Canada and Alberta.  In 1983,  Mr.  Igelman  received his law
degree from Osgoode Hall Law School located in Toronto.

ELI LEVITIN, AGE 38
Eli Levitin is Managing  Director and General  Counsel of Acta Realty Corp.  and
affiliated  companies,  which hold a  substantial  portfolio  consisting of real
estate,  various investment funds, including private equity and hedge funds, and
a variety of other investments. In addition to his management  responsibilities,
Mr.  Levitin is  actively  involved in  developing  Acta's  financial  structure
associated with its investment portfolio and entities.  Prior to joining Acta in
December 1993,  Mr.  Levitin  practiced law at the law firms of White & Case and
Stroock,  Stroock & Lavan,  where his primary areas of practice  were  corporate
reorganization and structured finance.  Mr. Levitin was a contributing editor of
Collier  Bankruptcy  Practice  Guide.  Mr. Levitin  graduated with a bachelor of
science from Brooklyn College in 1985 and received a JD from Columbia Law School
in 1988.

HUMBERT B. POWELL, III, AGE 63
For Humbert B. Powell,  III's  information,  see  "Executive  Officers and Other
Significant Employees" above.

In  addition,  Steven T.  Francesco,  our former Chief  Executive  Officer and a
former  member of the Board of Directors has been working with us and has agreed
to join the advisory board but has not yet signed an advisory agreement with us.
Mr. Francesco  worked with us to, among other things,  finalize various business
development initiatives which were started during his tenure with us.

                                       36

<PAGE>


SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities  Exchange Act of 1934 requires our directors and
executive  officers,  and persons who own more than 10% of our common stock,  to
file with the  Securities and Exchange  Commission  (the  "Commission")  initial
reports of ownership  and reports of changes in  ownership of our common  stock.
Such persons are  required by the  Commission's  regulations  to furnish us with
copies of all  Section  16(a)  forms they file.  Based  solely  upon a review of
copies of such forms  received  by us, or written  representation  from  certain
reporting persons,  we believe,  during the fiscal year ended December 31, 2002,
that there was compliance with all Section 16(a) filing requirements  applicable
to our officers, directors and 10% shareholders.

ITEM 10. EXECUTIVE COMPENSATION.
During our fiscal year ended  December  31, 2002,  we had three chief  executive
officers.  Frank  Drechsler  served as our  chief  executive  officer  until our
business combination with ER LLC on June 20, 2002. Mr. Drechsler did not earn or
receive any  compensation for services he rendered to us. Following the business
combination,  Humbert Powell, III had acted as our chief executive officer until
July 1, 2002. Mr. Powell did not earn or receive any  compensation  for services
he  rendered to us in such  capacity.  Steven T.  Francesco  served as our chief
executive  officer  from  July  1,  2002  until  February  5,  2003.  Since  the
resignation  of Mr.  Francesco  on February 5, 2003,  John  Gentile,  as Interim
President, has been serving as our principal executive officer.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                             LONG-TERM
                                                      ANNUAL COMPENSATION                  COMPENSATION
                                                      -------------------                  ------------
                                                                      OTHER ANNUAL          SECURITIES
            NAME AND                         SALARY       BONUS       COMPENSATION      UNDERLYING OPTIONS
       PRINCIPAL POSITION         YEAR        ($)          ($)           ($) (1)             (SHARES)
       ------------------         ----        ---          ---           -------             --------
<S>                               <C>       <C>           <C>           <C>               <C>
  Steven T. Francesco,            2002      $127,000       None           None                   0
  Chief Executive Officer
</TABLE>

-------------
(1)  The aggregate  amount of perquisites  and other  personal  benefits paid to
     each of the  individuals  listed on this table did not exceed the lesser of
     ten percent (10%) of such officer's annual salary and bonus for each fiscal
     year indicated or $50,000.

     During  the fiscal  year  ended  December  31,  2002,  we did not grant any
options to our named  executive  officers  nor do any of them own any options to
purchase shares of our common stock,  except for Humbert B. Powell,  III who was
granted 35,000 options as a member of our Board of Directors and Advisory Board.

         With respect to our current  officers,  the status of their  employment
agreements are as follows:

DAVID DEVOR,  VICE  PRESIDENT,  MARKETING AND SALES.  On September 5, 2002,  Mr.
Devor  signed  an  employment  agreement  which  provides  for a base  salary of
$150,000 per year. He was also granted the following  options to purchase shares
of our common stock:  (i) 200,000 shares at an exercise price of $.65 per share,
which vested immediately;  (ii) 100,000 shares at an exercise price of $0.65 per
share, 25,000 of which vest on February 29,2003 and 75,000 in five equal monthly
installments  commencing  March 29,



                                       37
<PAGE>


2003;  (iii) 200,000  shares at an exercise  price of $1.00 per share which vest
when either of the following  conditions  occur: (a) our market  capitalization,
based on the public float,  equals or exceeds $150 million for a period of sixty
consecutive  business  days and the  average  daily  volume of our common  stock
traded  during  those  sixty days is no less than  125,000 or (b) we sell all or
substantially all of our assets for a minimum of $125 million.

Neither John Gentile,  Interim President and Chief Operating Officer, nor George
Mellides,  our acting Chief Financial Officer,  have employment  agreements with
the Company.

DIRECTOR COMPENSATION
         As compensation for their services as members of the Board, each member
receives annual compensation of $10,000,  plus options to purchase 10,000 shares
of our common  stock at an  exercise  price  equal to the  closing  price of our
common stock on the date of the grant.  The options vest over a one-year  period
in equal quarterly  amounts,  so long as the director completes service for such
quarter.  Non-employee  directors  are  reimbursed  for  reasonable  expenses in
connection with serving as a director and member of a committee.

ADVISORY BOARD COMPENSATION
         As  compensation  for serving on the advisory  board,  the members have
received  options to purchase an aggregate of 260,000 shares of our common stock
at  exercise  prices  ranging  from $0.75 to $1.60.  All of these  options  were
granted  in  June  2002  and  vest  equally  on  the  first,  second  and  third
anniversaries  of the  date  of  grant,  so long as the  advisory  board  member
completes  service for such  period.  The  issuance  of the options  resulted in
deferred  stock-based  compensation  expense  of  $610,448  of which  93,263 was
expensed for the year ended  December 31, 2002 using the  Black-Scholes  pricing
model.

ITEM 11.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
RELATED

STOCKHOLDER MATTERS.

The following table sets forth  information  concerning  ownership of our common
stock as of March 31, 2003, by (i) each person known by us to be the  beneficial
owner of more than five percent of the  outstanding  shares of our common stock,
(ii) each director,  and (iii) all of our directors and executive  officers as a
group.

<TABLE>
<CAPTION>

                                                        NUMBER   OF   SHARES    PERCENTAGE OF OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER                    BENEFICIALLY OWNED      SHARES BENEFICIALLY OWNED (1)
------------------------------------                    ------------------      -----------------------------
<S>                                                     <C>                     <C>
LCG Capital Group, LLC                                      9,600,000 (2)                       52.7%
Hamilton Resources Group, LLC
Winchester Capital Group, LLC
Michael Alpert
c/o 335 Central Avenue, 2nd Floor
Lawrence, NY 11559

Martin Abrams                                               2,400,480                           13.2%
c/o Abrams Gentile Entertainment, Inc.
244 West 54th Street, 9th Floor
New York, NY 10017
</TABLE>


                                       38
<PAGE>

<TABLE>
<CAPTION>
                                                        NUMBER   OF   SHARES    PERCENTAGE OF OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER                    BENEFICIALLY OWNED      SHARES BENEFICIALLY OWNED (1)
------------------------------------                    ------------------      -----------------------------
<S>                                                     <C>                     <C>
Michael B. Schwab                                           2,113,478 (3)                       11.6%
c/o 1219 Lombard Street
San Francisco, CA 94109

Big Sky Partners                                            2,027,078 (4)                       11.2%
c/o 1219 Lombard Street
San Francisco, CA 94109

Anthony Gentile                                             1,129,260 (5)                       6.2%
c/o Abrams Gentile Entertainment, Inc.
244 West 54th Street, 9th Floor
New York, NY 10017

John Gentile                                                1,129,260 (5)                       6.2%
c/o Abrams Gentile Entertainment, Inc.
244 West 54th Street, 9th Floor
New York, NY 10017

Jayvee & Co., for AGF Canadian Growth Equity                  1,113,800                         6.1%
c/o Jayvee & Co.
P.O. Box 9
Commerce Court West
Securities Level
Toronto, Ontario M5H 4A6

Humbert B. Powell, III                                        7,500 (5)(6)                        *

Marc A. Fries                                                 7,500 (5)                           *

Brian D. Jedwab                                               7,500 (5)                           *

All executive officers and directors as a group               2,281,020                         12.5%
(5 persons)
</TABLE>

--------------
o        Less than 1%
(1)      Unless  otherwise  indicated,  we believe that all persons named in the
         above table have sole voting and  investment  power with respect to all
         shares of voting stock  beneficially  owned by them. A person is deemed
         to be the beneficial  owner of securities  that can be acquired by such
         person  within  60 days  from the date  hereof  upon  the  exercise  of
         options,  warrants or convertible  securities.  Each beneficial owner's
         percentage  ownership is determined by assuming that options,  warrants
         and  convertible  securities held by such person (but not those held by
         any other person) and which are  exercisable or  convertible  within 60
         days have been  exercised and  converted.  Assumes a base of 18,223,110
         shares of common stock outstanding.
(2)      Includes  4,800,000  shares of common stock held by LCG Capital  Group,
         LLC (LCG) and an  additional  4,800,000  shares  of common  stock  held
         collectively  by Martin Abrams,  John Gentile,  Anthony Gentile and MSH
         Entertainment Corporation,  who have agreed to vote their shares in the
         same  manner as LCG votes its shares  with  respect to certain  matters
         (including  but not limited to the election of  directors).  LCG may be
         deemed to



                                       39
<PAGE>


         beneficially  own such shares  whose vote it controls  but it disclaims
         beneficial  ownership  of  such  shares  except  to the  extent  of its
         pecuniary  interest.  Hamilton  Resources  Group,  LLC currently owns a
         majority of the equity in LCG and may be deemed to beneficially own the
         shares held by LCG.  Winchester  Capital  Group,  LLC, as the  managing
         member of LCG,  may be deemed to  beneficially  own the shares  held by
         LCG.  Michael  Alpert,  as the managing  member of  Winchester  Capital
         Group,  may be  deemed  to  beneficially  own the  shares  held by LCG.
         Hamilton  Resources Group,  Winchester Capital Group and Michael Alpert
         each disclaims beneficial ownership of the shares beneficially owned by
         LCG, except to the extent of its pecuniary interest therein.
(3)      Includes  86,400 shares of common stock held by Mr.  Schwab,  1,920,000
         shares of common stock held directly by Big Sky  Partners,  and 107,078
         shares of common stock held indirectly by Big Sky Partners  through its
         ownership in LCG Capital Group. Mr. Schwab,  as managing partner of Big
         Sky Partners,  may be deemed to beneficially own the shares held by Big
         Sky  Partners,  but he disclaims  beneficial  ownership of such shares,
         except to the extent of his pecuniary interest therein.
(4)      Includes  1,920,000  shares of common  stock held  directly  by Big Sky
         Partners and 107,078 shares of common stock held  indirectly by Big Sky
         Partners  through its ownership in LCG Capital Group.  Big Sky Partners
         disclaims beneficial ownership of the shares held by LCG Capital Group,
         except to the extent of its pecuniary interest therein.
(5)      Includes  7,500  shares  of  common  stock  issuable   upon  currently
         exercisable directors options.


SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

         The following table sets forth certain information regarding our equity
compensation plans at December 31, 2002:

<TABLE>
<CAPTION>

                                                                                                     NUMBER
                                                                                                       OF
                                                                                                    SECURITIES
                                                                                                REMAINING AVAILABLE
                                     NUMBER OF SECURITIES TO BE       WEIGHTED-AVERAGE          FOR FUTURE ISSUANCE
                                       ISSUED UPON EXERCISE OF        EXERCISE PRICE OF            UNDER EQUITY
         PLAN CATEGORY                   OUTSTANDING OPTIONS         OUTSTANDING OPTIONS        COMPENSATION PLANS
         -------------                   -------------------         -------------------        ------------------
<S>                                     <C>                           <C>                       <C>
Equity compensation plans approved
by security holders
                                              1,357,000                      $1.08                   1,357,000
Equity compensation plans not
approved by security holders
                                                    N/A                       N/A                       N/A
                                              ---------                    -------                  -----------
         Total                                1,357,000                      $1.08                   1,357,000
                                              =========                    =======                  ==========
</TABLE>



ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.


ESSENTIAL REALITY, LLC

         On June 20, 2002, we  consummated a business  combination  with ER LLC.
Pursuant  to  the  terms  of the  transaction,  all  of  the  members  of ER LLC
contributed  their  membership  interests  to us in exchange for an aggregate of
16,874,784  shares of our common stock.  LCG Capital Group,  LLC, Martin Abrams,
John  Gentile and  Anthony  Gentile,  all of whom were  members of ER LLC at the
consummation of the transaction,  are now significant  shareholders of ours. See
"Security Ownership of Certain Beneficial Owners and Management".  Following the
transaction,  ER LLC, then our wholly-owned subsidiary, was merged with and into
us.We owe an aggregate of $228,492 in accrued salaries to certain  affiliates of
ER LLC for  services  rendered  to ER LLC.  We  currently  owe $39,600 to Abrams
Gentile Entertainment Corporation,  $60,000 to Anthony Gentile for unpaid salary
as a Senior Vice President of ER LLC,  $9,755 to David Devor in connection  with
services  rendered as Vice  President of  Marketing,  $60,000 to John Gentile in
connection  with services  rendered as Executive  Vice  President of ER LLC,



                                       40
<PAGE>



and $59,137 to Michael Alpert in connection with services  rendered as President
and Chief Executive Officer of ER LLC.

         In  July  2000,  Essential  Reality,  LLC  entered  into  a  consulting
agreement  with MC Squared  Incorporated  to help manage the  relationship  with
product developers.  This consulting  agreement replaced a previous  Development
Agreement  executed between  Essential  Reality,  LLC and MC Squared in November
1999. In connection with these agreements we paid MC Squared $250,000. We are no
longer making payments to MC Squared. In September 2000 the consulting agreement
terminated and the development process was managed by us internally.  MC Squared
is a  company  owned by a person  related  to  certain  members  of our Board of
Directors.  Pursuant to such agreement, we are required to pay royalties of 1.8%
on net sales of the P5TM and 9% of the license fee  collected by us with respect
to P5TM,  indefinitely.  No payment is due MC  Squared  until  sales or fees are
actually  received  by us.  MC  Squared  has sued us in  connection  with  these
agreements. See "Legal Proceedings" above.

LCG CAPITAL GROUP, LLC

         LCG Capital Group,  LLC (LCG) is a founding member of ER LLC and, after
our  business   combination,   beneficially  owns  approximately  53.5%  of  our
outstanding  common stock. ER LLC received  interest-free  loans from LCG in the
aggregate amount of $70,912, which are payable on demand.

BUSINESSDEVELOPMENT.COM, LLC

         BusinessDevelopment.com,  LLC (BDC) is an entity  controlled by Michael
Alpert,  an  affiliate  of LCG.  LCG does not  directly own any interest in BDC,
although  certain people are affiliated  with both LCG and BDC. BDC entered into
an agreement  with ER LLC on December  13, 2000,  pursuant to which BDC provides
general  consulting  services to ER LLC,  and now to us, in return for a monthly
cash   retainer.   Such   services   consist   of   forming   revenue-generating
opportunities,  including without limitation distribution agreements,  licensing
agreements, joint ventures, strategic alliances and partnerships.  The amount of
the  retainer  originally  was $6,000 per month,  increased to $15,000 per month
from July 1, 2002 to September  30, 2002 and is  currently  $7,500 per month and
can increase from time to time up to a maximum of $20,000 per month,  based upon
our mutual consent with BDC,  depending on the level and geographic scope of the
services. To date, together with ER LLC, we have incurred $193,000 of consulting
fees from BDC  under  the  terms of such  agreement.  Included  in  general  and
administrative  expenses is $117,000  and $100,000 at December 31, 2002 and 2001
respectively.

         In addition to the monthly  retainer,  we also are  obligated to pay to
BDC a  potential  revenue  share of up to four  percent  (4.0%) on  transactions
facilitated by BDC.  Either BDC or we may cancel this agreement with thirty (30)
days  prior  notice.  BDC is not  registered  as a  broker-dealer.  BDC does not
participate  in  document  preparation  or  marketing,  nor do they  perform due
diligence. In determining suitability for potential business opportunities,  BDC
necessarily analyzes the parties involved,  but no analyses of sophistication or
other broker-dealer type functions are performed by BDC on our behalf.

         Until  November 30, 2001,  ER LLC shared office space with BDC. This is
no longer the case.  There was an allocation  of general  expenses in connection
with  such  office  space,  whereby  BDC  paid  70% and ER LLC  paid 30% of such
expenses.  Certain  items,  such as office  supplies and computer  leases,  were
assumed by ER LLC and taken to its new offices.


                                       41
<PAGE>



OTHER RELATIONSHIPS AND RELATED TRANSACTIONS

         Abrams  Gentile  Entertainment  Corporation  (AGE),  a company owned by
certain founding members of ER LLC, including Anthony and John Gentile,  who are
directors of ours,  and Martin  Abrams,  a shareholder of ours who owns 13.4% of
our  outstanding  common  stock,  has  provided  services  to ER LLC and us as a
general   consultant   and  advisor   with   respect  to   developing   business
relationships.  Anthony  Gentile owns 24.995% of AGE,  John Gentile owns 24.995%
and Martin Abrams owns 50.01%. We have incurred fees (including, but not limited
to, accrued  compensation and accounts  payable) to AGE and may incur additional
expenses  as  services  are  performed.   Services  performed  to  date  include
assistance with the product logo design, advertising,  planning,  production and
other  business  development  activities.  Included in product  and  development
expense is $33,700 and $55,000 for the years ended December 31, 2002 and 2001.

         We are  allocated the costs of various  computer and related  equipment
leases  assumed by Hymax  Group,  LLC, an affiliate of LCG. LCG does not own any
interest in Hymax Group,  LLC, but Hymax Group,  LLC is affiliated  with BDC and
Michael  Alpert.  Such payments are due through  August  20003.  Hymax also made
certain of its employees available to provide operational support services to ER
LLC,  and  now  us,  and  was  reimbursed  for  a  portion  of  such  employees'
compensation,  based on the percentage of time worked for us. Such reimbursement
amount  aggregated  approximately  $4,500 per month from January 1, 2002 to June
30, 2002 and were then reduced to $2,500 per month from July 1, 2002 to December
31, 2002. Effective January 2003 such services have ceased.  Included in general
and  administrative  expenses is $46,600 and $49,600,  respectively,  of payroll
allocated expenses.

         Advances  from   affiliated   companies  are  from  entities  that  are
affiliated with certain shareholders of the Company. The advances are payable on
demand and bear interest at the rate of 10% per annum. Certain of these advances
were satisfied in September  2002, by granting the Company's  interest in "other
assets" of $22,500 to these  entities.  At December  31,  2002,  $1,712  remains
outstanding.

         Included in general and administrative  expenses is $21,700 and $26,000
at December 31, 2002 and 2001,  respectively,  of marketing expense payable to a
company owned by a person related to certain members of the Company who assisted
in  establishing  and  executing its  marketing  programs.  Included in accounts
payable-related parties is $21,700 of this expense at December 31, 2002.

         Included in general and administrative  expenses is $35,000 and $58,000
at December 31, 2002 and 2001,  respectively,  of business  development  expense
payable to a company that is related to certain  members of LCG who assisted the
Company in executing  its  business  development  program.  Included in accounts
payable-related parties is $35,000 of this expense at December 31, 2002.

         We currently do not have a policy with respect to future  related party
transactions.  Accordingly, we have frozen all future related party transactions
until such a policy is in place,  but continue to make payments  pursuant to the
related party transactions set forth herein.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.

(a)      Exhibits

     See the Exhibit Index immediately following the Financial Statements.

                                       42
<PAGE>



(b) Reports on Form 8-K:

     None.


ITEM 14. CONTROLS AND PROCEDURES.

         Within the 90 day period  prior to the filing date of this  report,  we
carried out an evaluation,  under the supervision and with the  participation of
our management,  including our acting principal executive officer and our Acting
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure  controls and procedures.  Based upon that evaluation,  our principal
executive  officer  and  Acting  Chief  Financial  Officer  concluded  that  our
disclosure  controls and  procedures  are  effective in timely  alerting them to
material  information  relating to us  required  to be included in our  periodic
Commission filings.

         There were no significant  changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their  evaluation,  including any corrective  actions with regard to significant
deficiencies and material weaknesses.







                            [SIGNATURE PAGE FOLLOWS]



                                       43
<PAGE>


                                   SIGNATURES

         In accordance  with Section 13 or 15(d) of the Securities  Exchange Act
of 1934,  the  registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

ESSENTIAL REALITY, INC.                           Date:    June   2003

By:
         -----------------------------------
Name:  Humbert B. Powell, III
Title:   Chairman of the Board

POWER OF ATTORNEY

         Essential  Reality,  Inc. and each of the undersigned do hereby appoint
Humbert B. Powell,  III and John  Gentile,  and each of them singly,  its or his
true and lawful attorney to execute on behalf of Essential Reality, Inc. and the
undersigned  any and all  amendments  to the Annual Report on Form 10-KSB and to
file the same with all  exhibits  thereto  and  other  documents  in  connection
therewith, with the Securities and Exchange Commission.

         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following  persons on behalf of the  registrant  and in
the capacities and on the dates indicated.


<TABLE>
<CAPTION>
<S>                                                                             <C>
                                                                                Date:   June 27, 2003
-----------------------------------------------------
John Gentile, Interim President, Chief Operating
OFFICER AND DIRECTOR (principal executive officer)


                                                                                Date :  June 27, 2003
-----------------------------------------------------
George Mellides, Acting Chief Financial Officer
(principal financial and accounting officer)


                                                                                Date:   June 27, 2003
-----------------------------------------------------
Humbert B. Powell, III, CHAIRMAN OF THE BOARD

                                                                                Date:   June 27, 2003
-----------------------------------------------------
Marc A. Fries, DIRECTOR


                                                                                Date:   June 27, 2003
-----------------------------------------------------
Brian D. Jedwab, DIRECTOR


                                                                                Date:   June 27, 2003
-----------------------------------------------------
Anthony Gentile, DIRECTOR

</TABLE>

<PAGE>


CERTIFICATION

SECTION 302 CERTIFICATION

I, John Gentile, certify that:

     1.   I have  reviewed  this  annual  report  on Form  10-KSB  of  Essential
          Reality, Inc., a Nevada corporation (the "Registrant");
     2.   Based on my knowledge,  this annual report does not contain any untrue
          statement  of a  material  fact  or  omit to  state  a  material  fact
          necessary to make the statements  made, in light of the  circumstances
          under which such  statements were made, not misleading with respect to
          the period covered by this annual report;
     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this  annual  report,  fairly  present in all
          material respects the financial  condition,  results of operations and
          cash flows of the Registrant as of, and for, the periods  presented in
          this annual report;
     4.   The Registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  Registrant
          and have:

          a)   designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the Registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               annual report is being prepared;
          b)   evaluated  the  effectiveness  of  the  Registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing of this annual report (the "Evaluation Date"); and
          c)   presented  in  this  annual  report  our  conclusions  about  the
               effectiveness of the disclosure  controls and procedures based on
               our evaluation as of the Evaluation Date;

     5.   The Registrant's other certifying officers and I have disclosed, based
          on our most recent  evaluation,  to the Registrant's  auditors and the
          audit  committee  of  Registrant's  board  of  directors  (or  persons
          performing the equivalent functions):

          a)   all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the Registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  Registrant's  auditors any material
               weaknesses in internal controls; and b) any fraud, whether or not
               material,  that involves management or other employees who have a
               significant role in the Registrant's internal controls; and

     6.   The  Registrant's  other  certifying  officers and I have indicated in
          this annual report whether there were significant  changes in internal
          controls or in other factors that could significantly  affect internal
          controls  subsequent  to the  date  of  our  most  recent  evaluation,
          including   any   corrective   actions  with  regard  to   significant
          deficiencies and material weaknesses.

Date:    June __, 2003       By:
                                 ----------------------------------------
                                      John Gentile, Interim President,
                                      Chief Operating Officer and Director
                                      (principal executive officer)





<PAGE>


                                  CERTIFICATION
SECTION 302

CERTIFICATION

I, George Mellides, certify that:

     1.   I have  reviewed  this  annual  report  on Form  10-KSB  of  Essential
          Reality, Inc., a Nevada corporation (the "Registrant");
     2.   Based on my knowledge,  this annual report does not contain any untrue
          statement  of a  material  fact  or  omit to  state  a  material  fact
          necessary to make the statements  made, in light of the  circumstances
          under which such  statements were made, not misleading with respect to
          the period covered by this annual report;
     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this  annual  report,  fairly  present in all
          material respects the financial  condition,  results of operations and
          cash flows of the Registrant as of, and for, the periods  presented in
          this annual report;
     4.   The Registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  Registrant
          and have:

               a)   designed such  disclosure  controls and procedures to ensure
                    that  material   information  relating  to  the  Registrant,
                    including its consolidated subsidiaries, is made known to us
                    by others  within those  entities,  particularly  during the
                    period in which this  annual  report is being  prepared;
               b)   evaluated the  effectiveness of the Registrant's  disclosure
                    controls and procedures as of a date within 90 days prior to
                    the filing of this annual  report (the  "Evaluation  Date");
                    and
               c)   presented in this annual  report our  conclusions  about the
                    effectiveness  of the  disclosure  controls  and  procedures
                    based on our evaluation as of the Evaluation Date;

     5.   The Registrant's other certifying officers and I have disclosed, based
          on our most recent  evaluation,  to the Registrant's  auditors and the
          audit  committee  of  Registrant's  board  of  directors  (or  persons
          performing the equivalent functions):

               d)   all  significant  deficiencies in the design or operation of
                    internal   controls   which  could   adversely   affect  the
                    Registrant's  ability  to  record,  process,  summarize  and
                    report   financial   data  and  have   identified   for  the
                    Registrant's  auditors any material  weaknesses  in internal
                    controls; and

               e)   any fraud, whether or not material, that involves management
                    or  other  employees  who  have a  significant  role  in the
                    Registrant's internal controls; and

     6.   The  Registrant's  other  certifying  officers and I have indicated in
          this annual report whether there were significant  changes in internal
          controls or in other factors that could significantly  affect internal
          controls  subsequent  to the  date  of  our  most  recent  evaluation,
          including   any   corrective   actions  with  regard  to   significant
          deficiencies and material weaknesses.xcc

Date:    June __, 2003               By:
                                         -------------------------------
                                              George Mellides
                                              Acting Chief Financial Officer

<PAGE>
                         INDEX TO FINANCIAL STATEMENTS

                                                                   PAGE
                                                                   ----
Reports of Independent Certified Public Accountants                F-2
Financial Statements                                               F-3
Balance Sheets as of December 31, 2002 and 2001                    F-4
Statements of Operations for the Years Ended                       F-5
December 31, 2002 and 2001
Statements of Cash Flows for the Years Ended
December 31, 2002 and 2001                                         F-6
Notes to Financial Statements                                      F-7




<PAGE>

                             ESSENTIAL REALITY, INC.

                              FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 2002 AND 2001








                                    CONTENTS

                                                               PAGE

INDEPENDENT AUDITORS' REPORTS                                   1-2

FINANCIAL STATEMENTS:
  Balance Sheet                                                  3
  Statement of Operations                                        4
  Statement of Changes in Stockholders' Deficit                  5
  Statements of Cash Flows                                      6-7
  Notes Financial Statements                                   8-33



<PAGE>


                          INDEPENDENT AUDITORS' REPORT



To the Members and Board of Managers of
Essential Reality, LLC:

We have audited the accompanying statements of operations, members' deficit, and
cash flows for the year ended  December  31, 2001 of Essential  Reality,  LLC (a
development  stage enterprise) (the "Company").  These financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  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  audit  provides  a
reasonable basis for our opinion.

In our  opinion,  such  financial  statements  present  fairly,  in all material
respects,  the results of the  Company's  operations  and its cash flows for the
year ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will continue as a going  concern.  The Company is a  development  stage
enterprise  engaged in the  development,  manufacture  and marketing of a gloved
shaped  device that  controls the movement of objects on a computer  screen.  As
discussed in Note 1 to the financial statements,  through December 31, 2001, the
Company has  experienced  cumulative  net losses of  $4,772,242  and  cumulative
negative  operating cash flows of $4,057,437,  which raise substantial doubt its
ability to continue as a going  concern.  Management's  plans  concerning  these
matters are also  described in Note 1. The  financial  statements do not include
any adjustments that might result from the outcome of these uncertainties.




Deloitte & Touche LLP
New York, New York

January 21, 2002 (June 20, 2002 as to Note 1)


<PAGE>

                          INDEPENDENT AUDITORS' REPORT



Board of Directors
Essential Reality, Inc.
New York, New York


We have audited the accompanying  balance sheet of Essential Reality,  Inc. (the
"Company")  as of December 31, 2002,  and the related  statement of  operations,
stockholders'  equity (deficit),  and cash flows for the year then ended.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility is to express an opinion on the financial statements based on our
audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  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  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Essential Reality,  Inc. as of
December 31, 2002,  and the results of its operations and its cash flows for the
year then ended, in conformity with accounting  principles generally accepted in
the United States of America.

The  accompanying  financial  statements  have  been  prepared assuming that the
Company  will  continue  as  a going concern. At December 31, 2002 the Company`s
current  liabilities exceeded its current assets $1,920,958.As discussed in Note
1  to the accompanying financial statements, the Company's significant operating
losses raise substantial doubt about its ability to continue as a going concern.
Management's  plans  concerning  these matters are also described in Note 1. The
financial  statements  do not include any adjustments that might result from the
outcome  of  this  uncertainty.




Stonefield Josephson, Inc.

Irvine, California
May 25, 2003

                                      F-2
<PAGE>




                  ESSENTIAL REALITY, INC. (FORMERLY JPAL, INC.)

                        BALANCE SHEET - DECEMBER 31, 2002


<TABLE>
<CAPTION>


                                     ASSETS

CURRENT ASSETS:
<S>                                                                      <C>
     Cash and cash equivalents                                           $    188,858
     Accounts receivable                                                       38,679
     Notes receivable, net                                                    400,000
     Inventories, net                                                         304,529
     Other current assets                                                     117,994
                                                                         ------------
            Total current assets                                            1,050,060

EQUIPMENT AND IMPROVEMENTS, net of accumulated
  depreciation and amortization                                               378,272

INTANGIBLE ASSETS, net of accumulated amortization                            260,653

OTHER ASSETS                                                                   58,050
                                                                         ------------
                                                                          $ 1,747,035
                                                                         ============
                      LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
     Accounts payable and accrued expenses                               $  1,559,179
     Due to related parties                                                   201,870
     Accrued compensation                                                     228,492
     Secured convertible debenture                                            500,000
     Current portion of long-term debt                                        481,477
                                                                         ------------
             Total current liabilities                                      2,971,018

LONG-TERM DEBT, net of current portion (net of deferred
  interest of $806,593)                                                       510,477

COMMITMENTS AND CONTINGENTIES

STOCKHOLDERS' DEFICIT:
     Common stock, $0.001 par value; 50,000,000 shares authorized;
       18,223,110 issued and outstanding                                       18,223
     Additional paid-in capital                                            13,923,869
     Deferred compensation expense                                         (2,050,830)
     Accumulated deficit                                                  (13,625,722)
                                                                         ------------
            Total stockholders' deficit                                    (1,734,460)
                                                                         ------------
                                                                         $  1,747,035
                                                                         ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                      F-3


<PAGE>
                  ESSENTIAL REALITY, INC (FORMERLY JPAL, INC.)

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                          Year ended December 31,
                                                        ----------------------------
                                                             2002            2001
                                                        ------------    ------------
<S>                                                     <C>             <C>
REVENUE                                                 $    112,602    $       --

COST OF REVENUE                                              304,023            --
                                                        ------------    ------------
GROSS LOSS                                                  (191,421)           --
                                                        ------------    ------------
OPERATING EXPENSES:
     Sales and marketing                                   1,711,894         716,674
     Product development                                   1,037,396       1,579,129
     General and administrative expenses                   1,924,823         823,791
     Depreciation and amortization                            68,861          11,850
     Impairment on inventory realization                   1,883,207            --
     Stock-based compensation                                880,885            --
                                                        ------------    ------------
TOTAL OPERATING EXPENSES                                   7,507,066       3,131,444
                                                        ------------    ------------
LOSS FROM OPERATIONS                                      (7,698,487)     (3,131,444)
                                                        ------------    ------------
OTHER INCOME (EXPENSE):
     Interest income                                          17,025          20,465
     Interest expense                                     (1,173,944)        (20,505)
     Miscellaneous                                             1,926            --
                                                        ------------    ------------
            Total other income (expense)                  (1,154,993)            (40)
                                                        ------------    ------------
LOSS BEFORE PROVISION FOR INCOME TAXES                  $ (8,853,480)   $ (3,131,484)

PROVISION FOR INCOME TAXES                                      --              --
                                                        ------------    ------------
NET LOSS                                                $ (8,853,480)   $ (3,131,484)
                                                        ============    ============
NET LOSS PER SHARE - BASIC AND DILUTED                  $      (0.49)   $     (0.017)
                                                        ============    ============
NUMBER OF WEIGHTED AVERAGE SHARES - BASIC AND DILUTED     18,056,987      17,955,718
                                                        ============    ============
</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                      F-4




<PAGE>
                  ESSENTIAL REALITY, INC (FORMERLY JPAL, INC.)

                       STATEMENTS OF STOCKHOLDERS' DEFICIT

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

<TABLE>
<CAPTION>
                                                               Members                 Common stock               Additional
                                                                               -----------------------------       paid-in
                                                              Capital              Shares          Amount          capital
                                                                               ---------------   -----------  -----------------
<S>                                                          <C>                    <C>               <C>            <C>
Balance as of January 1, 2001                                $2,5000                      --            --                 --
Net loss                                                                                  --            --
                                                          -----------------    ---------------   -----------  -----------------
Balance at December 31, 2001                                 2.500,000
Exchange of members capital to Common Stock                 (2,500,000)              9,600,000         9,600          2,490,400
Proceeds received from private placement, net of
  offering costs of $988,103                                                         7,011,626         7,012          6,083,076
Issuance of warrants related to private placement                                         --            --              813,165
Offering costs related to private placement                                               --            --             (813,165)
Conversion of convertible note payable                                                 263,158           263            499,737
Beneficial conversion features related to convertible notes
  in June 2002                                                                            --            --              318,747
Warrants issued related to convertible notes in June 2002                                 --            --              181,253
Warrants issued to non-convertible note holders
  in June 2002                                                                            --            --              497,490
Warrants issued for service                                                               --            --              152,962
Options issued to directors and employees in June 2002                                    --            --              775,710
Options issued to consultants in June 2002                                                --            --              610,448
Excess note payable assumed by Essential Reality
  Partners, LLC assets in reverse merger                                                  --            --             (139,039)
Issuance of shares for JPAL                                                          1,080,934         1,081             (1,081)
Options issued to directors and employees                                                 --            --            1,347,595
Conversion of 8 1/2% notes payable                                                     217,392           217            250,000
Excess of fair value of shares over the face value of
  the notes payable                                                                       --            --              402,173
Beneficial conversion features related to convertible notes
  in November 2002                                                                        --            --              275,000
Warrants issued related to convertible notes in
  November 2002                                                                           --            --              109,448
Shares issued for professional services                                                 50,000            50             69,950
Accretion of deferred compensation expense                                                --            --                 --
Net loss                                                                                  --            --                 --
                                                          -----------------    ---------------   -----------  -----------------
Balance, December 31,2002                                 $             --        (13,625,722)   $    18,223  $      13,923,869
                                                          =================    ===============   ===========  =================
</TABLE>


<TABLE>
<CAPTION>

                                                                Deferred                              Total
                                                              compensation       Accumulated       stockholders'
                                                                expense           deficit            deficit
                                                            ---------------   ----------------   ----------------
<S>                                                             <C>                 <C>                <C>
Balance as of January 1, 2001                               $          --     $     (1,640,758)  $     (1,640,758)
Net loss                                                                            (3,131,484)        (3,131,484)
                                                            ---------------   ----------------   ----------------
Balance at December 31, 2001                                           --           (4,772,242)        (4,772,242)
Exchange of members capital to Common Stock
Proceeds received from private placement, net of
  offering costs of $988,103                                           --                 --            6,090,088
Issuance of warrants related to private placement                      --                 --              813,165
Offering costs related to private placement                            --                 --             (813,165)
Conversion of convertible note payable                                 --                 --              500,000
Beneficial conversion features related to convertible notes
  in June 2002                                                         --                 --              318,747
Warrants issued related to convertible notes in June 2002              --                 --              181,253
Warrants issued to non-convertible note holders
  in June 2002                                                         --                 --              497,490
Warrants issued for service                                            --                 --              152,962
Options issued to directors and employees in June 2002             (775,710)              --                 --
Options issued to consultants in June 2002                         (610,448)              --                 --
Excess note payable assumed by Essential Reality
  Partners, LLC assets in reverse merger                               --                 --             (139,039)
Issuance of shares for JPAL                                            --                 --                   (0)
Options issued to directors and employees                        (1,347,595)              --                 --
Conversion of 8 1/2% notes payable                                     --                 --              250,217
Excess of fair value of shares over the face value of
  the notes payable                                                    --                 --              402,173
Beneficial conversion features related to convertible notes
  in November 2002                                                     --                 --              275,000
Warrants issued related to convertible notes in
  November 2002                                                        --                 --              109,448
Shares issued for professional services                                --                 --               70,000
Accretion of deferred compensation expense                          682,923               --              682,923
Net loss                                                               --           (8,853,480)        (8,853,480)
                                                            ---------------   ----------------   ----------------
Balance, December 31,2002                                   $    (2,050,830)  $    (13,625,722)  $      3,037,782
                                                            ===============   ================   ================
</TABLE>





   The accompanying notes are an integral part of these financial statements.

                                      F-5


<PAGE>
                  ESSENTIAL REALITY, INC. (FORMERLY JPAL, INC.)

                            STATEMENTS OF CASH FLOWS

                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>

                                                                                          Year ended December 31,
                                                                                 -------------------------------------------
                                                                                        2002                   2001
                                                                                 -------------------    --------------------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
<S>                                                                              <C>                     <C>
     Net loss                                                                    $        (8,853,480)   $        (3,131,484)
                                                                                 -------------------    -------------------
     ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY
       (USED FOR) OPERATING ACTIVITIES:
        Depreciation and amortization                                                         68,861                 11,850
        Reserve for collectability of notes receivable                                       102,121                      -
        Reserve for inventory obsolesence                                                  1,363,361                      -
        Amortization of deferred interest                                                    208,302                 18,361
        Non-cash compensation                                                                880,885                      -
        Imputed interest on conversion of debt instrument                                    789,670                      -

     CHANGES IN ASSETS AND LIABILITIES:
        (INCREASE) DECREASE IN ASSETS:
           Accounts receivable                                                               (38,679)                     -
           Inventories                                                                    (1,667,890)                     -
           Deferred financing cost                                                           217,755               (217,755)
           Notes receivable                                                                 (502,121)                     -
           Interest receivable                                                                     -                 48,716
           Prepaid expenses, deposits, and other assets                                      (61,157)               (85,567)

        INCREASE (DECREASE) IN LIABILITIES:
           Accounts payable and accrued expenses                                             950,698                600,895
           Due to affiliates                                                                 (28,674)                89,985
           Accrued compensation                                                              (28,611)                35,836
                                                                                 -------------------    -------------------
              Total adjustments                                                            2,254,521                502,321
                                                                                  ------------------    -------------------
              Net cash used for operating activities                                      (6,598,959)            (2,629,163)
                                                                                 -------------------    -------------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
     Payments for capitalized product development                                           (260,000)                     -
     Payments for tools, dies, and molds                                                    (337,331)                     -
     Payments for capitalized website                                                        (22,300)                     -
     Payments for purchase of domain names                                                         -                (18,000)
     Payments for purchases of equipment                                                     (73,864)               (12,949)
                                                                                 -------------------    -------------------
              Net cash used for investing activities                                        (693,495)               (30,949)
                                                                                 -------------------    -------------------

CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
     Proceeds from insurance notes payable                                                    81,477                      -
     Net proceeds from issuance of members capital                                         6,083,706                      -
     Proceeds from Secured Convertible Debenture                                             500,000                      -
     Proceeds from bridge loans                                                            1,825,000              1,500,000
     Repayment of bridge loans                                                              (550,000)                     -
     Repayment of notes payable                                                             (550,000)                     -
     Proceeds from repayment of notes receivable for members' capital                              -                865,453
     Proceeds from repayment of notes receivable from developer                               82,971                      -
     Net advances from LCG Capital, Inc.                                                      (5,705)                76,617
                                                                                 -------------------    -------------------
              Net cash provided by financing activities                                    7,467,449              2,442,070
                                                                                 -------------------    -------------------
NET INCREASE (DECREASE) IN CASH                                                              174,995               (218,042)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                                  13,863                231,905
                                                                                 -------------------    -------------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                           $           188,858    $            13,863
                                                                                 ===================    ===================
</TABLE>



   The accompanying notes are an integral part of these financial statements.

                                      F-6


<PAGE>
                 ESSENTIAL REALITY, INC. (FORMERLY JPAL, INC.)

                      STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
                                                                           Year ended December 31,
                                                             -----------------------------------------------
                                                                    2002                         2001
                                                             -------------------         -------------------
 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

<S>                                                          <C>                        <C>
    Interest paid                                             $            22,500       $               --
                                                             ====================       ====================
    Income tax paid                                                          --         $               --
                                                             ====================       ====================
NON-CASH INVESTING AND FINANCING ACTIVITIES:

    Bridge loans converted to member units                   $            500,000       $               --
                                                             ====================       ====================
    Elimination of bridge loans and accrued interest
      on merger                                              $          2,378,431       $               --
                                                             ====================       ====================
    Assumption of notes on merger                            $          2,517,070       $               --
                                                             ====================       ====================
    Imputed interest on note payable                         $            208,302       $               --
                                                             ====================       ====================
    Imputed interest on conversion of debt instruments       $            767,169       $               --
                                                             ====================       ====================
    Issuance of common stock for consulting fees             $             45,000       $               --
                                                             ====================       ====================
    Issuance of common stock to related parties
      to pay off debt                                        $            195,735       $               --
                                                             ====================       ====================
    Deferred interest expense - bridge loans                 $               --         $            232,389
                                                             ====================       ====================
    Accrued interest expense - bridge loans                  $             82,178       $            250,750
                                                             ====================       ====================

</TABLE>



 The accompanying notes are an integral part of these financial statements.

                                      F-6 (continued)



<PAGE>

                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001



(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         BUSINESS ACTIVITY:

                  Essential Reality,  LLC ("ER LLC" or the "Company") was formed
                  as Freedom Multimedia, LLC in the state of Delaware on July 9,
                  1998 and began active  operations on June 1, 1999. The Company
                  changed  its name to  Essential  Reality,  LLC ("ER,  LLC") on
                  December  29,  1999.  On June 20,  2002,  ER LLC  completed  a
                  business  combination   (recapitalization)   with  JPAL,  Inc.
                  ("JPAL"), a Nevada Corporation (the  "Transaction").  Whereby,
                  all of the  members  of ER LLC  contributed  their  membership
                  interests in ER LLC to the Company in exchange for  16,874,784
                  shares of the Company's common stock. The shareholders of JPAL
                  canceled  7,564,326  of their  shares of JPAL common stock and
                  were left with 1,080,934  shares of common stock  representing
                  6.02% of the Company.  Upon the business  combination,  ER LLC
                  was  dissolved  and all of its  assets  and  liabilities  were
                  transferred into JPAL. Following the Transaction, JPAL changed
                  its name to Essential Reality, Inc.

                  The  Company was formed to  develop,  manufacture,  and market
                  computer  peripheral  devices,  with an initial  emphasis on a
                  product called "P5." However,  due to less than expected sales
                  of the P5, the Company has  expanded its focus and now aims to
                  become  a  leading   developer  and   distributor  of  unique,
                  technology-based  consumer electronics,  gaming products,  and
                  consumer  youth  products  targeted to  teenagers  in the mass
                  market.

         BASIS OF PRESENTATION:

                  The  financial  statements  of the Company  were
                  prepared in conformity with Statement of Financial  Accounting
                  Standards   ("SFAS")  No.  7,  "Accounting  and  Reporting  by
                  Development  State  Enterprises,"  through  December 31, 2001.
                  Effective  October  1,  2002,  the  Company  no longer met the
                  requirements of SFAS No. 7 and,  accordingly,  all disclosures
                  required  under  SFAS No. 7 have  been  discontinued  in these
                  financial statements.

         GOING CONCERN:

                  The  accompanying  financial  statements have been prepared in
                  conformity with accounting  principles  generally  accepted in
                  the United States of America that contemplate  continuation of
                  the  Company as a going  concern.  However,  the  Company  has
                  reported a net loss of $8,853,480  for the year ended December
                  31, 2002, and has an accumulated  deficit of $13,625,722,  and
                  at year end the  Company`s  current  liabilities  exceeded its
                  current   assets  by   $1,920,958.   Without   realization  of
                  additional  capital,  it would be unlikely  for the Company to
                  continue as a going  concern.  This factor raises  substantial
                  doubt  about the  Company's  ability  to  continue  as a going
                  concern.   The   financial   statements  do  not  include  any
                  adjustments   that  might  result  from  the  outcome  of  the
                  uncertainty.

                  Management  plans to take the following steps that it believes
                  will be  sufficient to provide the Company with the ability to
                  continue in existence:


                                       F-7
<PAGE>


                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001



(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

         GOING CONCERN, CONTINUED:

                  Management  intends to raise financing through the sale of its
                  stock  on the  public  market  as well as from  bridge  loans.
                  Management believes that with this financing, the Company will
                  be able to generate  additional  revenues  that will allow the
                  Company  to  continue  as  a  going  concern.   This  will  be
                  accomplished by hiring additional personnel and focusing sales
                  and marketing  efforts on the  distribution of product through
                  key  marketing  channels  currently  being  developed  by  the
                  Company.   The   financial   statements  do  not  include  any
                  adjustments   that  might  result  from  the  outcome  of  the
                  uncertainty.

         REVENUE RECOGNITION:

                  The Company  recognizes under Staff  Accounting  Bulletin 101,
                  gross  revenue  when the  earnings  process  is  complete,  as
                  evidenced by an agreement with the customer, transfer of title
                  and the  rights  and  risks of  ownership  have  passed to the
                  customer,  the  product is  delivered,  the price is fixed and
                  determinable,  and  collection of the resulting  receivable is
                  reasonably  assured.  Because the  Company  allows many of its
                  distributors   price   protection   and/or  right  of  return,
                  recognition   of   revenue  in  the   accompanying   financial
                  statements has been deferred until the  distributors  sell the
                  merchandise   and  the  cash  is  collected  by  the  Company.
                  Inventory  at  distributors  is reported as  consigned  in the
                  balance sheet.

                  In cases  where  sales are made to  certain  distributors  and
                  title has  transferred,  risks of  ownership  has  passed  and
                  collection is assured, sales have been recorded and an account
                  receivable has been recorded.

                  The Company records an allowance for uncollectible accounts on
                  a customer-by-customer basis as appropriate.

                  The  Company may bundle  product  offerings  from  third-party
                  vendors  along  with  the  P5  product  or  may  sell  the  P5
                  independently.  The software is incidental to the product as a
                  whole and according to Financial Accounting Standards Board No
                  86,  Accounting for the Costs of Computer Software To Be Sold,
                  Leased or  Marketed,  all revenue will be allocated to the P5.
                  As such,  the  Company  will  record  the gross  amount of the
                  purchase  price of the P5 product as revenue and will  reflect
                  the  royalty  to  be  paid  to  the  third-party  vendor  as a
                  component of cost of sales.

         USE OF ESTIMATES:

                  The  preparation  of financial  statements in conformity  with
                  accounting  principles generally accepted in the United States
                  of  America   requires   management  to  make   estimates  and
                  assumptions  that  affect the  reported  amounts of assets and
                  liabilities,  disclosure of contingent liabilities at the date
                  of the  financial  statements  and  the  reported  amounts  of
                  revenues  and expenses  during the  reporting  period.  Actual
                  results could differ from those estimates.


                                      F-8
<PAGE>


                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

         CASH AND CASH EQUIVALENTS:

                  For purposes of the statement of cash flows,  cash equivalents
                  include  all highly  liquid  debt  instruments  with  original
                  maturities  of three  months or less that are not securing any
                  corporate obligations.  The Company had no cash equivalents at
                  December 31, 2002.

                  The Company maintains its cash in bank deposits accounts that,
                  at times, may exceed federally insured limits. At December 31,
                  2002, the Company had approximately  $88,900 in excess of FDIC
                  insured limits.  The Company has not experienced any losses in
                  such accounts.

         ACCOUNTS RECEIVABLE:

                  The Company provides an allowance for doubtful  accounts equal
                  to the estimated uncollectible amounts. The Company's estimate
                  is based a review  of the  current  status  of trade  accounts
                  receivable.  It is  reasonably  possible  that  the  Company's
                  estimate of the allowance  for doubtful  accounts will change.
                  The  Company  has  not  experienced  any  losses  in  accounts
                  receivable and has provided no allowance at December 31, 2002.

         INVENTORIES:

                  Inventories  are valued at the lower of cost or  market,  with
                  cost being  determined on the first-in  first-out  basis.  The
                  inventory represents high-technology parts that may be subject
                  to rapid  technology  obsolescence  or limited sales cycle and
                  which are sold in a highly competitive industry. If the actual
                  product  demand or  selling  prices  are less than  cost,  the
                  Company   establishes  an  allowance   account  based  on  net
                  realizable value. Included in operating expenses as Impairment
                  on  Inventory   Realization  is  an  allowance  of  $1,363,600
                  provided against finished goods at December 31, 2002.

                  Inventory sold with the right of price protection and/or right
                  of return is reported as inventory on  consignment.  Consigned
                  inventory amounted to $275,882 at December 31, 2002.

         PRODUCT WARRANTY:

                  Due to  effective  product  testing and the short time between
                  the product  shipment  and the  detection  and  correction  of
                  production  failures,  the  warranty  accrual  and the related
                  expense were not  significant  for the year ended December 31,
                  2002.


                                      F-9
<PAGE>


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

         EQUIPMENT AND IMPROVEMENTS:

                  Equipment and  improvements  are valued at cost.  Depreciation
                  and amortization are provided using the straight-line  method.
                  Leasehold  improvements are amortized on a straight-line basis
                  over the shorter of the lease term or the length of the lease,
                  which is five years.

                  The estimated  service lives of equipment and improvements are
                  as follows:

                           Office equipment               5 years
                           Testing equipment              3 years
                           Furniture and fixtures         5 years
                           Computers                      3 years
                           Leasehold improvements         5 years

         INTANGIBLE ASSETS:

         Domain Names:

                  Domain  names are  valued at cost and are fully  amortized  at
                  December 31, 2002.  At December 31, 2001,  the domain name net
                  book value was $9,000.

         Website Development Costs:

                  In March 2000 the Emerging  Issues Task Force  ("EITF") of the
                  Financial   Accounting  Standards  Board  ("FASB")  reached  a
                  consensus  on Issue No. 00-2 for Web Site  Development  Costs.
                  The website development costs for the years ended December 31,
                  2002 and 2001 were $22,320 and $-0-, respectively.

         Capitalized Development Costs:

                  Product  development  costs  include  costs  incurred  by  the
                  Company  to  research  and  develop  the P5  product.  Product
                  development  costs are expensed until such time as the Company
                  determines that a product is technologically feasible. Product
                  development  costs are  capitalized  from such date until such
                  time as product development is substantially complete. Product
                  development   costs  capitalized  will  be  amortized  on  the
                  straight-line  basis  over the  estimated  useful  life of the
                  product,  which is estimated  to be three  years.  The Company
                  attained technological feasibility in 2002.


                                      F-10
<PAGE>


                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001



(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

         LONG-LIVED ASSETS:

                  In  October  2001,  the FASB  issued  Statement  of  Financial
                  Accounting  Standards  ("SFAS") No. 144,  "Accounting  for the
                  Impairment or Disposal of Long-Lived  Assets." This  statement
                  supersedes  SFAS No. 121,  "Accounting  for the  Impairment of
                  Long-Lived  Assets and for  Long-Lived  Assets to Be  Disposed
                  of." Although  retaining many of the  fundamental  recognition
                  and  measurement   provisions  of  SFAS  121,  the  new  rules
                  significantly change the criteria that would have to be met to
                  classify  an  asset  as  held-for-sale.   The  statement  also
                  supersedes certain  provisions of Accounting  Principles Board
                  Opinion No. 30, "Reporting the Results of Operations-Reporting
                  the  Effects  of  Disposal  of a Segment  of a  Business,  and
                  Extraordinary,  Unusual and Infrequently  Occurring Events and
                  Transactions,"  and will  require  expected  future  operating
                  losses  from  discontinued   operations  to  be  displayed  in
                  discontinued  operations in the period or periods in which the
                  losses are incurred rather than as of the measurement date, as
                  presently  required.  We concluded that the effect of adopting
                  this  statement  had  no  material  impact  on  our  financial
                  position, results of operations, or cash flows.

         ADVERTISING:

                  The  Company   expenses   advertising   costs  when  incurred.
                  Advertising expense totaled $289,400 and $10,700 for the years
                  ended December 31, 2002 and 2001, respectively.

         RESEARCH AND DEVELOPMENT:

                  Research  and  development  costs  are  expensed  in the  year
                  incurred.   These  costs  totaled  $1,037,400,   net  of  loan
                  receivable  of $400,000  (see Note 3) and  $1,579,100  for the
                  years ended December 31, 2002 and 2001, respectively.

         INCOME TAXES:

                  Deferred tax assets and  liabilities  are  recognized  for the
                  future tax  consequences  attributable to differences  between
                  the financial  statement  carrying  amounts of existing assets
                  and liabilities and their  respective tax bases.  Deferred tax
                  assets,  including  tax loss  and  credit  carryforwards,  and
                  liabilities  are measured  using enacted tax rates expected to
                  apply to taxable income in the years in which those  temporary
                  differences  are  expected to be  recovered  or  settled.  The
                  effect on deferred tax assets and  liabilities  of a change in
                  tax rates is  recognized in income in the period that includes
                  the enactment date. Deferred income tax expense represents the
                  change  during  the  period in the  deferred  tax  assets  and
                  deferred tax  liabilities.  The components of the deferred tax
                  assets and liabilities are individually  classified as current
                  and non-current based on their characteristics. Realization of
                  the deferred tax asset is dependent on  generating  sufficient
                  taxable  income in  future  years.  Deferred  tax  assets  are
                  reduced  by a  valuation  allowance  when,  in the  opinion of
                  management,  it is more likely  than not that some  portion or
                  all of the deferred tax assets will not be realized.



                                      F-11
<PAGE>

                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

         FAIR VALUE OF FINANCIAL INSTRUMENTS:

                  The   carrying   amount  of  the   Company's   cash  and  cash
                  equivalents,   accounts  receivable,   inventories,   accounts
                  payable,  and accrued  expenses  approximates  their estimated
                  fair  values  due  to  the  short-term   maturities  of  those
                  financial   instruments.   Also,  the  carrying   amounts  for
                  long-term  debt  approximate  fair  value,  because  the terms
                  offered to the Company are at current market rates.

         COMPREHENSIVE INCOME:

                  SFAS No. 130, "Reporting  Comprehensive  Income,"  establishes
                  standards  for the  reporting  and  display  of  comprehensive
                  income and its components in the financial  statements.  As of
                  December  31,  2002 and 2001,  the  Company  has no items that
                  represent other comprehensive  income and, therefore,  has not
                  included a schedule of  comprehensive  income in the financial
                  statements.

         BASIC AND DILUTED LOSS PER SHARE:

                  In  accordance  with SFAS No. 128,  "Earnings  Per Share," the
                  basic loss per common  share is computed by dividing  net loss
                  available  to  common  stockholders  by the  weighted  average
                  number of common shares  outstanding.  Diluted loss per common
                  share is computed  similarly  to basic loss per common  share,
                  except that the denominator is increased to include the number
                  of additional  common shares that would have been  outstanding
                  if the  potential  common  shares  had been  issued and if the
                  additional  common shares were dilutive.  At December 31, 2002
                  and 2001,  the  Company  did not include the effects of common
                  stock   components   because  their  effect  would  have  been
                  anti-dilutive.

         SEGMENT REPORTING:

                  Based on the Company's integration and management  strategies,
                  the Company  operated in a single  business  segment.  For the
                  year ended  December 31, 2002,  all revenues have been derived
                  from domestic and international operations.

         NEW ACCOUNTING PRONOUNCEMENTS:

                  In July 2001,  the FASB  issued SFAS No.  142,  "Goodwill  and
                  Other   Intangibles."  SFAS  No.  142  addresses  the  initial
                  recognition,   measurement,  and  amortization  of  intangible
                  assets  acquired  individually or with a group of other assets
                  (but  not  those  acquired  in a  business  combination),  and
                  addresses  the  amortization  provisions  for excess cost over
                  fair value of net assets acquired or intangibles acquired in a
                  business  combination.  The  statement is effective for fiscal
                  years beginning after December 15, 2001, and is effective July
                  1, 2001 for any intangibles acquired in a business combination
                  initiated  after June 30, 2001. The adoption of this statement
                  did not have a  material  impact  to the  Company's  financial
                  position or results of operations.


                                      F-12
<PAGE>

                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

         NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED:

                  In October 2001, the FASB issued SFAS No. 143, "Accounting for
                  Asset  Retirement  Obligations,"  which requires  companies to
                  record  the fair  value of a  liability  for asset  retirement
                  obligations  in the  period in which  they are  incurred.  The
                  statement applies to a company's legal obligations  associated
                  with  the  retirement  of a  tangible  long-lived  asset  that
                  results from the acquisition, construction, and development or
                  through the normal  operation  of a long-lived  asset.  When a
                  liability is initially recorded,  the company would capitalize
                  the  cost,  thereby  increasing  the  carrying  amount  of the
                  related  asset.  The  capitalized  asset  retirement  cost  is
                  depreciated  over the life of the  respective  asset while the
                  liability is accreted to its present value. Upon settlement of
                  the  liability,  the  obligation  is settled  at its  recorded
                  amount or the company  incurs a gain or loss. The statement is
                  effective for fiscal years  beginning after June 30, 2002. The
                  Company does not expect the adoption to have a material impact
                  to the Company's financial position or results of operations.

                  In October 2001, the FASB issued SFAS No. 144, "Accounting for
                  the  Impairment or Disposal of Long-Lived  Assets."  Statement
                  144 addresses the  accounting and reporting for the impairment
                  or disposal of long-lived  assets.  The  statement  provides a
                  single  accounting model for long-lived  assets to be disposed
                  of. New criteria must be met to classify the asset as an asset
                  held-for-sale.  This  statement  also focuses on reporting the
                  effects  of a  disposal  of a  segment  of  a  business.  This
                  statement  is  effective  for  fiscal  years  beginning  after
                  December 15, 2001. The adoption of this statement did not have
                  a  material  impact to the  Company's  financial  position  or
                  results of operations.

                  In April 2002, the FASB issued Statement No. 145,  "Rescission
                  of FASB  Statements  No.  4,  44,  and 64,  Amendment  of FASB
                  Statement No. 13, and Technical  Corrections."  This statement
                  rescinds  FASB  Statement No. 4,  "Reporting  Gains and Losses
                  from  Extinguishment  of  Debt,"  and  an  amendment  of  that
                  Statement,  FASB  Statement No. 64,  "Extinguishments  of Debt
                  Made to Satisfy Sinking-Fund  Requirements" and FASB Statement
                  No. 44,  "Accounting for Intangible Assets of Motor Carriers."
                  This Statement  amends FASB Statement No. 13,  "Accounting for
                  Leases," to  eliminate an  inconsistency  between the required
                  accounting for  sale-leaseback  transactions  and the required
                  accounting for certain lease  modifications that have economic
                  effects that are similar to sale-leaseback  transactions.  The
                  Company does not expect the adoption to have a material impact
                  to the Company's financial position or results of operations.

                  In July 2002,  the FASB  issued SFAS No. 146  "Accounting  for
                  Exit or Disposal Activities." The provisions of this statement
                  are effective for disposal activities initiated after December
                  31, 2002, with early application encouraged.  The Company does
                  not  expect  the  adoption  of FASB No. 146 to have a material
                  impact on the  Company's  financial  position  or  results  of
                  operations.



                                      F-13
<PAGE>

                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

         NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED:

                  In  October   2002,   the  FASB  issued   Statement  No.  147,
                  "Acquisitions of Certain Financial Institutions - an amendment
                  of FASB Statements No. 72 and 144 and FASB  Interpretation No.
                  9," which removes acquisitions of financial  institutions from
                  the  scope  of  both  Statement  72 and  Interpretation  9 and
                  requires   that  those   transactions   be  accounted  for  in
                  accordance with Statements No. 141,  "Business  Combinations,"
                  and No.  142,  "Goodwill  and  Other  Intangible  Assets."  In
                  addition,  this Statement amends SFAS No. 144, "Accounting for
                  the  Impairment or Disposal of Long-Lived  Assets," to include
                  in its scope long-term customer-relationship intangible assets
                  of   financial    institutions    such   as   depositor-   and
                  borrower-relationship  intangible assets and credit cardholder
                  intangible assets.  The requirements  relating to acquisitions
                  of financial  institutions  are effective for acquisitions for
                  which the date of  acquisition is on or after October 1, 2002.
                  The  provisions  related to accounting  for the  impairment or
                  disposal of certain long-term customer-relationship intangible
                  assets are effective on October 1, 2002.  The adoption of this
                  Statement  did not have a  material  impact  to the  Company's
                  financial position or results of operations as the Company has
                  not engaged in either of these activities.

                  In  December  2002,   the  FASB  issued   Statement  No.  148,
                  "Accounting   for  Stock-Based   Compensation-Transition   and
                  Disclosure," which amends FASB Statement No. 123,  "Accounting
                  for Stock-Based  Compensation," to provide alternative methods
                  of transition  for a voluntary  change to the fair value based
                  method of accounting for stock-based employee compensation. In
                  addition, this Statement amends the disclosure requirements of
                  Statement 123 to require prominent  disclosures in both annual
                  and  interim   financial   statements   about  the  method  of
                  accounting  for  stock-based  employee  compensation  and  the
                  effect of the method used on reported results.  The transition
                  guidance and annual disclosure provisions of Statement 148 are
                  effective  for fiscal years  ending  after  December 15, 2002,
                  with earlier application  permitted in certain  circumstances.
                  The interim disclosure  provisions are effective for financial
                  reports  containing  financial  statements for interim periods
                  beginning  after  December  15,  2002.  The  adoption  of this
                  statement  did not have a  material  impact  on the  Company's
                  financial position or results of operations as the Company has
                  not  elected  to  change  to the fair  value  based  method of
                  accounting for stock-based employee compensation.




                                      F-14
<PAGE>


                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

         NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED:

                  In  November  2002,  the FASB  issued  Interpretation  No. 45,
                  "Guarantor's   Accounting  and  Disclosure   Requirements  for
                  Guarantees,  Including Indirect  Guarantees of Indebtedness of
                  Others,  an  Interpretation  of FASB Statements No. 5, 57, and
                  107 and  Rescission of FASB  Interpretation  No. 34" ("FIN No.
                  45").  The  interpretation  requires  that upon  issuance of a
                  guarantee,  the entity must recognize a liability for the fair
                  value of the obligation it assumes under that obligation. This
                  interpretation  is intended to improve  the  comparability  of
                  financial  reporting by  requiring  identical  accounting  for
                  guarantees issued with separately identified consideration and
                  guarantees issued without separately identified consideration.
                  For  the  company,   the  initial   recognition,   measurement
                  provision  and  disclosure  requirements  of  FIN  No.  45 are
                  applicable to guarantees issued or modified after December 31,
                  2002. The company is currently evaluating what impact, if any,
                  adoption of FIN No. 45 will have on its consolidated financial
                  position, consolidated results of operations, or liquidity.

                  In  January  2003,  the FASB  issued  Interpretation  No.  46,
                  "Consolidation of Variable Interest Entities."  Interpretation
                  46 changes the criteria by which one company  includes another
                  entity in its consolidated  financial statements.  Previously,
                  the criteria were based on control  through  voting  interest.
                  Interpretation  46 requires a variable  interest  entity to be
                  consolidated  by a company  if that  company  is  subject to a
                  majority  of the  risk  of loss  from  the  variable  interest
                  entity's  activities  or entitled to receive a majority of the
                  entity's residual returns or both. A company that consolidates
                  a variable  interest entity is called the primary  beneficiary
                  of   that   entity.   The   consolidation    requirements   of
                  Interpretation  46  apply  immediately  to  variable  interest
                  entities  created  after January 31, 2003.  The  consolidation
                  requirements  apply to older entities in the first fiscal year
                  or interim period  beginning  after June 15, 2003.  Certain of
                  the disclosure  requirements apply in all financial statements
                  issued after January 31, 2003, regardless of when the variable
                  interest entity was  established.  The Company does not expect
                  the  adoption  to  have a  material  impact  to the  Company's
                  financial position or results of operations.

                  During April 2003,  the FASB issued SFAS 149 -  "Amendment  of
                  Statement   133  on   Derivative   Instruments   and   Hedging
                  Activities,"  effective for contracts entered into or modified
                  after June 30,  2003,  except as stated  below and for hedging
                  relationships  designated  after June 30,  2003.  In addition,
                  except as  stated  below,  all  provisions  of this  Statement
                  should  be  applied  prospectively.  The  provisions  of  this
                  Statement that relate to Statement 133  Implementation  Issues
                  that have been effective for fiscal  quarters that began prior
                  to June 15, 2003,  should continue to be applied in accordance
                  with their respective effective dates. In addition, paragraphs
                  7(a) and 23(a),  which relate to forward purchases or sales of
                  when-issued  securities  or other  securities  that do not yet
                  exist,  should be applied to both  existing  contracts and new
                  contracts  entered into after June 30, 2003.  The Company does
                  not participate in such transactions,  however,  is evaluating
                  the effect of this new  pronouncement,  if any, and will adopt
                  FASB 149 within the prescribed time.



                                      F-15
<PAGE>


                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

         NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED:

                  During May 2003,  the FASB issued SFAS 150 -  "Accounting  for
                  Certain  Financial  Instruments with  Characteristics  of both
                  Liabilities and Equity,"  effective for financial  instruments
                  entered into or modified  after May 31, 2003, and otherwise is
                  effective  at  the  beginning  of  the  first  interim  period
                  beginning  after June 15,  2003.  This  Statement  establishes
                  standards for how an issuer  classifies  and measures  certain
                  financial instruments with characteristics of both liabilities
                  and equity. It requires that an issuer classify a freestanding
                  financial  instrument  that is within its scope as a liability
                  (or an asset in some circumstances). Many of those instruments
                  were previously  classified as equity.  Some of the provisions
                  of this Statement are consistent  with the current  definition
                  of liabilities  in FASB Concepts  Statement No. 6, Elements of
                  Financial Statements.  The Company is evaluating the effect of
                  this new  pronouncement  and will  adopt  FASB 150  within the
                  prescribed time.

         RECLASSIFICATIONS:

                  Certain  amounts in the 2001  financial  statements  have been
                  reclassified to conform to the basis of  presentation  used in
                  2002.


(2)      BUSINESS COMBINATION:

         On June 20, 2002, Essential Reality,  LLC, a Delaware Limited Liability
         Company,  completed a business  combination  with JPAL,  Inc., a Nevada
         corporation and an SEC registrant  pursuant to an Amended  Contribution
         Agreement between ER LLC and JPAL, whereby all of the members of ER LLC
         contributed  their  membership  interests  in ER LLC to the  Company in
         exchange for an aggregate of 16,874,784  shares of the Company's common
         stock.  Concurrent  with  the  Transaction,  the  shareholders  of JPAL
         canceled  7,564,326  of their shares of JPAL common stock and were left
         with  1,080,934  shares  of  common  stock  representing  6.02%  of the
         Company. Following the Transaction,  JPAL changed its name to Essential
         Reality, Inc. and ER LLC, a wholly owned subsidiary of the Company, was
         merged into the Company.  Subsequently,  ER LLC was  liquidated and the
         assets became assets of Essential Reality, Inc.

         The Transaction was accounted for as a recapitalization  of ER LLC. The
         management of ER LLC remained as the  management of the Company.  Since
         the  Transaction  was  accounted  for as a  recapitalization  and not a
         business combination,  no goodwill has been recorded in connection with
         the   Transaction  and  the  costs  incurred  in  connection  with  the
         Transaction  have  been  accounted  for as a  reduction  of  additional
         paid-in  capital.  As  a  result  of  the  recapitalization:   (i)  the
         historical financial statements of the Company for periods prior to the
         date  of  the  Transaction  are  no  longer  the  historical  financial
         statements  of  JPAL,  and,  therefore,   JPAL's  historical  financial
         statements  are no  longer  presented;  (ii) the  historical  financial
         statements  of  the  Company  for  periods  prior  to the  date  of the
         Transaction  are those of ER LLC; (iii) all references to the financial
         statements  of  the  "Company"   apply  to  the  historical   financial
         statements  of ER LLC  prior to the  Transaction  and to the  financial
         statements of the Company  subsequent to the Transaction;  and (iv) any
         reference  to  the  Company  applies  solely  to ER LLC  and  Essential
         Reality, Inc.



                                      F-16
<PAGE>



                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001


(3)      NOTES RECEIVABLE:

         Notes receivable as of December 31, 2002 consisted of the following:

<TABLE>
<CAPTION>
<S>                                                                             <C>
                  Due from former employee                                      $           50,000
                  Due from product developer                                               452,121
                                                                                ------------------
                                                                                           502,121
                  Less : reserve for collectibility                                        102,121
                                                                                ------------------
                                                                                $          400,000
                                                                                ==================
</TABLE>


         In July 2001,  the Company  signed an agreement  with a third party for
         the  development  of the P5.  In  connection  with the  agreement,  the
         Company  agreed  to  provide  loan  advances  up to  $2,000,000,  later
         increased to $2,700,000,  to cover approved development costs. The loan
         is  non-interest  bearing  and  is  reduced  by  qualified  development
         expenses  incurred  by the  developer,  and is  further  reduced by tax
         credits from a division of the Canadian Government for research, earned
         by the  developer  and  passed  through  to the  Company.  The  Company
         received a General Security  Agreement that created a security interest
         in  the  developer's   equipment,   inventory,   accounts   receivable,
         intangibles,  etc.  The loan is  payable  within  two years  after each
         advance unless on demand after the two years at the discretion of ER.

         For the year ended December 31, 2002, the loan balance has been reduced
         by  $1,403,325  of  qualified  development  expenses  and  $535,092  of
         research and  development  credits from the  Canadian  Government.  The
         remaining receivable of $400,000 is net of an allowance for reduced tax
         credits of $52,121 at December 31, 2002.  As of December 31, 2001,  the
         notes receivable in the amount of $294,297 was fully reserved.

         In July,  2002 the Company loaned the former  President and COO $50,000
         due in one year with interest  accruing at 6%. This loan was an advance
         for a potential  bonus the employee may receive in  connection  with an
         employment  agreement  assuming he met all the terms of the  agreement.
         The Company  terminated the employee due to cause and  accordingly  has
         reflected  the advance as still  outstanding.  However,  the Company is
         unsure  of its  collectability  and has  reserved  the  loan in full at
         December 31, 2002.


(4)      INVENTORIES:

         Inventories as of December 31, 2002 consisted of:
<TABLE>
<CAPTION>

<S>                                                                             <C>
                  Finished goods                                                $        1,392,278
                  Less: inventory reserve for net realizable value                       1,363,631
                                                                                ------------------
                                                                                            28,647
                  Inventory on consignment                                                 275,882
                                                                                ------------------
                                                                                $          304,529
                                                                                ==================
</TABLE>



                                      F-17
<PAGE>


                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001


(4)      INVENTORIES, CONTINUED:

         Subsequent to year-end,  the Company experienced  difficulty in selling
         its P5 glove at its  suggested  retail  pricing  and does not expect to
         sell  above its cost to  manufacture.  Accordingly,  it has  provided a
         reserve for the lower of cost or market against the remaining  finished
         goods  inventory.  Included  in  operating  expenses is  Impairment  of
         Inventory  Realization of $1,363,631 and $519,576 of finished goods and
         raw materials/work-in process, respectively, at December 31, 2002.


(5)      EQUIPMENT AND IMPROVEMENTS:

         A summary as of December 31, 2002 is as follows:

<TABLE>
<CAPTION>
<S>                                                                             <C>
                  Furniture and fixtures                                        $            3,257
                  Computers                                                                 11,875
                  Office equipment                                                          10,433
                  Tooling, molds, dies, and equipment                                      392,267
                                                                                ------------------
                                                                                           417,832
                  Less: accumulated depreciation and amortization                           39,560
                                                                                ------------------
                                                                                $          378,272
                                                                                ===================
</TABLE>


         Depreciation  and  amortization  expense amounted to $29,194 and $2,850
         for the years ended December 31, 2002 and 2001, respectively.


(6)      INTANGIBLE ASSETS:

         Intangible assets as of December 31, 2002 are as follows:

<TABLE>
<CAPTION>
<S>                                                                             <C>
                  Domain name                                                   $           18,000
                  Product development                                                      260,000
                  Website                                                                   22,320
                                                                                ------------------
                                                                                           300,320
                  Less: accumulated amortization                                            39,667
                                                                                ------------------
                  Intangible, net                                               $          260,653
                                                                                ==================
</TABLE>

                  Amortization expense for intangible assets amounted to $39,667
                  and $9,000 for the years  ended  December  31,  2002 and 2001,
                  respectively.



                                      F-18
<PAGE>

                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001




(7)      NOTES PAYABLE AND LONG-TERM DEBT:

         A summary of long-term debt as of December 31, 2002 is as follows:

<TABLE>
<CAPTION>
<S>                                                                            <C>
                  Unsecured 8 1/2% convertible note payable                     $          500,000
                  Unsecured 8 1/2% non-convertible note payable                          1,217,070
                  Insurance note payable                                                    81,477
                                                                                ------------------
                                                                                         1,798,547
                  Less: current maturities                                                 481,477
                                                                                ------------------
                                                                                         1,317,070
                  Less: deferred interest                                                  806,593
                                                                                ------------------
                                                                                $          510,477
                                                                                ==================
</TABLE>


         The non-current  portion of long-term debt at December 31, 2002 matures
         in 2004.

         (A)      SECURED CONVERTIBLE DEBENTURE:

                  In November  2002,  pursuant to a  Subscription  Agreement  to
                  raise  $1,000,000  8%  Secured   Convertible   Debenture  (the
                  "Debenture"),  the Company  received  $500,000 and the balance
                  will be received in 2003. The debenture  contains a beneficial
                  conversion  feature  for six months at a  conversion  price of
                  $1.00.  The  debenture  also contains  detachable  warrants to
                  acquire 100,000 shares of common stock at an exercise price of
                  $1.00 per share  expiring  in five  years.  The  Debenture  is
                  collateralized by the Company's right,  title, and interest in
                  and to all present  and future  rights to payment of goods and
                  services.

                  If the Company raises at least  $3,000,000,  to the extent the
                  Debenture  has not been  repaid  or  converted  in  full,  the
                  remaining  outstanding  amounts shall  automatically be deemed
                  converted at the lower of 1.00 per share or 10% below offering
                  per security  issued for future  financing debt equity capital
                  of Company.

                  The payment of  principal  and/or  interest  on the  Debenture
                  shall be equal in right of payment to the other  debentures to
                  be  received  in the  first  half  of 2003  in the  amount  of
                  $500,000,  based on the  principal  amount  of all  debentures
                  outstanding at the time of such prepayments.  In the event the
                  lender  receives  payments  in excess of its pro rata share of
                  borrower's  prepayments of the  debentures,  then lender shall
                  hold in trust all such excess  payments for the benefit of the
                  holders of the  debentures  and shall pay such amounts held in
                  trust to such holders upon demand by such holders.

                  Payments  on the  debentures  from the sale of P5 units are as
follows:
<TABLE>
<CAPTION>
<S>               <C>     <C>
                  (1)      $15.00 per unit from the sale of 1 to 10,000 units;
                  (2)      $35.00 per unit from the sale of 10,001 to 20,000 units; and
                  (3)      $50.00 per unit from the sale of 20,001 to 30,000 units.
</TABLE>



                                      F-19
<PAGE>

                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001


(7)      NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED:

         (A)      SECURED CONVERTIBLE DEBENTURE, CONTINUED:

                  As of December 31, 2002, 53 P5 units have been sold,  however,
                  no  payments  have been made on the  Debenture.  Further,  the
                  Company  expects  to abandon  the P5 product  line in 2003 and
                  accordingly,  does not  expect to realize  substantial  future
                  revenues from the sale of P5 units.

                  Subsequent  to year-end  the notes  became due and the Company
                  defaulted  on these  notes.  The  Company  requested  a 90-day
                  extension, until July 15, 2003.

         (B)      CONVERTIBLE AND NON-CONVERTIBLE NOTES:

                  As a result  of the  Transaction,  bridge  loans  and  accrued
                  interest thereon in the amount of $2,378,431 owed by ER LLC to
                  JPAL were  eliminated.  Concurrent with the  Transaction,  the
                  Company assumed obligation of certain notes payable of JPAL in
                  the amount of $2,517,070 (the "JPAL" notes).

                  Subsequent  to the  completion  of the  Recapitalization,  the
                  Company  repaid  $550,000  of JPAL  notes and  issued two year
                  warrants to purchase  15,000  shares of common stock having an
                  exercise price of $1.30 per share.  In July 2002,  $250,000 of
                  these  notes  was  converted  into  common  stock at $1.15 per
                  share.  The  remaining  balance of  $1,717,070 is comprised of
                  $500,000 of convertible  notes,  which are  convertible  for a
                  period of six months  ended  December 20, 2002 at a conversion
                  price of $1.90 into an aggregate  of 263,158  shares of common
                  stock and $1,217,070 of  non-convertible  notes with two years
                  warrants  to  purchase  840,000  shares of  common  stock at a
                  purchase  price of $1.90 per share.  These notes bear interest
                  at the  rate of 8 1/2%  per  annum  with  $77,574  of  accrued
                  interest as of December  31,  2002.  These notes are due April
                  30, 2004, and contain the following prepayment provisions:

                  i.       During fiscal 2003,  quarterly  principal payments of
                           $100,000 plus accrued  interest due 15 days following
                           each of the four quarters.  The Company has requested
                           90-day  extension  for  all  provisions  relating  to
                           mandatory prepayments.

                  ii.      50% of the proceeds  received by the  Company  as  a
                           result of the exercise of warrants.

                  iii.     During fiscal 2002, 15% of the net proceeds  received
                           from  the  sale  of  equity  in  the  Company   above
                           $10,000,000, subject to a maximum of $700,000;

                  iv.      During fiscal 2003, 20% of the net proceeds  received
                           from the sale of equity in the Company,  subject to a
                           maximum of $700,000,  provided, that in the event the
                           aggregate  principal amount of bridge loans remaining
                           outstanding  at the time such equity is raised  shall
                           exceed  $1,000,000,  then the maximum  amount due and
                           payable shall be $900,000; and



                                      F-20
<PAGE>

                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001


(7)      NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED:

         (B)      CONVERTIBLE AND NON-CONVERTIBLE NOTES, CONTINUED:

                    v.   Beginning  October 1, 2002,  35% of any Excess Cash, as
                         defined,  greater than  $2,000,000,  up to a maximum of
                         $200,000 (in addition to amounts  received under clause
                         (iv) above) in any quarter.

                    vi.  The value of the warrants issued above was priced using
                         the  Black-Scholes  pricing  model.  (Refer to footnote
                         12.)

                  Subsequent to year-end,  the Company defaulted on these notes.
                  The Company requested a 90-day extension, until July 15, 2003.


(9)      INCOME TAXES:

         Realization of deferred tax assets is dependent on future earnings,  if
         any,  the  timing  and  amount of which is  uncertain.  Accordingly,  a
         valuation  allowance,  in an amount equal to the net deferred tax asset
         as of  December  31,  2002,  has  been  established  to  reflect  these
         uncertainties.  As of December 31, 2002,  the deferred tax asset before
         valuation allowances is approximately $2,032,700 for federal purposes.

         Utilization of the net operating loss carryforwards may be subject to a
         substantial  annual  limitation  due to  ownership  change  limitations
         provided by the Internal  Revenue Code of 1986.  The annual  limitation
         may result in the expiration of net operating loss carryforwards before
         utilization.

         Income tax provision  amounted to $-0- for the year ended  December 31,
         2002.  For the year ended  December 31, 2001 the Company was taxed as a
         Limited Liability Company and accordingly no provision was recorded.  A
         reconciliation of the provision (benefit) for income taxes with amounts
         determined by applying the statutory  U.S.  federal  income tax rate to
         income before income taxes as of December 31, 2002 is as follows:

<TABLE>
<CAPTION>
<S>                                                         <C>                 <C>
                  Computed tax at federal statutory rate of 34%                 $       (2,908,200)
                  Reduction for loss from ER LLC                                           875,500
                  Change in valuation allowance                                          2,032,700
                                                                                -------------------

                                                                                $                -
                                                                                ===================
</TABLE>


         Deferred  income  taxes  reflect  the  net  tax  effects  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 as of December 31, 2002 are as follows:



                                      F-21
<PAGE>

                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001


(9)      INCOME TAXES, CONTINUED:
<TABLE>
<CAPTION>
                  Deferred tax assets:
<S>                                                                             <C>
                  Allowance for doubtful accounts                               $           34,700
                  Accrued payroll                                                           77,170
                  Inventory obsolescence reserve                                           463,500
                  Net operating losses carryforwards                                     1,456,800
                                                                                -------------------
                      Total deferred tax assets                                          2,032,700
                                                                                -------------------
                  Net deferred assets before valuation allowance                         2,032,700
                  Valuation allowance                                                   (2,032,700)
                                                                                -------------------
                  Net deferred tax assets                                       $                -
                                                                                ===================
</TABLE>


         At December 31, 2002,  the Company has  available  unused net operating
         losses  carryforwards  of  $5,978,500  for purposes that may be applied
         against future  taxable income and that, if unused,  began to expire in
         2002.


(10)     RETIREMENT PLAN:

         The Company  sponsors a 401(k)  contributory  plan (the "Plan") for the
         benefits of employees  who are at least 21 years of age. The  Company's
         management determines, at its discretion,  the annual and contribution.
         The Company  elected not to  contribute to the Plan for the years ended
         December 31, 2002 and 2001.


(11)     STOCK OPTION PLANS:

         The Company has elected to follow Financial  Accounting Standards Board
         Statement  No.  123  (Accounting  for  Stock-Based   Compensation)  and
         accordingly the Company determined compensation costs based on the fair
         value at the grant date for its stock options.

         Effective June 20, 2002, the Company  adopted the 2001 Stock  Incentive
         Plan.  The Company  issued to its directors and  employees,  options to
         purchase an  aggregate  of  1,097,000  shares of its common  stock at a
         weighted average exercise price of $1.13 per share. Such options expire
         ten years  following the grant date. This included  200,000  contingent
         options, as further explained in the following paragraph.  The issuance
         of  the  non-contingent   options  resulted  in  deferred   stock-based
         compensation of $2,123,305, of which $589,660 was expensed for the year
         ended December 31, 2002. Deferred  compensation expense will be charged
         to earnings  over the vesting  period of the options,  which is between
         one to three years.  Deferred  compensation  expense was computed using
         the Black-Scholes  pricing model using a fair market value ranging from
         $2.00 to $3.10 per share, a term of three years,  volatility of 44% and
         a risk-free rate of 5%.




                                      F-22
<PAGE>


                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001


(11)     STOCK OPTION PLANS, CONTINUED:

         On September 5, 2002,  the Company  issued  options to an employee (the
         "Contingent" options) to purchase 200,000 shares of its common stock at
         an exercise  price of $1.00 per share.  The options vest when either of
         the following  conditions  occur: (i) the market  capitalization of the
         Company,  based on the public float, equals or exceeds $150,000,000 for
         a period of 60  consecutive  business days and the average daily volume
         of the  Company's  common stock traded  during these 60 days is no less
         than 125,000 or (ii) the Company sells all or substantially  all of its
         assets for a minimum of  $125,000,000.  Since these options do not vest
         unless a future event occurs,  the options are considered  variable and
         will  only  be  recorded  by  the  Company  if  the  contingencies  are
         satisfied.

         Effective  June 20,  2002,  the  Company  adopted  the  Advisory  Board
         Agreement. The Company issued to its advisors and consultants,  options
         to purchase an  aggregate  of 260,000  shares of its common  stock at a
         weighted average exercise price of $0.83 per share. Such options expire
         ten years  following  the  grant  date.  The  issuance  of the  options
         resulted  in  deferred  stock-based  compensation  of $610,448 of which
         $93,263 was  expensed for the year ended  December  31, 2002.  Deferred
         compensation  expense will be charged to earnings  over the term of the
         advisors' and/or consultants' agreements. Deferred compensation expense
         was computed using the Black-Scholes  pricing model using a fair market
         value of $3.05 per share,  a term of 10 years,  volatility of 44% and a
         risk-free rate of 5%.

         Additional  information  with  respect to these two Plans' stock option
activity is as follows:

<TABLE>
<CAPTION>
                                                                                                            Weighed
                                                                                      Number               Average of
                                                                                     of Shares           Exercise Price
                                                                                ------------------      ---------------
<S>                                                                                                     <C>
                  Outstanding at December 31, 2001                                               -      $             -
                  Granted Directors and Employees                                        1,097,000                 1.13
                  Granted Advisors and Consultants                                         260,000                  .83
                  Exercised                                                                      -                    -
                  Cancelled                                                                      -                    -
                                                                                ------------------      ---------------
                  Outstanding at December 31, 2002                                       1,357,000      $          1.08
                                                                                ==================      ===============
                  Options exercisable at December 31, 2002                                 422,000      $             -
                                                                                ==================      ===============
</TABLE>


                                      F-23
<PAGE>


                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001



(11)     STOCK OPTION PLANS, CONTINUED:

          The  following  tables  summarize   information  about  stock  options
          outstanding and exercisable at December 31, 2002:


<TABLE>
<CAPTION>

                                                      Weighted          Outstanding                           Exercisable
                                                       Average            Options                               Options
                Range of           Number of        Remaining in         Weighted           Number of          Weighted
                Exercise          Outstanding     Contractual Life        Average            Shares             Average
                 Prices             Options            in Year        Exercise Price       Exercisable      Exercise Price
             ---------------    --------------      -----------       --------------       -----------      --------------
<S>           <C>                <C>                <C>                <C>                <C>                <C>
              $.65 to $1.00          1,072,600             9.36         $      .75             396,334       $      .75
             $1.01 to $4.00            284,400             9.36               2.31              25,666              2.31
                                --------------      -----------         ----------         -----------       -----------

                                     1,357,000             9.36         $     1.08             422,000       $      1.08
                                ==============      ===========         ==========         ===========       ===========
</TABLE>

         The  assumptions  used in the  Black-Scholes  model were as follows for
stock options granted in 2002:

         The  valuation  of the  directors  and  employees  was  computed  using
intrinsic value method.

                  Risk-free interest rate                  3.91 - 4.74
                  Expected volatility of common stock       43 - 74%
                  Dividend yield                               0%
                  Expected life of options                   3 years

         The  Black-Scholes  option valuation model was developed for estimating
         the fair value of traded options that have no vesting  restrictions and
         are fully transferable. Because option valuation models require the use
         of subjective assumptions,  changes in these assumptions can materially
         affect the fair value of the options. The Company's options do not have
         the characteristics of traded options;  therefore, the option valuation
         models do not necessarily  provide a reliable measure of the fair value
         of its options.


(12)     WARRANTS:

         The warrant activities as December 31, 2002 and 2001 are as follows:

<TABLE>
<CAPTION>
                                                                                                            Weighed
                                                                                      Number                Average
                                                                                     of Shares           Exercise Price
                                                                                ------------------      ---------------
<S>                                                                             <C>                     <C>
                  Outstanding at December 31, 2001                                               -      $             -
                  Granted                                                                1,286,211                 1.68
                  Exercised                                                                      -                    -
                  Cancelled                                                                      -                    -
                                                                                ------------------      ---------------
                  Outstanding at December 31, 2002                                       1,286,211      $          1.68
                                                                                ===================      ==============
                  Warrants exercisable at December 31, 2002                              1,286,211      $          1.68
                                                                                ==================       ==============
</TABLE>



                                      F-24
<PAGE>


                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001



(12)     WARRANTS, CONTINUED:

          The following tables summarize  information about warrants outstanding
          and exercisable at December 31, 2002:

<TABLE>
<CAPTION>

                                                      Weighted          Outstanding                           Exercisable
                                                       Average            Options                               Options
                Range of           Number of        Remaining in         Weighted           Number of          Weighted
                Exercise          Outstanding     Contractual Life        Average            Shares             Average
                 Prices             Options            in Year        Exercise Price       Exercisable      Exercise Price
             ---------------    --------------      -----------       --------------       -----------      --------------
<S>                                <C>                  <C>                <C>              <C>                  <C>
              $1.00 - 1.90         1,286,211            2.54               $1.68            1,286,211            $1.68
</TABLE>

         1.       In connection with the offering ER LLC issued to the financial
                  advisors  warrants to purchase an aggregate of 331,211  shares
                  of membership units.  These warrants have an exercise price of
                  $1.30 per membership  unit and are exercisable for a period of
                  up  to  five  years.  As a  result  of  the  Recapitalization,
                  warrants  to purchase  membership  units in ER LLC have become
                  warrants to purchase common shares of the Company.

                  The Company  recognized no expense and the  transaction had no
                  net-effect on stockholders' equity as these warrants were part
                  of the  offering  costs.  The fair  value of the  warrants  of
                  $813,165 was determined using the Black-Scholes option-pricing
                  model,  with  the  following  assumptions:   (i)  no  expected
                  dividends;  (ii) a  risk-free  interest  rate of 5.00%;  (iii)
                  expected  volatility  of 80%; and (iv) an expected life of two
                  years.  The value of these  warrants  was  computed  using the
                  Black-Scholes pricing model.

2.                In connection with the Recapitalization, the Company issued to
                  the current and former  convertible and  non-convertible  note
                  holders two-year  warrants to purchase an aggregate of 840,000
                  shares and 15,000 shares of common stock, respectively.

                  The  $1,467,070  non-convertible  note holders were  allocated
                  544,382  warrants  of the total of  840,000  with an  exercise
                  price of $3.05.  In  accordance  with EITF 00-27,  the Company
                  first  determined  the value of the note and the fair value of
                  the  detachable   warrants  issued  in  connection  with  this
                  non-convertible  debenture. The estimated value of the 544,382
                  warrants of $497,490 was  determined  using the  Black-Scholes
                  pricing model with the following assumptions:  (i) no expected
                  dividends;  (ii) a  risk-free  interest  rate of 4.83%;  (iii)
                  expected  volatility  of 44%; and (iv) an expected life of two
                  years.  The face amount of the note payable of $1,467,070  was
                  proportionately allocated to the note payable and the warrants
                  in the amount of  $497,490  and  $969,580,  respectively.  The
                  amount allocated to the warrants of $497,490 was recorded as a
                  discount on the note payable and is being  accreted into notes
                  payable as additional interest expense over the remaining life
                  of the note.  Of the  $497,490  discount,  as of December  31,
                  2002, $135,679 has been amortized to expense.




                                      F-25
<PAGE>


                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001


(12)     WARRANTS, CONTINUED:

                  The $500,000  convertible note holders were allocated  205,618
                  warrants  of the total of 840,000  with an  exercise  price of
                  $3.05.  In  accordance  with EITF  00-27,  the  Company  first
                  determined  the  value of the  note and the fair  value of the
                  detachable warrants issued in connection with this convertible
                  debenture.  The  estimated  value of the  205,618  warrants of
                  $284,321 was determined using the Black-Scholes  pricing model
                  with the  following  assumptions:  (i) no expected  dividends;
                  (ii) a  risk-free  interest  rate  of  4.83%;  (iii)  expected
                  volatility of 44%; and (iv) an expected life of two years. The
                  face   amount   of  the   note   payable   of   $500,000   was
                  proportionately allocated to the note payable and the warrants
                  in the amount of  $318,747  and  $181,253,  respectively.  The
                  amount allocated to the warrants of $181,253 was recorded as a
                  discount on the note payable and is being  accreted into notes
                  payable as additional interest expense over the remaining life
                  of the note.  The value of the note payable was then allocated
                  between the note and the beneficial conversion feature,  which
                  amounted to $-0- and $318,747,  respectively.  The  beneficial
                  conversion  feature  expired  prior to  December  31, 2002 and
                  accordingly  the entire  discount of  $318,747  was charged to
                  interest expense. Of the $181,253 discount, as of December 31,
                  2002, $49,433 has been amortized to expense.  None of the note
                  balance under this  agreement has been  converted  into common
                  stock as of December 31, 2002.

                  The remaining  90,000 warrants  granted to others  represented
                  consulting  expense of $124,449 and was  determined  using the
                  Black-Scholes  pricing model with the  following  assumptions:
                  (i) no expected  dividends;  (ii) a risk-free interest rate of
                  4.83%; (iii) expected  volatility of 44%; and (iv) an expected
                  life of two years.

                  The 15,000  warrants valued at $28,513 were charged to expense
                  and value was determined using the Black-Scholes pricing model
                  with the  following  assumptions:  (i) no expected  dividends;
                  (ii) a  risk-free  interest  rate  of  4.83%;  (iii)  expected
                  volatility of 44%; and (iv) an expected life of two years.

          3.       In connection with the $500,000  raised under a  Subscription
                  Agreement  dated  November 20, 2002, in  accordance  with EITF
                  00-27,  the Company first determined the value of the note and
                  the fair value of the detachable warrants issued in connection
                  with this  convertible  debenture.  The estimated value of the
                  100,000   warrants  of  $140,120  was  determined   using  the
                  Black-Scholes  pricing model with the  following  assumptions:
                  (i) no expected  dividends;  (ii) a risk-free interest rate of
                  4.04%; (iii) expected  volatility of 83%; and (iv) an expected
                  life of two  years.  The face  amount of the note  payable  of
                  $500,000,  which has a conversion  feature for six months, was
                  proportionately allocated to the note payable and the warrants
                  in the amount of  $390,552  and  $109,448,  respectively.  The
                  amount allocated to the warrants of $109,448 was recorded as a
                  discount on the note  payable.  The value of the note  payable
                  was then  allocated  between  the  note  and the  preferential
                  conversion  feature,  which amounted to $115,552 and $275,000,
                  respectively.  The combined  total  discount is  $384,448,  is
                  being  accreted  into  notes  payable as  additional  interest
                  expense over the  remaining  life of the note. Of the $500,000
                  discount,  as of December 31, 2002, $71,486 has been amortized
                  to expense.  None of the note balance under this agreement has
                  been converted into common stock as of December 31, 2002.



                                      F-26
<PAGE>


                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001



(13)     COMMITMENTS AND CONTINGENCIES:

a.                The  Company  leases its office and  certain  equipment  under
                  non-cancellable  agreements.  The  following  is a schedule of
                  future minimum rental payments required under these leases:
<TABLE>
<CAPTION>
<S>                                                                            <C>
                           Year ending December 31,
                               2003                                             $          131,388
                               2004                                                        142,129
                               2005                                                        145,117
                               2006                                                        139,710
                                                                                ------------------
                                                                                $          558,344
                                                                                ==================
</TABLE>



                  Real estate taxes,  insurance,  and  maintenance  expenses are
                  obligations of the Company.  It is expected that in the normal
                  course of  business,  leases  that  expire  will be renewed or
                  replaced.  Rent expense for the years ended  December 31, 2002
                  and 2001 totaled $114,338 and $39,000, respectively.

b.                The Company is allocated  certain  equipment lease costs under
                  leases  assumed by a company  related  to a certain  member of
                  LCG.  The  Company  is not  obligated  under the leases but is
                  allocated a portion the minimum  payments under the leases are
                  as follows:

<TABLE>
<CAPTION>
<S>                                                                            <C>
                           Year ending December 31,
                               2003                                             $           25,533
                               2004                                                          1,188
                                                                                ------------------
                                                                                $           26,721
                                                                                ==================
</TABLE>

                  Computer  lease expense for the years ended  December 31, 2002
                  and 2001 amounted to $47,666 and $13,000, respectively.

          c.      The  Company  has  an  employment   agreement  with  the  vice
                  president of marketing and sales.  The agreement  provides for
                  an annual base salary of $150,000  per year and four months of
                  severance compensation.

          d.       LITIGATION

                  On November 21,  2002, a complaint  was filed by MC Squared in
                  United States District Court for the Southern  District of New
                  York  against  us,  Humbert  Powell,  Chairman of our Board of
                  Directors,  Steven Francesco,  our ex-Chief Executive Officer,
                  David  Devor,  an officer  and Brian  Jedwab,  a member of our
                  Board of Directors, alleging breach of a development agreement
                  between us (originally Essential Reality, LLC) and MC Squared.
                  Specifically, the complaint alleges a failure by us to provide
                  a design credit to MC Squared on the packaging for the P5(TM).
                  The complaint  seeks specific  performance and a recall of all
                  P5(TM)  products  shipped to date without the design credit on
                  the packaging.  We have submitted an answer with counterclaims
                  and have made a motion to dismiss this  complaint.  A decision
                  on the motion is pending.




                                      F-27
<PAGE>


                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001



(13)     COMMITMENTS AND CONTINGENCIES, CONTINUED:

                  On  January  21,   2003,   a   complaint   was  filed  by  RDA
                  International,  Inc. in the Supreme  Court of the State of New
                  York  against ER LLC  seeking  payment of  $203,265  for work,
                  labor, and services  performed in connection with advertising,
                  marketing, and multimedia programs for the P5(TM).

                  On February 28, 2003, a complaint was filed by Aaron Gavios, a
                  former  employee of ours, in The United States  District Court
                  for the  Southern  District of New York  against  us,  Humbert
                  Powell, Chairman of our Board of Directors and Brian Jedwab, a
                  member  of  our  Board  of  Directors,  alleging  breach  of a
                  contract.  Specifically,  the  complaint  alleges  failure  to
                  provide for severance  pay,  failure to provide stock options,
                  and  failure  to  reimburse  for  automobile   lease  totaling
                  $120,000, plus interest and legal fees.

                  On April 16, 2003, a complaint  was filed by Ziff Davis Media,
                  Inc. in the Supreme Court of the State of New York against the
                  Company seeking  payment of $27,443 for print  advertising for
                  the P5.

                  Management  believes  there are valid defenses to these claims
                  and intends to  vigorously  defend;  however,  there can be no
                  assurance of a successful  outcome.  The costs associated with
                  these  litigations,  including the time required to defend the
                  Company,  as well as the  potential  cost  should  there be an
                  adverse  judgment,  may have a material  adverse effect on the
                  financial condition and results of operation.


(14)     RELATED-PARTY TRANSACTIONS:

         The Company had the following related-party  transactions for the years
         ended December 31, 2002 and 2001:

         a.       The  Company  accrued  compensation  expense of  $228,492  and
                  $257,103 for certain  officers and  shareholders for the years
                  ended December 31, 2002 and 2001, respectively.  These amounts
                  are included in due to related parties at December 31, 2002.

         b.       Advances from affiliated  companies are from entities that are
                  affiliated  with  certain  shareholders  of the  Company.  The
                  advances  are payable on demand and bear  interest at the rate
                  of 10% per annum.  Certain of these advances were satisfied in
                  September  2002, by granting the Company's  interest in "other
                  assets" of $22,500 to these  entities.  At December  31, 2002,
                  $1,712 remains outstanding.

         c.       Non-interest  bearing  advances  from an  affiliate of certain
                  shareholders,  LCG Capital  Group,  LLC,  were made in 2001 of
                  which  $5,705  was paid in 2002  leaving a balance  of $70,912
                  outstanding at December 31, 2002.



                                      F-28
<PAGE>

                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001


(14)     RELATED-PARTY TRANSACTIONS, CONTINUED:

         d.       Included  in product  and  development  expense is $33,700 and
                  $55,000  for the  years  ended  December  31,  2002 and  2001,
                  respectively,  to a company owned by certain  shareholders  of
                  the Company that have  consulted with the Company in the areas
                  of product strategy, design, and development.

         e.       Included  in general  and  administrative  expenses  are costs
                  incurred of $203,479 and $242,000 for the years ended December
                  31,  2002 and 2001,  respectively,  by two  entities  that are
                  related to certain  members of LCG Capital  Group.  Such costs
                  were  determined  to be  allocable  costs to the  Company  and
                  include  consulting  fees  related  to  business  development,
                  employee salaries, occupancy,  telephone, and computer leases.
                  In the case of employee  salaries,  costs are allocated to the
                  Company  based on the time  each  employee  conducts  business
                  specific to the  Company.  In the case of the other  expenses,
                  costs are allocated based on a percentage of resources used by
                  the Company.

         f.       Included in general and administrative expenses is $21,700 and
                  $26,000  at  December  31,  2002 and  2001,  respectively,  of
                  marketing  expense  payable  to a  company  owned  by a person
                  related to certain  members of the  Company  who  assisted  in
                  establishing and executing its marketing programs. Included in
                  accounts payable-related parties is $21,700 of this expense at
                  December 31, 2002.

         g.       Included in general and administrative expenses is $35,000 and
                  $58,000  at  December  31,  2002 and  2001,  respectively,  of
                  business  development  expense  payable  to a company  that is
                  related to certain  members of LCG who assisted the Company in
                  executing  its  business  development  program.   Included  in
                  accounts payable-related parties is $35,000 of this expense at
                  December 31, 2002.


(15)     STOCKHOLDERS' EQUITY:

         In November  2002,  the Company  issued  50,000  shares in exchange for
         deferral of payment of legal  services  valued at $70,000  based on the
         market  price  of the  Company's  stock  when  the  services  had  been
         completed.  An amount of $70,000 of expense was charged to equity-based
         compensation. The law firm resigned in the first quarter of 2003 before
         completing  the deferred legal services and the Company paid $25,000 to
         settle the outstanding  amount owned. The Company may pursue the return
         of the shares  because the law firm did not  complete  the  agreed-upon
         services.

         On June 20, 2002, ER LLC completed a private placement (the "Offering")
         whereby it issued  7,274,784  membership  units for gross  proceeds  of
         $7,577,900. Included in the gross proceeds was $500,000 of bridge loans
         that  were  converted  to  480,000  membership  units  of the  Company.
         $250,000 of the bridge  loans  converted  was owed to JPAL and $250,000
         was due to a third-party lender. JPAL exchanged the membership interest
         in ER LLC for the  reduction  of $250,000  in notes  payable it owed to
         third-party lenders.




                                      F-30
<PAGE>



                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001


(15)     STOCKHOLDERS' EQUITY, CONTINUED:

         In connection  with the Offering,  the Company  issued to its financial
         advisors  warrants to purchase an aggregate of 331,211 shares of common
         stock (the "Additional Warrants"). Such warrants shall have an exercise
         price of $1.30  per  membership  unit and  shall be  exercisable  for a
         period of up to five years. As a result of the Transaction, warrants to
         purchase  membership  units in ER LLC have become  warrants to purchase
         common  shares of the Company.  The value of the warrants  issued above
         was priced using the  Black-Scholes  pricing model.  (Refer to footnote
         12.)


(16)     CONTRACTUAL OBLIGATIONS/GAME PUBLISHERS-LICENSING AGREEMENTS:

         a.       In  March  2000,   the  Company   entered  into  a  consulting
                  agreement,  which requires the Company to pay the  consultant,
                  $0.25 for each of the first 150,000 units of the P5 sold.

         b.       In July  2000,  the  Company  entered  into an  agreement  for
                  product  development  with a company that is owned by a person
                  who  is  related  to  certain  shareholders  of  the  Company.
                  Pursuant  to the  agreement,  the  Company is  required to pay
                  royalties of 1.8% on net sales of P5 and 9% of the license fee
                  collected by the Company with respect to P5, indefinitely. The
                  Company is contesting  certain terms of this  agreement and is
                  currently in litigation.  As of December 31, 2002,  $1,098 was
                  included in accounts payable related to this.

         c.       In August  2000,  the Company  entered  into a  memorandum  of
                  understanding,  which provides for a renewable  two-year lease
                  for a certain component of P5. Royalties are calculated as the
                  number  of units of P5 sold  multiplied  by the  greater  of a
                  $0.25 and the difference between the manufacturing cost of the
                  license  component and  alternative  component  with a minimum
                  license fee of $125,000 per annum. The Company has elected not
                  use the licensed  component  therefore  no  royalties  are due
                  pursuant to the memorandum of understanding.

         d.       In January  2001,  the  Company  entered  into  memorandum  of
                  understanding for the development of certain components of P5.
                  Pursuant to the  memorandum of  understanding,  the Company is
                  required  to pay  royalties  of 1% of P5's  net  sales  to the
                  developer,  indefinitely.  A nonrefundable  royalty advance of
                  $15,000  was paid in 2001.  Included  in  accounts  payable at
                  December 31, 2002 is royalty expense of $35,000  incorporating
                  the  component   technology  pursuant  to  the  memorandum  of
                  understanding into P5.

         e.       In July 2001, the Company entered a development  agreement for
                  the  development  of certain  components  of P5. The developer
                  accomplished  the  objectives  set forth in the  agreement  to
                  complete development of the P5 by June 2002. Consequently, the
                  Company is required to pay base  royalties  of 1% of net sales
                  generated from P5,  indefinitely  and  additional  0.5% of net
                  sales  generated  from P5,  indefinitely.  Included in accrued
                  expenses is $917 at December 31, 2002.



                                      F-31
<PAGE>



                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001


(16)     CONTRACTUAL OBLIGATIONS/GAME  PUBLISHERS-LICENSING AGREEMENTS,
         CONTINUED:

         f.       In May 2002, the Company  placed an order for the  manufacture
                  of approximately  35,000 P5s with a third-party  manufacturer.
                  Under the terms of the order,  the  Company  paid a deposit of
                  $100,000  upon placing the order and posted  letters of credit
                  in the amount of $2,000,000.  As of September 30, 2002,  there
                  was $2,000,000 in restricted  cash,  upon which the letters of
                  credit could be drawn.  Beginning in October 2002, the Company
                  began accepting  receipt of these goods from the manufacturer,
                  and as of December 24, 2002, $1,842,234 has been drawn against
                  the letters of credit, as payment. The balance of $157,766 was
                  paid on January 30, 2003.

         g.       In May 2002, the Company entered into an agreement with a game
                  developer.  Under  the  agreement  the  game  developer  shall
                  disclose to the Company the source code for two specific games
                  so that the P5 software  can be  integrated  with the game and
                  use  their  best  efforts  to  provide  reasonable   technical
                  assistance  to  the  Company  and  its  developer  during  the
                  integration  process.  In addition,  the game  developer  will
                  release  software  updates enabling current users of the games
                  to use P5. The Company will be responsible for integration and
                  payment to the game  developer  of  $100,000.  As of March 31,
                  2003 the Company paid $66,665. Included in accrued liabilities
                  is $33,335 related to this agreement.

         h.       In August 2002, the Company committed to pay a game publisher
                  a minimum of $35,000.  At December 31, 2002,  $17,500 was paid
                  with $17,500 included in accounts payable.

         i.       In August 2002,  the Company  committed to pay  royalties to a
                  game  publisher  at the  rate of $5.00  per  unit.  A  minimum
                  commitment  of $125,000 is  required.  At December  31,  2002,
                  $62,500 was paid with $62,500 included in accrued expenses.

         j.       In September 2002, the Company committed to pay royalties to a
                  game  publisher  at the rate of $1.50 per unit.  A minimum  of
                  $37,500 is required.  At December  31, 2002,  $18,750 was paid
                  with $18,750 included in accrued expenses.

         k.       In September 2002, the Company committed to pay royalties to a
                  game  publisher  at the  rate of $5.00  per  unit.  A  minimum
                  commitment  of $187,500 is  required.  At December  31,  2002,
                  $93,750 was paid with $93,750 included in accounts payable


(17)     SUBSEQUENT EVENT:

         NEW FINANCING:

                  On March 12,  2003,  the  Company  sold to a private  investor
                  100,000 shares for $1.00 per share totaling $100,000.

                  During  the  first  quarter  of 2003,  the  Company  raised an
                  additional  $500,000  pursuant  to the 8% Secured  Convertible
                  Debenture described in footnote 7.



                                      F-32
<PAGE>



                             ESSENTIAL REALITY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 2002 AND 2001


(17)     SUBSEQUENT EVENT, CONTINUED:

         NEW FINANCING, CONTINUED:

                  Also, the Company  obtained an additional  $25,000  short-term
                  unsecured financing with no interest.

         SEVERANCE AGREEMENTS:

                  In  January  2003,   the  Company   terminated  six  personnel
                  consisting of various  officers and support staff. The Company
                  is obligated for $291,000 of severance pay contingent upon the
                  Company obtaining installment financing of $1,000,000 minimum,
                  excluding bridge loans.

                  In addition,  in connection with these  severance  agreements,
                  the  Company  is  obligated  to  issue  to one  of its  former
                  officers,  five-year  warrants to purchase  250,000  shares of
                  common stock at an exercise price of $0.75 per share.

         PRIVATE PLACEMENT:

                  On March 10,  2003,  the Company  entered  into an  Investment
                  Banking/Advisory  Agreement  with First  Securities  USA, Inc.
                  through  its  SBI USA  division  ("SBI")  engaging  SBI as the
                  exclusive financial advisor, for six months in connection with
                  the  management  of a "PIPE"  (private  investment  in  public
                  equity)  of equity  securities,  which may or may not  include
                  common  stock and  warrants  to purchase  common  stock of the
                  Company,  on a best  efforts  basis  up to  $5,000,000  with a
                  minimum  of   $3,000,000.   The  private   placement  will  be
                  structured  as a  transaction  exempt  from  section  5 of the
                  Securities  Act of 1933 and shall  comply with section 4(2) of
                  the  Securities Act and Regulation D and to permit the initial
                  closing  upon the  receipt  and  acceptance  by the Company of
                  $3,000,000 for irrevocable subscriptions for the securities up
                  to $5,000,000.  The Company will pay the  Investment  Banker a
                  retainer  of  $25,000  in  common  stock  of the  Company.  In
                  addition,  the Company will pay a commission  in cash equal to
                  10% of the aggregate gross proceeds of the securities sold, as
                  well as warrants  for the  purchase of a number of  securities
                  equal to 10% of the number of  securities  sold in the private
                  placement.  The warrants will be exercisable for five years at
                  a price equal to 110% of the offering price per security.


                                      F-33
<PAGE>

EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER        DESCRIPTION
---------     -----------
<S>        <C>
2.1        Amended Contribution Agreement, dated as of April 24, 2002, by and among Essential Reality, LLC, the Registrant
           (f/k/a JPAL, Inc.), Martin Abrams, John Gentile, Anthony Gentile and LCG Capital Group, LLC.  Incorporated herein by
           reference from Exhibit A to the Registrant's Proxy Statement on Schedule 14A filed on May 21, 2002.

2.2        Amendment to Amended Contribution Agreement, dated as of June 14, 2002, by and among Essential Reality, LLC, the
           Registrant (f/k/a JPAL, Inc.), Martin Abrams, John Gentile, Anthony Gentile and LCG Capital Group, LLC.
           Incorporated herein by reference from Exhibit 2.2 to the Registrant's Current Report on Form 8-K filed on July 3,
           2002.
3.1        Amended and Restated Articles of Incorporation of the Registrant.  Incorporated herein by reference from Exhibit 3.1
           to the Registrant's Registration Statement on Form SB-2 filed on August 18, 2000 ("2000 SB-2").

3.2        Amendment to Articles of Incorporation filed June 20, 2002 with the State of Nevada. Incorporated herein by
           reference from Exhibit 3.2 to the Registrant's Registration Statement on Form SB-2 filed on July 19, 2002 ("2002
           SB-2").

3.3        Amendment to Articles of Incorporation filed June 21, 2002 with the State of Nevada.  I incorporated herein by
           reference from Exhibit 3.3 to the 2002 SB-2.

3.4        Bylaws of the Registrant.  Incorporated herein by reference from Exhibit 3.2 to the 2000 SB-2.

10.1       JPAL, Inc. 2001 Stock Incentive Plan.  Incorporated herein by reference from Exhibit C to the Registrant's Proxy
           Statement on Schedule 14A filed on January 18, 2002.

10.2*      Manufacturing Agreement with V-Tech Communications Ltd entered into as of May 15, 2002.

10.3*      Development Agreement with VR Yad dated as of July 1, 2001.

10.4       Consulting / Advisor Agreement with Abrams Gentile Entertainment, Inc. dated as of February 1, 2001.

10.5*      Agreement with  BusinessDevelopment.com  LLC dated as of December 13, 2000.  Amendment with Business  Development.com
           LLC dated as of  December 1,2001

 10.6*     Investment Banking/Advisor Agreement with SBI USA, a division of First Securities USA, Inc., dated March 10, 2003.

24.1*      Power of Attorney (included on signature page hereto).

99.1*      Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2*      Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
</TABLE>

--------------
o        Filed herewith.



<PAGE>