<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB
(Mark One)
|X|  Annual report under section 13 or 15(d) of the Securities Exchange Act of
     1934 for the fiscal year ended December 31, 2001.

|_|  Transition report under section 13 or 15(d) of the Securities Exchange Act
     of 1934 for the transition period from _____________ to ______________

COMMISSION FILE NUMBER 000-29800

                                 VIRTGAME CORP.
                                 --------------
             (Exact name of registrant as specified in its charter)


                 Delaware                                33-0716247
 ----------------------------------------   ------------------------------------
      (STATE OR OTHER JURISDICTION OF       (I.R.S. EMPLOYER IDENTIFICATION NO.)
      INCORPORATION OR ORGANIZATION)

            6969 Corte Santa Fe
                  Suite A
           San Diego, California                         92121-3270
 ----------------------------------------   ------------------------------------
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                (ZIP CODE)

         REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 858-373-5001
                                                            ------------

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

                                (Title of Class)
                                  COMMON SHARES

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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X]

VirtGame, Corp.'s revenues for the most recent fiscal year were $ 589,227.

The aggregate market value of the voting stock of the Registrant held by
non-affiliates of the Registrant, based upon the closing price of the Common
Stock on the OTC Bulletin Board on March 18, 2002 was approximately $ 8,941,738.
The number of shares outstanding of the registrant's Common Stock, as of March
18, 2002 was 22,109,116.


                       DOCUMENTS INCORPORATED BY REFERENCE

Document of the Registrant                        Form 10-KSB Reference Location
None                                                            N/A

<PAGE>

                                 VIRTGAME CORP.

                        TABLE OF CONTENTS FOR FORM 10K-SB
                          YEAR ENDED DECEMBER 31, 2001

                                     PART I
                                     ------
Item 1.       Business
                     Business Developments                                    3
                     Business of Company                                      5
                     Products and Services                                    6
                     Customers                                                6
                     New Industry and Competition                             6
                     Regulation                                               6
                     Employees                                                6
                     Research and Development                                 6
                     Proprietary Technology                                   7
                     Marketing and Sales                                      7
Item 2.       Description of Property                                         7
Item 3.       Legal Proceedings                                               7
Item 4.       Submission of Matters to a Vote of Security Holders             7

                                     PART II
                                     -------

Item 5.       Market for Common Equity and Related Stockholders Matters       7
Item 6.       Management's Discussion and Analysis or Plan of Operation       8
Item 7.       Audited Financial Statements                                    9
Item 8.       Changes In and Disagreement With Accountants on Accounting
              and Financial Disclosure                                        10

                                    PART III
                                    --------

Item 9.       Directors, Executive Officers, Promoters and Control Persons    10
Item 10.      Executive Compensation                                          11
Item 11.      Security Ownership of Certain Beneficial Owners and Management  12
Item 12.      Certain Relationships and Related Transactions                  13
Item 13.      Exhibits and Reports on Form 8-K                                14

                                       2
<PAGE>

                                     PART I
                                     ------

         THIS REPORT CONTAINS FORMS OF FORWARD-LOOKING STATEMENTS THAT ARE BASED
ON THE COMPANY'S BELIEFS AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION
CURRENTLY AVAILABLE TO THE COMPANY. WHEN USED IN THIS REPORT, THE WORDS
"BELIEVE," "EXPECT," "ANTICIPATE," "ESTIMATE" AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS, INCLUDING WITHOUT LIMITATIONS,
MATERIAL RISK FACTORS SUCH AS INADEQUATE WORKING CAPITAL, AUDITORS QUALIFICATION
AS TO GOING CONCERN, RECENT COMMENCEMENT OF OPERATIONS, LACK OF MARKET
ACCEPTANCE TO DATE FOR THE COMPANY'S PRODUCTS AND SERVICES, NOMINAL REVENUES TO
DATE, CONTINUING LOSSES FROM OPERATIONS, FUTURE GROWTH OF REVENUE AND THREAT OF
REGULATION OF COMPANY'S BUSINESS. SHOULD ONE OR MORE OF THESE RISKS OR
UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT,
ACTUAL RESULTS WILL VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED, OR
PROJECTED AND THE VARIATIONS MAY BE MATERIAL. THE COMPANY CAUTIONS POTENTIAL
INVESTORS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS ALL
OF WHICH SPEAK ONLY AS OF THE DATE MADE.


ITEM 1.  BUSINESS

Business Developments
---------------------

         Headquartered in San Diego, California, VirtGame is a provider of
Computer Server Platforms and Integrated Software Products for the Gaming and
Lottery industries, developing jurisdictional screening technology and
integration of other technologies such as age verification, security and
authentication. The Company was formed under the laws of the State of Delaware
on October 24, 1995 under the name MBA Licensing Corp. On June 20, 1996, the
Company changed its corporate name to Internet Gaming Technologies, Inc. On
January 22, 1997, the Company changed its corporate name to Virtual Gaming
Technologies, Inc., on September 9, 1999; the Company changed its name to
VirtGame Corp. and on February 19, 2002, the Company changed its corporate name
to VirtGame Corp.

         In 1996 the company started developing software such as baccarat,
blackjack, video poker, and pari-mutuel sports wagering for its own operation.
The Company's initial gaming operation started in September 1997 with a
casino-style Internet gaming operation excluding customers from those
jurisdictions that were opposed to the Internet gaming such as the U.S., this
operation was discontinued in year 2000. During the gaming operation, the
Company was only offering its games in certain international jurisdictions,
located in Europe, the Caribbean, Latin America, the Middle East, Australia,
Asia and Africa using a server site and hardware located in Antigua. The
Company's business in the last two years has been providing software
applications for the gaming and lottery markets capitalizing on its
international hands on gaming operations experience.

         In November 1995, the Company conducted a private placement of its
$.00001 par value common stock ("Common Stock") at $0.25 per share pursuant to
Rule 504 under the Securities Act of 1933 ("1933 Act"). In that offering, the
Company sold 1,160,000 shares of Common Stock in consideration of cash proceeds
of $60,000, net of $5,000 of offering costs, and the cancellation of $225,000 of
licensing and consulting fees due and payable. In May 1996, the Company chose to
suspend all operations relating to the development of the virtual reality
CD-ROMs and video game cartridges in favor of pursuing the development of
casino-style gaming operations over the Internet.

         Pursuant to a Securities Purchase Agreement dated September 5, 1996, as
amended, eLOT, Inc. ("eLOT") agreed to purchase 233,333 shares of Common Stock
at $3.00 per share. In addition, the Company granted eLOT a common stock
purchase warrant entitling eLOT to purchase 200,000 shares of Common Stock at an
exercise price of $3.45 per share. The warrant is immediately exercisable and
expires on March 6, 2002. These warrants were not exercised and were expired at
the time of this report. eLOT was formerly known as eLottery and prior to that
as Unistar Entertainment, Inc.

         Between April 1997 and August 1997, the Company conducted a private
placement of shares of Common Stock, at a price of $2.00 per share, pursuant to
Rule 506 under the 1933 Act. In that offering, the Company sold 1,018,250 shares
of Common Stock for the gross proceeds of $2,036,500. Proceeds from the sale of
the shares were applied towards the development and implementation of the
Company's Internet gaming operations and working capital.

                                       3
<PAGE>

         Between January 1998 and December 1998, the Company conducted a private
placement of 1,400,000 shares of Common Stock, at a price of $3.00 per share,
pursuant to Rule 506 under the 1933 Act. In that offering, the Company sold
1,387,238 shares of Common Stock for the gross proceeds of $4,161,703. Proceeds
from the sale of the shares were applied towards the development and
implementation of the Company's Internet gaming operations and working capital.

         Between February 1999 and June 1999, the Company conducted a private
placement of 700,000 shares of Common Stock at an offering price of $3.00 per
share, pursuant to Rule 506 under the 1933 Act. In that offering, the Company
sold a total of 181,358 shares of Common Stock for the gross proceeds of
$544,074. Proceeds from the sale of the shares were applied towards the
development and implementation of the Company's Internet gaming operations and
working capital.

         Between August 1999 and January 2000, the Company conducted a private
placement of 2,100,000 shares of Common Stock at an offering price of $1.50 per
share, pursuant to Rule 506 under the 1933 Act. In that offering, the Company
sold a total of 1,301,600 shares of Common Stock for the gross proceeds of
$1,952,400. Proceeds from the sale of the shares were applied towards the
development and implementation of the Company's Internet gaming operations and
working capital.

         On December 21, 1999, the Company acquired all of the issued and
outstanding common shares of Primeline Technologies, Inc. in consideration of
VirtGame's issuance of 447,208 shares of its common stock to Primeline
stockholders.

         In January 2000, the Company started a private placement of 1,000,000
shares of common stock, at a price of $1.50 per share, pursuant to rule 506
under the 1933 Act. In that offering, the Company sold a total of 236,667 shares
of Common Stock for the gross proceeds of $355,000. Proceeds from the sale of
the shares were applied towards the development and implementation of the
Company's software development, Internet gaming operations and working capital.

         In April 2000, the Company started a private placement of 1,000,000
shares of common stock, at a price of $0.50 per share, pursuant to rule 506
under the 1933 Act. In that offering, the Company sold a total of 1,020,000
shares of Common Stock for the gross proceeds of $510,000. Proceeds from the
sale of the shares were applied towards the Company's software development and
working capital. There was a finder involved in issuance of these shares and the
finder received 1,000,000 shares of Common Stock in payment of finder's fee. The
total shares issued with relation to this private placement amounted to
2,020,000 shares.

         In October 2000, the Company started a private placement of 1,000,000
shares of common stock, at a price of $1.00 per share, pursuant to rule 506
under the 1933 Act. In that offering, 78,800 shares of Common Stock have been
sold for the gross proceeds of $78,800. Proceeds from the sale of the shares
were applied towards the Company's software development and working capital.
There was a finder involved in issuance of these shares and the finder received
8,856 shares of Common Stock in payment of finder's fee. The total shares issued
with relation to this private placement amounted to 87,656 shares.

         In March 2001, the Company started a private placement of 16 Units of
10% Subordinated Notes for a principal amount of $37,500 per Unit, and a warrant
to purchase 150,000 shares of Common Stock of the Company. To date, 14 Units
have been sold for the gross proceeds of $525,000. All, but one, holders of
these notes have exercised their rights, under the terms of the notes, to
convert their notes to common stock at $0.25 per share, i.e. $487,500 in
additional paid in capital representing 1,950,000 shares of common stock were
issued during the year. Proceeds of the sale of the shares were applied towards
the Company's software development and working capital. There were finders
involved in raising this capital and the finders received 3,100,000 options to
buy the Company's common stock at $0.25 per share, of which 1,300,000 options
were exercised during the year and the balance is outstanding at the time of
this report.

         During the year, one consultant exercised options to buy 1,000,000
options at the exercise price of $0.25 per share and one officer exercised to
buy 100,000 options at exercise prices of $0.25 per share and another officer
exercised to buy 10,000 options at exercise price of $0.50 per share.

                                       4
<PAGE>

         During the year, the Company issued 1,000,000 shares of common stock to
one consultant and has signed an agreement to issue 500,000 shares to another
consultant, which is yet to be issued at the time of this report. The expenses
related to the issuance of all of these shares were recognized during the year.

         Unless the context otherwise requires, all references to the Company
includes its wholly-owned subsidiaries Virtual Gaming Technologies Argentina,
S.A., an Argentinean corporation and Virtual Gaming Technologies (Antigua) Ltd.,
an Antiguan corporation which was discontinued in year 2000. The Company's
executive offices are located at 6969 Corte Santa Fe, Suite A, San Diego,
California 92121 and its telephone number is (858) 373-5001.

Business of Company
-------------------

         Headquartered in San Diego, California, VirtGame is a provider of
Computer Server Platforms and Integrated Software Products for the Gaming and
Lottery industries, developing jurisdictional screening technology and
integrating other technologies such as age verification, security and
authentication. The Company's business model is to take advantage of technology
to develop the next generation of software for the gaming and lottery
industries. The Company in October 2000 received approval from Nevada Gaming
Board for a Nevada closed loop sports wagering system for Coast Resorts, a
Nevada licensed casino operator with four casinos in Las Vegas.

         Gaming has developed into a highly specialized industry. Gaming
companies' expertise in branding, logistics, customer relationship management,
statistics, new distribution channels and expansion into new marketplaces has
created a need for new and highly integrated technology products to help it meet
the demands of the next generation marketplace. To meet these demands,
regulatory frameworks are evolving rapidly to meet the technological changes
currently taking place in the software and telecommunication arenas. VirtGame's
goal is to develop and integrate various solutions to comply with the regulatory
concerns relating to the new software technology and telecommunication
developments.

         The Company offers an online distribution channel for traditional
brick-and-mortar gaming companies. Utilizing an Internet e-BorderControl
technology, VirtGame can design and construct private-label online casinos and
sports books available exclusively for online users in Nevada. The Company has
developed an over-the-counter solution that integrates conventional Nevada-style
casino sports books with the Internet/Intranet. The Company has developed
PrimeLine, an over-the-counter sports book that is approved in Nevada, which is
operational at a Las Vegas casino and is capable of seamless integration with
the Company's e-BorderControl technology to offer sports wagering on the
Company's proprietary Nevada Intranet system.

         Throughout most of the Company's history, its primary business focus
was the operation of casino-style gaming over the Internet in jurisdictions with
no ban on Internet gaming. In the third quarter of year 2000, the Company
discontinued its Internet casino operation and focused on providing e-gaming
software solutions. The traditional Gaming Industry is experiencing a paradigm
shift brought about by new technology and is recognizing the need for a major
transformation. Changing regulations and market factors are causing gaming
operators to look for expedient technology solutions that can be integrated with
their existing systems and provide new distribution channels. VirtGame has
completed development of an Internet / Intranet gaming solution and has
developed a robust next generation Gaming Server Platform for the Industry.

         VirtGame has built comprehensive and scalable Internet lottery, casino,
sports wagering and racing software applications that are customizable for
private label use. The Company is leveraging its technology and know-how to
develop and provide innovative solutions to licensed land based casinos and
lottery operators around the world.

         During the year the Company signed an exclusive technology development
agreement with Codere LLC, a subsidiary of Codere Group, a diversified gaming
company based in Spain with operations in Europe and South America.

         From the inception of the new operations as an ASP in the second
quarter of year 2000 through December 31, 2001 the Company has generated
$1,062,726 of revenue from software license fees. At the time of this 10K-SB
Report, the Company had generated $1,075,497 in software license fees from
inception of operations as an Application Service Provider to the gaming and
lottery industries.

                                       5
<PAGE>

Products and Services
---------------------

         The Company operated an offshore Internet casino and sports book from
late 1997 to mid 2000 excluding U.S. players. VirtGame discontinued its gaming
operation to focus as an enabler for licensed land based operators to extend
their reach to their customers beyond physical visits and to avoid any conflict
of interests with its land based gaming customers. The Company believes it is
well positioned as a gaming ASP to help brick-and-mortar gaming operators go
online. VirtGame creates customized enterprise-level software and has developed
a pricing strategy that combines the benefit of both software and ASP pricing
models by charging customers an initial set up and a monthly account fee based
on number of active players, which includes upgrades and maintenance.


         The Company's corporate web site is at www.VirtGame.com, its demo
sports book software is at www.primelinesports.com, a sample of its lottery
product is at: www.LoteriaDelSur.com.


Customers
---------

         The Company's customers are the traditional brick and mortar gaming and
lottery industries, and as such, is dependent on few customers. The Company's
list of clients to date includes, two U.S. lottery operators, two Nevada and two
Latin American gaming companies. The Company is currently negotiating and
bidding on several contracts with other state lottery or gaming companies.

New Industry and Competition
----------------------------

         The Company enables land based gaming companies to provide interactive
gaming service such as virtual casinos and sports books and enables state and
national lotteries to provide instant lottery products to the to their
customers. Although the gaming industry is well established and has recently
experienced significant growth and profitability, gaming on the Internet or
Intranet is a recent development and is an unproven segment of the gaming
industry. The competition for providing such solutions is increasing and the
market is rapidly evolving. The barrier to entry in Internet markets is
generally low. We believe the principal distinguishing factor for our business
is compliance with regulations and obtaining licensing and approvals from
regulatory bodies.

Regulation
----------

         Gaming activities are stringently regulated in the United States and
most developed countries. As a provider of Computer Service Platforms to the
gaming industry, the Company's policy is not to participate in net win or loss
of its clients unless it is licensed in that jurisdiction.

Employees
---------

         As of the date of this 10-KSB Report, the Company employs 11 people on
a full time basis, 10 of the employees were based in San Diego, California and
one was based in Las Vegas, Nevada. None of our employees are covered by an
ongoing collective bargaining agreement with us.

Research and Development
------------------------

         The Company spent approximately $762,000 in research and development in
2001, $544,000 of which were written off during the year. The Company intends to
conduct continuing development and innovation of its products in accordance with
changing consumer preferences, demographics, and the evolution of new
technologies. The Company's development strategy is to leverage its proprietary
technology and regulatory approvals to integrate third party developed solutions
such as age verification, identification and security in order to provide
full-integrated applications that are competitive and innovative in the
regulated gaming industry.

                                       6
<PAGE>

Proprietary Technology
----------------------

         The Company has internally developed proprietary gaming software
applications, based on the Java programming language and Macromedia Flash that
allows for interactive gaming, including simulated casino motion and sound, on a
real-time basis. The Company has developed a proprietary e-BorderControl
technology that limits access of players to one jurisdiction or restricts access
of players from specific jurisdictions.

Marketing and Sales
-------------------

         The Company's primary marketing and sales strategy is to sell its
software to licensed land based casinos and lottery operators around the world.


ITEM 2.  DESCRIPTION OF PROPERTY

         The Company's executive offices are located in San Diego, California
and consist of approximately 4,000 square feet for a monthly rent of
approximately $3,000.

ITEM 3.  LEGAL PROCEEDINGS

         The Company is not a party in any litigation and has no knowledge of
any pending legal proceedings in any court or agency of government, or
government authorities.


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

         On November 26, 2001, our board of directors approved a resolution
authorizing us to file the amendment to our certificate of incorporation with
the Delaware Secretary of State. Effective December 3, 2001, the holders of a
majority of the outstanding shares of our common stock entitled to vote thereon
executed a written consent in accordance with Section 228 of the General
Corporation Law of the State of Delaware approving and adopting the amendment to
our certificate of incorporation regarding change of our corporate name to
"VirtGame Corp. and increase the number of authorized shares of our common
stock, $.00001 par value, from 30,000,000 to 100,000,000 shares. This amendment
to our certificate of incorporation became effective on February 19, 2002.


                                     PART II
                                     -------

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS

         The Company's Common Stock is listed on the Over the Counter Bulletin
Board under the symbol "VGTI." The following table sets forth the high and low
closing prices of the Company's Common Stock for each calendar quarter since
commencement of trading. These quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.


                                                  High             Low
                                                 ------           -----
Mar 31, 2000                                      3.12            1.38
June 30, 2000                                     1.63            0.50
September 30, 2000                                1.56            0.63
December 31, 2000
                                                  1.47            0.38
March 31, 2001                                    0.91            0.19
June 30, 2001                                     0.98            0.19
September 30, 2001                                0.55            0.35
December 31, 2001                                 0.66            0.26

                                       7
<PAGE>

         On December 31, 2001, the closing price for the Company's Common Stock
was $ 0.28 per share. As of that date, the Company had 160 stockholders of
record and approximately 844 beneficial holders of stock.

         The Company has not paid any dividends on its Common Stock and
currently intends to retain any future earnings for use in its business;
therefore, the Company does not anticipate paying cash dividends in the
foreseeable future

         During the year the Company sold unregistered shares of its Common
Stock in the following transactions:

A.   In March 2001, the Company started a private placement of 16 Units of 10%
     Subordinated Notes for a principal amount of $37,500 per Unit, and a
     warrant to purchase 150,000 shares of Common Stock of the Company. To date,
     14 Units have been sold for the gross proceeds of $525,000. All, but one,
     holders of these notes have exercised their rights, under the terms of the
     note, to convert their notes to common stock at $0.25 per share, i.e.
     $487,500 in additional paid in capital, representing 1,950,000 shares of
     common stock were issued during the year. Proceeds of the sale of the
     shares were applied towards the Company's software development and working
     capital. There were finders involved in raising this capital and the
     finders received 3,100,000 options to buy the Company's common stock at
     $0.25 per share, of which 1,300,000 options were exercised during the year
     and the balance is still outstanding at the time of this report.
B.   In August 2001, the Company issued to three of its officers and directors
     1,900,000 options to purchase shares of Common Stock at an exercise price
     of $0.25 per share, of which 1,400,000 was immediately exercisable upon
     grant and 500,000 was exercisable one year from date of grant.
C.   In August 2001, the Company issued to nine of its employees options to
     purchase an aggregate of 837,000 shares of Common Stock at an exercise
     price of $0.25 per share, of which options to purchase 418,500 were
     immediately exercisable upon grant, and 418,500 become exercisable one year
     from the date of grant.
D.   During the year, the Company issued 3,108,166 shares, as a result of the
     direct issuance of shares and the exercise of options, as consideration for
     services provided in connection with the placement and execution of private
     placements to fund current year operations, consultation for providing
     strategic relationships, payment of legal fees, and the lease of a
     corporate house. The Company recorded an expense of $870,807 in connection
     with these transactions.
E.   During the year, the Company granted stock options to acquire 1,900,000
     shares of common stock to its investment banker as compensation for
     services rendered. These options were fully vested and exercised
     immediately. Proceeds from the exercise amounted to $114,500, net of
     issuance costs of $15,000. The Company also had subscriptions receivable of
     $345,500 at December 31, 2001 in connection with the exercise of these
     options.
F.   During the year, two officers of the Company exercised 110,000 shares of
     their fully vested stock options. The Company recorded $30,000 of cash
     proceeds from these transactions.

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

         The Company has derived all its revenues from licensing its software to
the gaming and lottery industries. Subsequent to the year ending December 31,
2001, the Company received new financings to pursue its plan of operation as a
software provider to the gaming and lottery industries. As of the date of this
report $1,147,000 of these funds have been received of which $250,000 were
receivable at December 31, 2001.

         In March 2001, the Company started a private placement of 16 Units of
10% Subordinated Notes for a principal amount of $37,500 per Unit, and a warrant
to purchase 150,000 shares of Common Stock of the Company. To date, 14 Units
have been sold for the gross proceeds of $525,000. All, but one, holders of
these notes have exercised their rights, under the terms of the note, to convert
their notes to common stock at $0.25 per share, i.e. $487,500 in additional paid
in capital representing 1,950,000 shares of common stock were issued during the
year. Proceeds of the sale of the shares were applied towards the Company's
software development and working capital. Between January 2000 and March 2000,
the Company conducted a private placement of 1,000,000 shares of Common Stock at
an offering price of $1.50 per share, pursuant to Rule 506 under the 1933 Act.
In that offering, the Company sold a total of 236,667 shares of Common Stock for
the gross proceeds of $355,000. Proceeds from the sale of the shares were
applied towards the development and implementation of the Company's Internet
gaming operations and working capital.


RESULTS OF OPERATIONS

         YEAR ENDED DECEMBER 31,2001 COMPARED TO YEAR ENDED DECEMBER 31,2000.
The Company's net revenues increased from $473,499 to $589,227 for the year
ended December 31, 2001 compared to the prior year. Operating expenses from
continuing operations increased by 52%for the year ended December 31, 2001 to
$2,772,446 compared to $1,820,822 in the prior year. The increase was all due to

                                       8
<PAGE>

a $1,029,777 expense for issuance of stock options and warrants to employees and
consultants of the Company. Excluding these non-cash items, operating expenses
decreased by about $36,000. All revenues and expenses related to operating
Internet casino and sports book operations are reflected as discontinued
operations in the Consolidated Statements of Operations for the year ending
December 31, 2000.

         Interest income decreased to $460 for the year ended December 31, 2001
compared to $6,411 for the prior year. Interest expense increased to $39,547 for
the year ended December 31, 2001 compared to $27,422 for the prior year, due to
higher average notes payable balances outstanding during the year.

         Net loss from continuing operations for the year ended December 31,
2001 was $2,212,894 compared to $1,373,116 for the year ending December 31,
2000. This increase was due to the charges expensed in relation to non-cash
items. There was no loss from discontinued operations for the year ending
December 31, 2001 compared to a loss of $256,995 from discontinued operations in
the prior year.

         Net loss for the year ending December 31, 2001 increased 35.8% to
$2,212,894 or $0.14 per share, on 15,537,933 weighted average shares
outstanding, compared with a loss in 2000 of $1,630,111, or $0.14 per share, on
11,920,790 weighted average shares outstanding.

LIQUIDITY AND CAPITAL RESOURCES

         The Company had a negative working capital of $540,703 at December 31,
2001. In order to obtain the necessary working capital to fund continued
operations; the Company, subsequent to the year ending December 31, 2001, has
received $1,147,000 in additional capital, of which $250,000 was receivable at
December 31, 2001. The Company plans to raise additional required funds through
various financing sources by issuing additional shares of Common Stock to fund
the continuing losses from operations as the Company endeavors to build revenues
and reach profitable operations. The Company believes it needs at least an
additional $1,000,000 before it starts generating cash flow from its operations.
If the Company is unable to raise the required capital, there will be a severe
impact on the Company's financial condition that would jeopardize the Company's
ability to continue as a going concern. The Company's Independent Auditor's
report includes an emphasis of matter as to the Company's ability to continue as
a going concern.

INFLATION

         The Company believes that inflation does not have a material effect on
its business.


ITEM 7.  FINANCIAL STATEMENTS

         The Independent Auditors' Reports for the years ended December 31, 2001
and 2000 are included in this report commencing on page F-1.

                                       9
<PAGE>

                                 VIRTGAME CORP.
                                AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
                        AND INDEPENDENT AUDITORS' REPORT

                 For the Years Ended December 31, 2001 and 2000

<PAGE>

                                 VIRTGAME CORP.
                                AND SUBSIDIARIES




                                TABLE OF CONTENTS
                                -----------------

INDEPENDENT AUDITORS' REPORT.................................................F-1

FINANCIAL STATEMENTS

      Consolidated Balance Sheets......................................F-2 - F-3

      Consolidated Statements of Operations .................................F-4

      Consolidated Statements of Shareholders' Equity..................F-5 - F-6

      Consolidated Statements of Cash Flows............................F-7 - F-8

      Notes to Consolidated Financial Statements......................F-9 - F-22

<PAGE>


                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------


To the Board of Directors and Shareholders
Virtgame Corp.
San Diego, California

We have audited the consolidated balance sheets of VirtGame Corp. (formerly
Virtgame.com Corp.) and Subsidiaries (the "Company") as of December 31, 2001 and
2000 and the related consolidated statements of operations, shareholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
VirtGame Corp. and Subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 10 to
the financial statements, the Company has suffered recurring losses from
operations since inception, has limited operating revenue and limited capital
resources. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 10. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.



San Diego, California                               PKF
February 21, 2002 (except for Note 12 for           Certified Public Accountants
      which the date is March 25, 2002)             A Professional Corporation

                                       F-1

<PAGE>

                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 2001 and 2000



                                     ASSETS
                                     ------

                                                          2001           2000
                                                       -----------   -----------

Current assets:
  Cash and cash equivalents                            $   12,045    $  123,053
  Accounts receivable, net of allowances
      of $94,750 and $0 for 2001and 2000                   68,350         4,511
  Unbilled revenues                                            --        27,925
  Prepaid expenses and other current assets                 6,152        16,453
  Receivable from exercise of options (Notes 8 and 11)    250,000            --
  Net assets of discontinued operations                        --        11,010
                                                       -----------   -----------

  Total current assets                                    336,547       182,952
                                                       -----------   -----------



Noncurrent assets:
  Deposits                                                  4,284         8,466
  Property and equipment, net (Note 2)                     75,459       155,330
  Capitalized software, net (Note 3)                      932,583       985,495
                                                       -----------   -----------

  Total noncurrent assets                               1,012,326     1,149,291
                                                       -----------   -----------

  Total assets                                         $1,348,873    $1,332,243
                                                       ===========   ===========

         The accompanying notes are an integral part of the consolidated
                              financial statements.

                                       F-2

<PAGE>

<TABLE>
                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 2001 and 2000


<CAPTION>
                      LIABILITIES AND SHAREHOLDERS' EQUITY
                      ------------------------------------

                                                                   2001             2000
                                                               -------------   -------------
<S>                                                            <C>             <C>
Current liabilities:
      Accounts payable                                         $    368,734    $    198,726
      Accrued expenses (Note 4)                                     258,259         100,840
      Current portion of capital lease obligation                     6,967           5,423
      Note payable (Note 5)                                          37,500              --
      Notes payable (Note 7)                                        205,790         201,090
                                                               -------------   -------------

      Total current liabilities                                     877,250         506,079

Long-term portion of capital lease obligation (Note 6)                2,469           9,643
                                                               -------------   -------------

      Total liabilities                                             879,719         515,722
                                                               -------------   -------------

Commitments and contingencies (Notes 6, 7, 8 and 10)


Shareholders' equity:
      Preferred stock, $ .00001 par value, 10,000,000 shares
         authorized, none issued or outstanding                          --              --
      Common stock, $ .00001 par value, 100,000,000 and
         30,000,000 shares authorized, 18,112,378 and
         12,832,092 shares issued and outstanding in
         2001 and 2000, respectively;
         1,913,738 and 125,857 shares issuable in
         2001 and 2000, respectively                                    200             130
      Additional paid-in capital                                 17,610,788      15,649,831
      Receivable from exercise of options                           (95,500)             --
      Accumulated deficit                                       (17,046,334)    (14,833,440)
                                                               -------------   -------------

      Total shareholders' equity                                    469,154         816,521
                                                               -------------   -------------

      Total liabilities and shareholders' equity               $  1,348,873    $  1,332,243
                                                               =============   =============
</TABLE>

         The accompanying notes are an integral part of the consolidated
                             financial statements.

                                       F-3

<PAGE>

<TABLE>
<CAPTION>
                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 For the years ended December 31, 2001 and 2000


                                                                  2001             2000
                                                              -------------   -------------
<S>                                                           <C>             <C>
Revenue                                                       $    589,227    $    473,499

Operating expenses:
      Salaries and payroll expenses                                915,210         938,960
      Other operating expenses                                   1,857,236         881,862
                                                              -------------   -------------

      Total expenses from continuing operations                  2,772,446       1,820,822
                                                              -------------   -------------

            Loss from continuing operations before
                  financial expense and income taxes            (2,183,219)     (1,347,323)

Financial income (expense):
      Interest income                                                  460           6,411
      Interest expense                                             (39,547)        (27,422)
      Other income                                                  13,832              --
                                                              -------------   -------------

      Total financial expense                                      (25,255)        (21,011)
                                                              -------------   -------------

            Loss from continuing operations before
                  income taxes                                  (2,208,474)     (1,368,334)

Income tax expense (Note 9)                                         (4,420)         (4,782)
                                                              -------------   -------------

            Loss from continuing operations                     (2,212,894)     (1,373,116)
                                                              -------------   -------------

Discontinued operations (Note 1)

      Loss from discontinued operations
            (net of tax provision of $0)                                --        (217,000)

      Loss on sale of discontinued operations                           --         (39,995)
                                                              -------------   -------------


            Net loss                                          $ (2,212,894)   $ (1,630,111)
                                                              =============   =============


Basic and diluted net loss per share                          $      (0.14)   $      (0.14)
                                                              =============   =============

Shares used to compute basic and diluted net loss per share     15,537,933      11,920,790
                                                              =============   =============
</TABLE>

         The accompanying notes are an integral part of the consolidated
                             financial statements.

                                       F-4

<PAGE>

<TABLE>
                                           VIRTGAME CORP.
                                          AND SUBSIDIARIES
                           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                           For the years ended December 31, 2001 and 2000


<CAPTION>
                                     Common Stock         Additional
                                -----------------------    Paid-In     Accumulated
                                  Shares        Amount     Capital       Deficit           Total
                                --------------------------------------------------------------------
<S>                              <C>          <C>       <C>            <C>             <C>
Balance forwarded,
   December 31, 1999             10,513,626   $   105   $ 14,726,388   $(13,203,329)   $  1,523,164

Issuance of common stock
   on exercise of employee
   stock option                     100,000         1          9,999             --          10,000

Issuances of common stock for
   cash, net of issuance costs:
   January 2000 through
   March 2000 (Note 8)              236,667         3        319,497             --         319,500

Issuances of common stock for
   cash, net of issuance costs:
   April 2000 through
   October 2000 (Note 8)          2,020,000        20        476,479             --         476,499

Issuances of common stock for
   cash, net of issuance costs:
   October 2000 through
   December 2000 (Note 8)            87,656         1         75,109             --          75,110

Issuance of stock warrants to
   consultant for services
   rendered (Note 8)                     --        --         42,359             --          42,359

Net loss for the year ended
   December 31, 2000                     --        --             --     (1,630,111)     (1,630,111)
                                --------------------------------------------------------------------

Balance, December 31, 2000       12,957,949   $   130   $ 15,649,831   $(14,833,440)   $    816,521
                                ====================================================================

                   The accompanying notes are an integral part of the consolidated
                                       financial statements.

                                                 F-5
</TABLE>

<PAGE>

<TABLE>
                                                VIRTGAME CORP.
                                               AND SUBSIDIARIES
                          CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
                                For the years ended December 31, 2001 and 2000

<CAPTION>

                                                Common Stock       Additional   Receivable
                                          ----------------------    Paid-In    from Exercise  Accumulated
                                            Shares       Amount     Capital     of Options       Deficit        Total
                                          -------------------------------------------------------------------------------

<S>                                        <C>          <C>       <C>           <C>          <C>             <C>
Balance forwarded,
   December 31, 2000                       12,957,949   $   130   $15,649,831   $      --    $ (14,833,440)  $   816,521

Issuance of  common stock on
   exercise of employee stock
   options (Note 8)                           110,000         1        29,999          --               --        30,000

Issuances of stock options to employees
   and consultants (Note 8)                        --        --       158,970          --               --       158,970

Issuance of common stock for
   conversion of note payable, net of
   issuance costs: March 2001 (Note 8)        150,000         1        33,749          --               --        33,750

Issuances of common stock for
   conversion of notes payable, net
   of issuance costs: April 2001
   through June 2001 (Note 8)               1,002,001        10       225,440          --               --       225,450

Issuances of common stock for
   conversion of notes payable, net
   of issuance costs: July 2001
   through September 2001 (Note 8)            638,000         6       143,544          --               --       143,550

Issuances of common stock for
   conversion of notes payable, net
   of issuance costs: October 2001
   through December 2001 (Note 8)             160,000         2        38,498          --               --        38,500

Issuances of common stock and exercise
   of stock options to consultants for
   services rendered (Note 8)               3,108,166        31       870,776          --               --       870,807

Issuances of common stock upon
   exercise of stock options (Note 8)       1,900,000        19       459,981     (95,500)              --       364,500

Net loss for the year ended
   December 31, 2001                               --        --            --          --       (2,212,894)   (2,212,894)
                                          -------------------------------------------------------------------------------

Balance, December 31, 2001                 20,026,116   $   200   $17,610,788   $ (95,500)   $ (17,046,334)  $   469,154
                                          ===============================================================================

                        The accompanying notes are an integral part of the consolidated
                                            financial statements.

                                                      F-6
</TABLE>
<PAGE>

<TABLE>
                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 For the years ended December 31, 2001 and 2000

<CAPTION>
                                                                          2001            2000
                                                                       ------------   ------------
<S>                                                                    <C>            <C>
Cash flows from continuing operating activities:
       Loss from continuing operations                                 $(2,212,894)   $(1,373,116)
       Adjustments to reconcile loss from continuing operations
          to net cash flows used in continuing operating activities:
             Bad debt                                                       94,750             --
             Depreciation and amortization                                 349,519        280,760
             Loss on sale of assets                                            721             --
             Issuance of common stock options and warrants
                for consulting fees and compensation                     1,029,777         42,359
             Changes in operating assets and liabilities:
                Decrease (increase) in:
                   Accounts receivable                                    (158,589)        (4,511)
                   Unbilled revenues                                        27,925        (27,925)
                   Prepaid expenses and other current assets                10,301          3,470
                Increase in:
                   Accounts payable and accrued expenses                   327,427         39,431
                                                                       ------------   ------------

       Net cash flows used in continuing operating activities             (531,063)    (1,039,532)
                                                                       ------------   ------------

Cash flows provided by discontinued operating activities                    11,010         95,613
                                                                       ------------   ------------

Cash flows from investing activities:
       Decrease in deposits                                                  4,182             47
       Proceeds from the sale of property and equipment                      1,423          3,456
       Purchase of property and equipment                                     (905)        (8,847)
       Capitalization of software development cost                        (217,975)      (230,705)
                                                                       ------------   ------------

       Net cash flows used in investing activities                        (213,275)      (236,049)
                                                                       ------------   ------------

Cash flows from financing activities:
       Net proceeds from the issuance of common stock                      585,750        881,109
       Borrowings on notes payable                                           4,700         10,000
       Borrowings on note payable                                           37,500             --
       Payments on notes payable                                                --         (7,786)
       Principal payments under capital lease                               (5,630)        (2,611)
                                                                       ------------   ------------

       Net cash flows provided by financing activities                     622,320        880,712
                                                                       ------------   ------------


Net decrease in cash and cash equivalents                                 (111,008)      (299,256)

Cash and cash equivalents at beginning of year                             123,053        422,309
                                                                       ------------   ------------

Cash and cash equivalents at end of year                               $    12,045    $   123,053
                                                                       ============   ============
</TABLE>

         The accompanying notes are an integral part of the consolidated
                             financial statements.

                                       F-7

<PAGE>

<TABLE>
                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                 For the years ended December 31, 2001 and 2000


<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

                                                                        2001        2000
                                                                     ---------   ---------

<S>                                                                  <C>         <C>
Cash paid during the year for:

       Interest                                                      $   3,043   $  2,671
                                                                     ==========  =========

       Income taxes                                                  $   4,420   $  4,782
                                                                     ==========  =========

Supplemental disclosure of noncash investing and financing activities:

       Foreign exchange loss                                         $    (191)  $ (1,584)
                                                                     ==========  =========

       Equipment acquired through capital lease                      $      --   $ 17,677
                                                                     ==========  =========

       Receivable from exercise of options                           $ 345,500   $     --
                                                                     ==========  =========
</TABLE>

         The accompanying notes are an integral part of the consolidated
                             financial statements.

                                       F-8
<PAGE>

                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2001 and 2000


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------

       ORGANIZATION AND BUSINESS

       VirtGame Corp. (the "Company," formerly Virtgame.com Corp. see Note 11)
       was incorporated in the State of Delaware on October 24, 1995, under the
       name MBA Licensing Corp. On June 20, 1996, the Board of Directors
       approved the change of the Company's name to Internet Gaming
       Technologies, Inc., on January 22, 1997, to Virtual Gaming Technologies,
       Inc., and on September 9, 1999, to Virtgame.com Corp.

       VirtGame is an application service provider to the gaming and lottery
       industries, offering Internet access confined to a specific jurisdiction
       or restricting access to users from specific jurisdictions through its
       patent pending eBorder Control technology enabling its customers to
       comply with established rules and regulations. VirtGame has built
       scalable Internet lottery, casino and sports wagering software and
       applications that are customizable for private label use. The Company
       offers its technology to licensed gaming operators.

       On December 21, 1999, the Company entered into a securities acquisition
       agreement and plan of reorganization (the "Primeline Acquisition") with
       Primeline Gaming Technologies, Inc. ("Primeline"). The Primeline
       Acquisition resulted in the Company acquiring 100% of the outstanding
       capital stock of Primeline in return for the issuance of 447,208 shares
       of its common stock. The Primeline Acquisition has been accounted for as
       a purchase at historical cost.

       PRINCIPLES OF CONSOLIDATION

       The accompanying financial statements consolidate the accounts of the
       Company and its wholly-owned subsidiaries, Virtual Gaming Technologies
       Argentina S.A. (Argentina), an Argentinean Corporation, Virtual Gaming
       Technologies (Antigua) Ltd., an Antiguan Corporation, and Primeline
       Gaming Technologies, Inc.(Primeline), a California Corporation. All
       significant intercompany accounts and transactions have been eliminated
       in consolidation. During 2000, the Company discontinued operations of the
       Antigua subsidiary, restating its gaming revenue by $25,000. The Company
       has also wound-up the operations of Argentina.

       DISCONTINUED FOREIGN OPERATIONS AND CONCENTRATIONS

       During the year ended December 31, 2000, the Company closed its Antigua
       office and discontinued marketing its casino and sportsbook operation.
       Such operations information has been presented as discontinued operations
       in the December 31, 2000 financial statements.

       The U.S. Dollar is considered the functional currency for Virtual Gaming
       Technologies Argentina S.A. and Virtual Gaming Technologies (Antigua)
       Ltd. Accordingly, the monetary assets and liabilities of these entities
       have been remeasured using the current rates of exchange and nonmonetary
       assets have been remeasured using the appropriate historical rates of
       exchange.

                                       F-9
<PAGE>

                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2001 and 2000


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------

       FINANCIAL INSTRUMENTS

       The carrying amounts reported in the consolidated balance sheets for cash
       and cash equivalents, accounts receivable, prepaid expenses and other
       current assets, deposits, accounts payable, and accrued expenses
       approximate fair value due to the immediate short- term maturity of these
       financial instruments.

       The fair value of the Company's capital lease obligation and notes
       payable approximate the carrying amount based on the current rates
       offered to the Company for debt of the same remaining maturities with
       similar collateral requirements.

       CASH AND CASH EQUIVALENTS

       The Company considers all cash accounts, which are not subject to
       withdrawal restrictions or penalties, and certificates of deposit and
       money market funds purchased with an original maturity of three months or
       less to be cash equivalents.

       The Company maintains its cash accounts at financial institutions located
       in California. Accounts at the financial institutions located in
       California are insured by the Federal Deposit Insurance Corporation
       (FDIC) up to $100,000. At December 31, 2001 and 2000, the Company's
       uninsured cash balances, including cash held in foreign banks and
       restricted cash, totaled $0 and $20,612, respectively. The Company has
       not experienced any losses in such accounts and management believes it
       places its cash on deposit with financial institutions which are
       financially stable.

       PROPERTY AND EQUIPMENT

       Property and equipment is recorded at cost. Depreciation is calculated on
       the straight-line basis over the estimated useful life of five years, or
       related lease life, if shorter.

       REVENUE RECOGNITION

       In December 1999, the SEC staff issued Staff Accounting Bulletin (SAB)
       No. 101, "Revenue Recognition," which summarized the SEC staff's views
       regarding the recognition and reporting of revenues in certain
       transactions. The implementation of SAB No. 101 does not require the
       Company to change the method by which it recognizes revenues. Revenues
       are recognized principally as services are provided to customers. Amounts
       billed in advance are recorded as current or long-term deferred revenue
       on the balance sheet, with current deferred revenue reflecting services
       expected to be provided within the next twelve months. During the years
       ended December 31, 2001 and 2000 the Company recorded $0 in deferred
       revenues.

                                      F-10
<PAGE>

                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2001 and 2000


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------

       REVENUE RECOGNITION (CONTINUED)

       The Company recognizes software license fee revenue in accordance with
       the provisions of Statement of Position (SOP) 97-2, "Software Revenue
       Recognition," as amended by SOP 98-9, "Software Revenue Recognition, With
       Respect to Certain Transactions." Software license fees represent
       revenues related to licenses for software delivered to customers for
       in-house applications. Revenues from single-element software license
       agreements are recognized upon shipment of the software. Revenues from
       software arrangements involving multiple elements are allocated to the
       individual elements based on their relative fair values. If services are
       considered essential to the functionality of the software products, both
       the software product revenue and service revenue are recognized using the
       percentage of completion method in accordance with the provisions of SOP
       81-1, "Accounting for performance of construction type and certain
       production type contracts." Contract revenues are recognized based on
       labor hours incurred to date compared to total estimated labor hours for
       the contract. Contract costs include all direct labor, direct material
       and indirect costs related to contract performance. Selling, general and
       administrative costs are charged to expense as incurred. Provisions for
       estimated losses on uncompleted contracts are recorded in the period in
       which such losses become probable based on the current contract
       estimates. Hosting fees represent revenues from post-contract customer
       support services where the Company's software is resident on a company
       server and are recognized ratably over the hosting period. Event fees are
       recognized as the events take place.

       STOCK BASED COMPENSATION

       The Financial Accounting Standards Board (FASB) issued Statement of
       Financial Accounting Standards (SFAS) No. 123, "Accounting for
       Stock-Based Compensation." This statement encourages, but does not
       require, companies to recognize compensation expense for grants of stock,
       stock options, and other equity instruments based on a fair-value method
       of accounting.

       Companies that do not choose to adopt the expense recognition rules of
       SFAS No. 123 will continue to apply the existing accounting rules
       contained in Accounting Principles Board Opinion (APB) No. 25, but will
       be required to provide proforma disclosures of the compensation expense
       determined under the fair-value provisions of SFAS No. 123, if material.
       APB No. 25 requires no recognition of compensation expense for most of
       the stock- based compensation arrangements provided by the Company,
       namely, broad-based employee stock purchase plans and option grants where
       the exercise price is equal to the market price at the date of the grant.

       The Company has adopted the disclosure provisions of SFAS No. 123. The
       Company has opted to follow the accounting provisions of APB No. 25 for
       stock-based compensation and to furnish the pro forma disclosures
       required under SFAS No. 123 (see Note 8).

                                      F-11
<PAGE>


                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2001 and 2000


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------

       ADVERTISING COSTS

       The Company charges the cost of advertising to expense as incurred.
       Advertising costs for the years ended December 31, 2001 and 2000, were
       approximately $1,500 and $9,300, respectively.

       CAPITALIZED SOFTWARE

       Effective January 1, 1999, the Company adopted Statement of Position
       ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
       Obtained for Internal Use." Among other provisions, SOP 98-1 requires
       that entities capitalize certain internal-use software costs once certain
       criteria are met. Under SOP 98-1, overhead, general and administrative
       and training costs are not capitalized. In addition, certain computer
       software costs are capitalized in accordance with SFAS No. 86,
       "Accounting for the Costs of Computer Software to Be Sold, Leased or
       Otherwise Marketed," and are reported at the lower of unamortized cost or
       net realizable value. Capitalized software amortization expense for the
       years ended December 31, 2001 and 2000 was approximately $271,000 and
       $201,000, respectively. Research and development costs expensed for the
       years ended December 31, 2001 and 2000 were approximately $544,000 and
       $511,000, respectively.

       CONCENTRATIONS OF MAJOR CUSTOMERS

       Sales to three customers represented 82% of revenues during the year
       ended December 31, 2001 and sales to four customers represented 99% of
       revenues for the year ended December 31, 2000. These customers
       represented 100% and 0% of accounts receivable at December 31, 2001 and
       2000, respectively.

       INCOME TAXES

       The Company accounts for income taxes using the asset and liability
       method. Under the asset and liability method, deferred income taxes are
       recognized for the tax consequences of "temporary differences" by
       applying enacted statutory tax rates applicable to future years to
       differences between the financial statement carrying amounts and the tax
       bases of existing assets and liabilities. 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.

       NET LOSS PER SHARE

       Basic net loss per share excludes dilution and is computed by dividing
       net loss by the weighted average number of common shares outstanding
       during the reported periods. Diluted net loss per share reflects the
       potential dilution that could occur if stock options and other
       commitments to issue common stock were exercised. During the years ended
       December 31, 2001 and 2000, options and warrants to purchase 5,623,500
       and 3,722,300 common shares, respectively, were anti-dilutive and have
       been excluded from the weighted average share computation.

                                      F-12
<PAGE>

                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2001 and 2000


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------

       OTHER COMPREHENSIVE INCOME

       For the years ended December 31, 2001 and 2000, the Company had no items
       that were required to be recognized as components of other comprehensive
       income.

       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 and disclosure of contingent assets and
       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.

       RECLASSIFICATION

       Certain prior year Balance Sheet and Cash Flow amounts have been
       reclassified to conform with current year presentation with no effect on
       results of operations or accumulated deficit.

       DISCLOSURE ABOUT SEGMENTS

       The Company has determined that it operates in one segment.

NOTE 2 - PROPERTY AND EQUIPMENT
-------------------------------

       Property and equipment consists of the following at December 31:

                                                           2001         2000
                                                       -----------   -----------

                   Computer hardware                   $  331,030    $  332,269
                   Office furniture and equipment          70,998        70,998
                                                       -----------   -----------

                                                          402,028       403,267

                   Less: accumulated depreciation        (326,569)     (247,937)
                                                       -----------   -----------

                                                       $   75,459    $  155,330
                                                       ===========   ===========

NOTE 3 - CAPITALIZED SOFTWARE

       Capitalized software consists of the following at December 31:

                                                           2001         2000
                                                       -----------   -----------

                   Computer software                   $1,404,353    $1,186,378
                   Less: accumulated amortization        (471,770)     (200,883)
                                                       -----------   -----------
                                                       $  932,583    $  985,495
                                                       ===========   ===========

                                      F-13
<PAGE>

                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2001 and 2000


NOTE 4 - ACCRUED EXPENSES
-------------------------

       Accrued expenses consists of the following at December 31:

                                                           2001          2000
                                                       -----------   -----------

                   Accrued payroll                     $  142,778    $   55,595
                   Accrued interest                        52,661        23,317
                   Accrued employee relocation             26,659            --
                   Accrued other                           36,161        21,928
                                                       -----------   -----------

                                                       $  258,259    $  100,840
                                                       ===========   ===========


NOTE 5 - NOTE PAYABLE
---------------------

       During the year ended December 31, 2001, the Company issued a $37,500
       convertible note payable which is convertible into 150,000 shares of the
       Company's common stock at the holders discretion, subordinated to certain
       other obligations, bears interest of 10% per annum and matures April
       2001. At December 31, 2001, there is approximately $2,500 of accrued
       interest on this note. This note has an attached warrant to purchase
       150,000 shares of the Company's common stock which expires April 2005.


NOTE 6 - COMMITMENTS AND CONTINGENCIES
--------------------------------------

       OPERATING LEASES

       As of December 31, 2001 the Company leases its office facilities under a
       month-to-month operating lease agreement which calls for monthly payments
       of approximately $4,500.

       During 2002 the Company signed a new lease to lease its office facilities
       under a non- cancelable operating lease through February 2005. The new
       lease calls for monthly payments of approximately $2,900 per month.

       In addition, the Company leases certain office equipment under
       non-cancellable operating lease agreements expiring at various times
       through December 2002. The leases call for aggregate monthly payments of
       approximately $2,200.

       CAPITAL LEASE

       The Company leases computer equipment under capital lease agreements,
       with imputed interest rates ranging from 13.97% to 27.11%, due in monthly
       installments of approximately $700 through April 2003. The computer
       equipment that collateralizes the leases had a net book value of
       approximately $11,500 at December 31, 2001. During the year ended
       December 31, 2001, the Company recorded amortization expense on leased
       equipment of approximately $2,300.

                                      F-14
<PAGE>

                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2001 and 2000

NOTE 6 - COMMITMENTS AND CONTINGENCIES (Continued)
--------------------------------------

       At December 31, 2001, the annual future minimum lease payments under
       operating and capital leases are as follows:

                                                            Operating   Capital
                                                             Leases      Lease
                                                            ---------  ---------

             2002                                           $ 53,622   $  8,372
             2003                                             38,190      2,791
             2004                                             40,170         --
             2005                                              6,750         --
                                                            ---------  ---------

             Total minimum lease payments                   $138,732     11,163
                                                            =========

             Less amount representing interest                           (1,727)
                                                                       ---------

             Present value of net minimum lease payments                  9,436

             Less current maturities                                     (6,967)
                                                                       ---------

             Long-term lease obligations                               $  2,469
                                                                       =========

       Rental expense for office facilities for the years ended December 31,
       2001 and 2000 totaled approximately $81,000 and $111,000, respectively.

       EMPLOYMENT AGREEMENTS

       During September 1999, the Company entered into a two-year employment
       agreement with the Chairman of the Board of Directors. The agreement
       provides for the grant of options to purchase: 100,000 shares of common
       stock at $.10 per share; 500,000 shares of common stock at an exercise
       price equal to the fair market value on the date of the agreement,
       200,000 shares of common stock at an exercise price equal to the fair
       market value on the one-year anniversary date of the agreement; and
       300,000 shares at an exercise price equal to the fair market value on the
       date of grant if, prior to termination of the agreement, the Company has
       secured debt or equity financing, or a combination thereof, in the
       aggregate amount of $10 million, after deducting for all associated
       costs. Compensation cost in the amount of $236,000 has been recognized on
       the grant of options to purchase 100,000 shares of common stock at $.10
       per share (see Note 8). During March 2000, the 100,000 options were
       exercised by the Chairman.

       During November 1999, the Company entered into a two year and nine-month
       employment agreement with the Chief Executive Officer (the "CEO"). The
       agreement provides for a base salary of $150,000, and an annual cash
       bonus equal to 2% of the Company's annual gross revenues in excess of $1
       million. In conjunction with this agreement, the CEO has agreed not to
       solicit any person employed full-time by the Company during the term of
       his employment and for one year after termination. The agreement also
       provides for a cash bonus of $100,000 upon the anticipated public
       offering of the Company and a payment of $250,000 upon the sale or merger
       of the Company. The CEO resigned during 2001 and as such the agreement
       terminated.

                                      F-15

<PAGE>

                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2001 and 2000


NOTE 6 - COMMITMENTS AND CONTINGENCIES (Continued)
--------------------------------------

       EMPLOYMENT AGREEMENTS (CONTINUED)

       During July 2001, the Company entered into a two year employment
       agreement with the Chief Operating Officer and Chief Financial Officer
       (the "COO and CFO"), both titles belonging to one individual. The
       agreement provides for a base annual salary of $125,000, and a cash bonus
       of $30,000 for the first $2,000,000 of capital investments placed with
       the Company after the signing of the employment agreement. The agreement
       also provides for a payment of 10% for each software licensing agreement
       the Company signs with specified companies, up to $25,000 per agreement.
       The employment agreement also provides for the Company to issue this
       officer 1,000,000 options at an exercise price of $0.25 per share
       exercisable for 5 years, of which 50% vest immediately and 50% vest one
       year from the start of the employment agreement.

       During September 2001, the Company entered into a month-to-month
       agreement with an interim Chief Executive Officer (the "CEO") where the
       Company would pay consulting fees in the amount of $12,500 per month
       until a more permanent arrangement was made. On January 1, 2002, the
       Company entered into a two year employment agreement with this
       individual. The new agreement provides for a base annual salary of
       $150,000, which will be increased to $200,000 thirty days after the
       Company has placed $2,000,000 in financial institutions. The agreement
       provides the CEO a cash bonus equal to 3% of any investment capital the
       CEO obtains for the Company. The agreement also provides for the Company
       to issue the CEO options in the amounts of: 200,000 at an exercise price
       of $0.50 on January 1, 2002; 200,000 at an exercise price of $1.50 on
       January 1, 2002; and 400,000 at an exercise price of $1.50 upon the date
       when the Company's stock trades over $5.00 for thirty consecutive days.


NOTE 7 - RELATED PARTY TRANSACTIONS
-----------------------------------

       NOTE PAYABLE TO STOCKHOLDER AND AFFILIATE

       During the year ended December 31, 1999, the Company received advances of
       $475,000 in the form of notes payable from its then Chairman of the Board
       of Directors and his affiliated company. During the year ended December
       31, 1999, $300,000 of this amount was converted into 100,000 shares of
       common stock. The notes payable are unsecured, due on demand and provide
       for interest at a fixed rate of 12% per annum. The principal balance
       outstanding was $85,000 as of December 31, 2001 and 2000, and total
       interest expense incurred by the Company on these related party notes
       payable for the years ended December 31, 2001 and 2000 was approximately
       $12,000 and $10,000, respectively.

       During the year ended December 31, 2001, the Company borrowed $4,700 from
       two of its employees. These notes do not bear interest and are payable on
       demand. As of December 31, 2001, no amounts have been repaid to the
       employees.

                                      F-16
<PAGE>

                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2001 and 2000


NOTE 7 - RELATED PARTY TRANSACTIONS (Continued)
-----------------------------------

       NOTE PAYABLE - LICENSING AGREEMENT

       During 1997, the Company entered into a settlement agreement with a
       vendor whereby the Company issued a $150,000 promissory note in exchange
       for the return of 385,000 shares of the Company's common stock. The
       promissory note is unsecured and bears interest at a fixed rate of 10%.
       Principal and interest are due in quarterly installments equal to 10% of
       the Company's net gaming revenue, as defined in the promissory note. All
       remaining principal and accrued interest was due in September 1998. The
       note was not repaid upon maturity and as of December 31, 2001 and 2000,
       had a balance of $116,090 and accrued interest of approximately $25,400
       and $12,100, respectively.

       RENTAL PROPERTY

       During the year ended December 31, 2001, the Company entered into a
       rental agreement with a shareholder, whereby the Company would lease a
       temporary corporate residence on a month-to-month basis. The shareholder
       received $15,000 as rent and 30,000 options as part of this arrangement
       (see Note 8).


NOTE 8 - SHAREHOLDERS' EQUITY
-----------------------------

       STOCK, OPTIONS AND WARRANTS ISSUED FOR SERVICES

       During the year ended December 31, 2000, the Company issued warrants to
       purchase 37,500 shares of its common stock as consideration for services
       provided in connection with execution of a software licensing agreement.
       All of the warrants are immediately exercisable and expire five years
       from the date of issuance. The warrants have been valued at $42,359 and
       have been recorded as an increase to additional paid-in capital and
       consulting fees. These warrants remain unexercised as of December 31,
       2001.

       During the year ended December 31, 2001, the Company issued 3,108,166
       shares, as a result of the direct issuance of shares and the exercise of
       options, as consideration for services provided in connection with the
       placement and execution of private placements to fund current year
       operations, consultation for providing strategic relationships, payment
       of legal fees, and the lease of a temporary corporate residence. The
       Company recorded an expense of $870,807 in connection with these
       transactions.

       During the year ended December 31, 2001, the Company granted stock
       options to acquire 1,900,000 shares of common stock to its investment
       banker as compensation for services rendered. These options were fully
       vested and exercised immediately. Proceeds from the exercise amounted to
       $114,500, net of issuance costs of $15,000. The Company also holds
       subscriptions receivable of $345,500 at December 31, 2001 in connection
       with the exercise of these options (see Note 11).

                                      F-17
<PAGE>

                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2001 and 2000


NOTE 8 - SHAREHOLDERS' EQUITY (Continued)
-----------------------------

       STOCK ISSUED FOR CASH

       During the year ended December 31, 2000, the Company issued shares of
       common stock relative to a 236,667 share private placement offering under
       Rule 506 of Regulation D promulgated under the Securities Act of 1933.
       Total net proceeds from the offering at December 31, 2000 were $319,500,
       net of issuance costs of $35,500.

       During the year ended December 31, 2000, the Company also issued shares
       of common stock relative to a 1,020,000 share private placement offering
       under Rule 506 of Regulation D promulgated under the Securities Act of
       1933. Total net proceeds from the offering at December 31, 2000 were
       $476,499, net of issuance costs of $33,501 and a finder's fee of
       1,000,000 shares of the Company's common stock.

       During the year ended December 31, 2000, the Company also issued shares
       of common stock relative to a 78,800 share private placement offering
       under Rule 506 of Regulation D promulgated under the Securities Act of
       1933. Total net proceeds from the offering at December 31, 2000 were
       $75,110, net of issuance costs of $3,690 and a finder's fee of 8,856
       shares of the Company's common stock.

       During the year ended December 31, 2001, two officers of the Company
       exercised 110,000 shares of their fully vested stock options. The Company
       recorded $30,000 of cash proceeds from these transactions.

       STOCK ISSUED UPON CONVERSION OF NOTES PAYABLE

       During the year ended December 31, 2001, the Company issued shares of
       common stock relative to the conversion of convertible notes payable.
       Total net proceeds from the sale and conversion of the notes was
       $441,250, net of issuance and commission costs of $46,250.

       STOCK OPTIONS

       In 1997, the Company adopted a stock option plan (the "Plan") under which
       options to purchase up to 500,000 shares of common stock may be granted
       to officers, employees or directors of the Company, as well as
       consultants, independent contractors or other service providers of the
       Company. Both "incentive" and "nonqualified" options may be granted under
       the Plan. Incentive options may be granted at an exercise price equal to
       the fair market value of the shares at the date of grant while
       nonqualified options may be granted at an exercise price determined by
       the Board of Directors. Individual option agreements will contain such
       additional terms as may be determined by the Board of Directors at the
       time of the grant. The Plan provides for grants of options with a term of
       up to 10 years. Incentive options must be granted with exercise prices
       equal to the fair market value on the date of grant, except that
       incentive options granted to persons owning stock possessing more than
       10% of the total combined voting power of all classes of stock of the
       Company may not be granted at less than 110% of the fair market value on
       the date of grant. The Company amended the Plan to increase the number of
       options to purchase 5,000,000 shares of common stock in 2000 and in 2001
       increased the number of options to purchase 10,000,000 shares of common
       stock.

                                      F-18
<PAGE>

                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2001 and 2000


NOTE 8 - SHAREHOLDERS' EQUITY (Continued)
-----------------------------

       STOCK OPTIONS (CONTINUED)

       The Company has elected to account for nonqualified grants and grants
       under its Plan following APB No. 25, FASB123 and related interpretations.
       Accordingly, compensation costs of approximately $158,000 and $42,000
       have been recognized for nonqualified options for the years ended
       December 31, 2001 and 2000, respectively. In November 1999, the Company
       extended the expiration date on options previously granted to the CEO to
       purchase 480,000 shares of common stock. The expiration date was extended
       by five years to December 31, 2005. No additional compensation cost has
       been recognized on the extension of the expiration date as there was no
       change in the intrinsic value of the options. During the year ended
       December 31, 2001, the CEO exercised 100,000 options and the remaining
       380,000 options expired unexercised upon his resignation.

       Under SFAS No.123, the fair value of each option granted during the years
       ended December 31, 2001 and 2000 was estimated on the measurement date
       utilizing the then current fair value of the underlying shares less the
       exercise price discounted over the average expected life of the options
       of zero to five years, with an average risk-free interest rate of 4.75%
       to 5.00%, price volatility of 1.0 to 2.0 and no dividends. Had
       compensation cost for all awards been determined based on the fair value
       method as prescribed by FASB Statement No.123, reported net loss and loss
       per common share would have been as follows:


                                                  December 31,     December 31,
                                                      2001             2000
                                                 --------------   --------------
       Net loss:
          As reported                            $  (2,212,894)   $  (1,630,111)

          Proforma                               $  (2,475,266)   $  (1,953,785)

       Basic and diluted net loss per share:
          As reported                            $       (0.14)   $       (0.14)

          Proforma                               $       (0.16)   $       (0.16)

                                      F-19
<PAGE>

                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2001 and 2000


NOTE 8 - SHAREHOLDER'S EQUITY (Continued)
-----------------------------

       STOCK OPTIONS (CONTINUED)

       A summary of the activity of the stock options for the years ended
       December 31, 2001 and 2000 is as follows:

<TABLE>
<CAPTION>
                                                       Year ended                   Year ended
                                                    December 31, 2001            December 31, 2000
                                                -------------------------    -------------------------
                                                               Weighted                      Weighted
                                                               Average                       Average
                                                               Exercise                      Exercise
                                                   Shares       Price          Shares         Price
                                                ------------  -----------    -----------  ------------
       <S>                                       <C>          <C>             <C>         <C>
       Outstanding at beginning of period         2,411,000   $     1.32      3,022,000   $      1.88
       Granted                                    7,662,200         0.24        779,500          0.50
       Canceled                                    (125,000)        1.10       (465,000)         3.14
       Exercised                                 (3,070,000)        0.23       (100,000)         0.10
       Expired                                   (1,030,000)        1.18       (825,500)         2.52
                                                ------------  -----------    -----------  ------------

       Outstanding at end of period               5,848,200   $     1.02      2,411,000   $      1.32
                                                ============  ===========    ===========  ============

       Exercisable at end of period               4,882,700   $     0.99      2,369,000   $      1.24
                                                ============  ===========    ===========  ============

       Weighted-average fair value of options
          granted during the period                           $     0.24                  $      0.42
                                                              ===========                 ============

       Weighted-average remaining contractual
          life of options outstanding at end of period         4.8 years                    2.7 years
                                                              ===========                 ============
</TABLE>

NOTE 9 - INCOME TAXES
---------------------

       Deferred income taxes reflect the net tax effects of the temporary
       differences between the carrying amounts of assets and liabilities for
       financial reporting and the amounts used for income tax purposes. The tax
       effect of temporary differences consisted of the following as of December
       31:

<TABLE>
<CAPTION>
                                                                  2001           2000
                                                              ------------   ------------
       <S>                                                    <C>            <C>
       Deferred tax assets:
          Net operating loss carryforwards                    $ 4,377,000    $ 3,477,000
          Compensation element of stock options issued            982,000        917,000
          Startup costs capitalized for income tax purposes        75,000        197,000
          Other                                                     7,000          7,000
                                                              ------------   ------------
             Gross deferred tax assets                          5,441,000      4,598,000

       Less valuation allowance                                (5,441,000)    (4,580,000)
                                                              ------------   ------------

                                                                       --         18,000

       Deferred tax liabilities, equipment                             --        (18,000)
                                                              ------------   ------------
                                                              $        --             --
                                                              ============   ============
</TABLE>

                                      F-20
<PAGE>

                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2001 and 2000


NOTE 9 - INCOME TAXES (Continued)
---------------------

       Realization of deferred tax assets is dependant upon sufficient future
       taxable income during the period that deductible temporary differences
       and carryforwards are expected to be available to reduce taxable income.
       As the achievement of required future taxable income is uncertain, the
       Company recorded a valuation allowance. The valuation allowance increased
       by $790,000 from 2000.

       As of December 31, 2001, the Company has net operating loss carryforwards
       for both federal and state income tax purposes. Federal net operating
       loss carryforwards totaling approximately $10,751,000 expire as follows:
       $194,000 in 2011, $322,000 in 2012, $3,609,000 in 2018, $2,935,000 in
       2019, $1,580,000 in 2020, and $2,111,000 in 2021. State net operating
       loss carryforwards totaling approximately $10,546,000 expire as follows:
       $320,000 in 2002, $3,608,000 in 2003, $2,930,000 in 2004, $1,579,000 in
       2005 and $2,109,000 in 2006. Due to Internal Revenue Service regulations,
       the availability of the operating loss carryforwards may be limited upon
       a substantial change in ownership.

       A reconciliation of the effective tax rates with the federal statutory
       rate is as follows as of December 31:

                                                          2001            2000
                                                       ----------     ----------

       Income tax benefit at statutory rate            $ 773,000      $ 569,000
       Change in valuation allowance                    (861,000)      (475,000)
       Nondeductible expenses                             (1,000)       (92,000)
       State income taxes, net                           129,000         95,000
       Other                                             (44,420)      (101,782)
                                                       ----------     ----------

                                                       $  (4,420)     $  (4,782)
                                                       ==========     ==========


NOTE 10 - MANAGEMENT'S PLANS FOR FUTURE OPERATIONS AND FINANCING
----------------------------------------------------------------

       The accompanying consolidated financial statements have been prepared
       assuming that the Company will continue as a going concern. However, the
       Company has experienced cumulative losses since its inception of
       approximately $17,046,000, inclusive of noncash charges for capital
       stock, options and warrant issuance-related activity of approximately
       $5,328,000. The cumulative losses have reduced net shareholders' equity
       to approximately $469,000 as of December 31, 2001. At present, the
       Company's working capital may not be sufficient to meet the Company's
       objectives as structured. Although these conditions indicate that the
       Company may be unable to continue as a going concern, management did
       anticipate that considerable losses would be incurred before the Company
       became self-sustaining. The consolidated financial statements do not
       include any adjustments that might result from the outcome of this
       uncertainty.

                                      F-21
<PAGE>

                                 VIRTGAME CORP.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2001 and 2000


NOTE 10 - MANAGEMENT'S PLANS FOR FUTURE OPERATIONS AND FINANCING (Continued)
----------------------------------------------------------------

       As discussed in Note 1, the Company acquired 100% of the outstanding
       capital stock of Primeline. Primeline has developed software that
       provides an online closed-loop sportsbook system. The software has gained
       regulatory approval from the Nevada Gaming Commission and has been
       installed at a land-based gaming corporation in Nevada.

       Based on current contract negotiations, management believes the Company
       will generate sufficient revenues and cash flows from software licensing
       agreements to meet its current obligations during the year ending
       December 31, 2002. To the extent such revenues are not realized,
       management believes it has the ability to raise additional capital to
       cover its current obligations until sufficient software licensing
       revenues and cash flows can be achieved by the Company.


NOTE 11 - SUBSEQUENT EVENTS
---------------------------

       Subsequent to December 31, 2001, the Company received $250,000 relating
       to a subscription receivable. In addition to this, the Company received
       an additional $287,000 from the sale of convertible notes, which were all
       converted into shares of common stock at $0.25 per share, and $570,000
       investment from the sale of 2,000,000 shares of common stock on another
       transaction.

       Subsequent to December 31, 2001, the Company changed its name from
       Virtgame.com Corp. to VirtGame Corp.

                                      F-22
<PAGE>

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

         Not applicable.

                                    PART III
                                    --------


ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

Name                 Age     Position
----                 ---     --------

Leo I. George        65      Chairman of the Board

Scott A. Walker      43      President, Chief Executive Officer and Director

Bruce Merati         44      Chief Operating Officer and Chief Financial Officer

         Mr. George has served as Chairman of the Board of the Company since
September 1999. Since 1995, Mr. George has served as Vice-President for
Regulatory Affairs of WinStar Communications, a provider of wireless
communications services. From 1992 to 1995, Mr. George served as Chairman of
Avant-Garde Telecommunications Corp., a provider of nationwide wireless bypass
services to long distance carriers. From 1989 to 1992, Mr. George served as the
general counsel to the Goeken Group, the founder of MCI. During that time, Mr.
George and John Goeken collaborated to launch Airfone, the first commercial
telephone service with U.S. airline carriers.

         Mr. Walker has served as a director of the Company since October 1998.
Mr. Walker replaced Mr. Paravia as President and Chief Executive Officer in June
2001. Prior to Mr. Walker, Mr. Paravia had served as President and a director of
the Company since July 1996 and as Chief Executive Officer of the Company since
July 1997. From January 1996 to June 2001, Mr. Walker served as a partner and as
General Counsel of MCOM Management Corp. From June 1995 to June 2001, Mr. Walker
served as a principal of Walker Worldwide Ltd., an international trading
company. From 1986 to 1995, Mr. Walker practiced law with the firm of Walker &
Corsa.

         Mr. Merati has served as Chief Financial Officer of the Company since
July 27, 1998 and as Chief Operating Officer of the Company since April 2000.
>From July 1997 to July 1998, Mr. Merati served as the Controller of The Weekend
Exercise Company, Inc., an apparel manufacturer. From 1995 to 1997, Mr. Merati
served as the Controller of Airline Interiors, Inc., an airline seat
manufacturer. From 1993 to 1995, Mr. Merati served as the Controller of First
Affiliated Securities, a securities broker-dealer and investment banker. Mr.
Merati is a Certified Public Accountant and a Chartered Accountant in England &
Wales and spent seven years as auditor with the London office of
PricewaterhouseCoopers.


         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires each director and executive officer of the Company, and
each person who owns more than ten percent (10%) of a registered class of the
Company's equity securities to file by specific dates with the Securities and
Exchange Commission (the "SEC") reports of ownership and reports of change of
ownership of equity securities of the Company. Officers, directors, and
10%stockholders are required by the SEC to furnish the Company with copies of
all Section 16(a) forms they file. The Company is required to state in this
report any failure of its directors and executive officers to file by the
relevant due date any of these reports during the Company's fiscal year. To the
Company's knowledge, all Section 16(a) filing requirements were complied with
during the fiscal years ended December 31, 2001 and 2000.

                                       10
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

         CASH COMPENSATION OF EXECUTIVE OFFICERS. The following table sets forth
the cash compensation paid by the Company to its Chief Executive Officer and to
all other executive officers for services rendered during the fiscal years ended
December 31, 2001, 2000 and 1999.


<TABLE>
<CAPTION>
                                   ANNUAL COMPENSATION               LONG-TERM COMPENSATION
                          -------------------------------------  ----------------------------
    NAME AND POSITION     YEAR   SALARY    BONUS      OTHER      RESTRICTED   COMMON SHARES    ALL OTHER COMPEN-
                                                      ANNUAL        STOCK      UNDERLYING           SATION
                                                   COMPENSATION  AWARDS ($)  OPTIONS GRANTED
                                                                               (# SHARES)
------------------------  ----  --------  -------  ------------  ----------  ----------------  -----------------

<S>                       <C>   <C>         <C>        <C>           <C>        <C>                   <C>
Scott A. Walker,          2001  $ 56,250    -0-        -0-           -0-         600,000              -0-
President and CEO (1)     2000    -0-       -0-        -0-           -0-           -0-                -0-
                          1999    -0-       -0-        -0-           -0-           -0-                -0-


Bruce Merati,             2001  $112,500    -0-        -0-           -0-        1,000,000             -0-
Chief Operating Officer   2000  $100,000    -0-        -0-           -0-         625,000              -0-
and Chief Financial       1999  $ 90,000    -0-        -0-           -0-           -0-                -0-
Officer (2)
</TABLE>

(1)      Commencing August 16, 2001, the Company began paying Mr. Walker a
         salary at the rate of $150,000 per annum.

(2)      Commencing  July 27, 1998, the Company began paying Mr. Merati a salary
         at the rate of $85,000 per annum.  Effective August 1, 1999,  Mr.
         Merati's salary was increased to $100,000 per annum and effective July
         1, 2001 Mr. Merati's salary was increased to $125,000 per annum.


<TABLE>
<CAPTION>
                             OPTION/SAR GRANTS IN LAST FISCAL YEAR
                                       INDIVIDUAL GRANTS
--------------------------------------------------------------------------------------------
          NAME            NUMBER OF    % OF TOTAL OPTIONS/SARS   EXERCISE OR EXPIRATION DATE
                          SECURITIES      GRANTED TO EMPLOYEES   BASE PRICE
                          UNDERLYING         IN FISCAL YEAR        ($/SH)
                         OPTIONS/SARS
                         GRANTED (#)
-------------------- ----------------- ------------------------- ----------- ---------------
<S>                       <C>                   <C>                 <C>       <C>
Scott A. Walker,            600,000             21.9%               $0.25     July 31, 2006
President and CEO

Bruce Merati - Chief      1,000,000             36.5%               $0.25     July 31, 2006
Operating and Chief
Financial Officer
</TABLE>


<TABLE>
<CAPTION>
                      AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                                 AND FY-END OPTION/SAR VALUES

---------------------------------------------------------------------------------------------
                                                           NUMBER OF
                      SHARES ACQUIRED                     SECURITIES           VALUE OF
                        ON EXERCISE                       UNDERLYING          UNEXERCISED
          NAME                         VALUE RECEIVED     UNEXERCISED        IN-THE-MONEY
                                                         OPTIONS (SARS       OPTIONS (SARS
                                                         AT FY-END (#)       AT FY-END($)
                                                         EXERCISABLE/        EXERCISABLE/
                                                         UNEXERCISABLE     UNEXERCISABLE(1)
--------------------  ---------------  --------------   ----------------   ------------------
<S>                       <C>              <C>          <C>                 <C>
Scott A. Walker,                                           600,000/0          $18,000/$0
President & CEO

Bruce Merati - Chief      10,000           $3,400       1,115,000/500,000   $15,000/$15,000
Operating and Chief
Financial Officer
</TABLE>


(1) Calculated based upon a last reported sale price of $0.28 per share of
    Common Stock, as reported on the OTC Bulletin Board on December 31, 2001.

                                       11
<PAGE>

         EMPLOYMENT AGREEMENTS:

         (a)   In September 1999, the Company entered into an employment
               agreement with its Chairman, Leo I. George, pursuant to which Mr.
               George received three-year options to purchase up to 100,000
               shares of Common Stock at an exercise price of $0.10 per share.
               These options contain a buy-back provision in favour of the
               Company, which enables the Company to buy-back these options and
               the shares underlying the options at a price of $3.50 per share.
               In addition, Mr. George received three-year options to purchase
               up to 700,000 shares of Common Stock, of which options to
               purchase 500,000 shares are fully vested and immediately
               exercisable and options to purchase 200,000 shares vest and first
               become exercisable on September 2, 2000. The exercise price for
               the 500,000 fully vested options is $2.44 per share. The exercise
               price for the 200,000 options that vest on September 2, 2000
               shall be equal to the fair market value of the Common Stock on
               that date. Finally, in the event the Company obtains debt or
               equity financing in excess of $10,000,000, Mr. George shall be
               entitled to three-year options to purchase up to 200,000 shares
               of Common Stock at an exercise price equal to the fair market
               value of the Common Stock on the date of grant.

         (b)   In July 2001, the Company entered into a two-year employment
               agreement with its Chief Operating Officer and Chief Financial
               Officer, Bruce Merati. The agreement provided for a base annual
               salary of $125,000, and a cash bonus of $30,000 for the first
               $2,000,000 of capital investment placed with the Company after
               the signing of the employment agreement. The agreement also
               provides for a payment of 10% for each software licensing
               agreement the Company signs with specified companies, up to
               $25,000 per agreement. The employment agreement also provides for
               the Company to issue this officer 1,000,000 options at an
               exercise price of $0.25 per share exercisable for 5 years, of
               which 50% vest immediately and 50% vest one year from the start
               of the employment agreement.

         (c)   In September 2001, the Company entered into a month-to-month
               agreement with an interim Chief Executive Officer (the "CEO"),
               Scott A. Walker where the Company would pay consulting fees in
               the amount of $12,500 per month until a more permanent
               arrangement was made. On January 1, 2002, the Company entered
               into a two-year employment agreement with Mr. Walker. The new
               agreement provides for a base salary of $150,000, which will be
               increased to $200,000 thirty days after the Company has placed
               $2,000,000 in financial institutions. The agreement provides the
               CEO a cash bonus equal to 3% of any investment capital the CEO
               obtains for the Company. The agreement also provides for the
               Company to issue the CEO options in the amounts of 200,000 at an
               exercise price of $0.50 on January 1, 2002; 200,000 at an
               exercise price of $1.50 on January 1, 2002; and 400,000 at an
               exercise price of $1.50 upon the date when the Company's stock
               trades over $5.00 for thirty consecutive days.

         COMPENSATION OF DIRECTORS. Non-officer directors of the Company did not
receive any fees for attending the meeting of the Board of Directors. All
directors received reimbursement for out-of-pocket expenses in attending Board
of Directors meetings. From time to time the Company may engage certain members
of the Board of Directors to perform services on behalf of the Company and will
compensate such persons for the services, which they perform.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information regarding the
beneficial ownership of the shares of Common Stock as of March 18, 2002 by (i)
each person who is known by the Company to be the beneficial owner of more than
five percent (5%) of the issued and outstanding shares of Common Stock, (ii)
each of the Company's directors and executive officers and (iii) all directors
and executive officers as a group.

        NAME AND ADDRESS       NUMBER OF SHARES     PERCENTAGE OWNED
----------------------------   ----------------     ----------------
Leo I. George (1)(2)                 1,010,000            4.4%
Daniel B. Najor (1)                  2,843,000           12.9%
Bruce Merati (1)(3)                  1,115,000            4.8%
Scott A. Walker (1)(4)               1,843,836            7.9%
All officers and directors           3,968,836           15.7%
as a group


(1)      Address is 6969 Corte Santa Fe, Suite A, San Diego, California 92121.

(2)      Includes options granted to Mr. George to purchase 500,000 shares of
         Common Stock at an exercise price of $2.46 per share and options to
         purchase 380,000 shares of Common Stock at an exercise price of $0.25
         per share.

(3)      Includes options granted to Mr. Merati to purchase 615,000 shares of

                                       12
<PAGE>

         Common Stock at an exercise price of $0.50 per share and options to
         purchase 500,000 shares of Common Stock at an exercise price of $0.25
         per share. Does not include options to purchase 500,000 shares of
         Common Stock at an exercise price of $0.25 per share that are subject
         to vesting.

(4)      Includes 543,836 shares of common stock owned by MCOM Management Corp.,
         with which Mr. Walker is affiliated. Also includes options granted to
         MCOM Management to purchase 300,000 shares of Common Stock at an
         exercise price of $0.25 per share. Also includes options granted to Mr.
         Walker to purchase 600,000 shares of Common Stock at an exercise price
         of $0.25 per share, and 200,000 shares of Common Stock at an exercise
         price of $0.50 per share, and 200,000 shares of Common Stock at an
         exercise price of $1.50 per share.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         During the year ended December 31, 1999, the Company received advances
of $475,000 in the form of notes payable from its then Chairman of the Board of
Directors and his affiliated company. During the year ended December 31, 1999,
$300,000 of this amount was converted into 100,000 shares of common stock. The
notes payable are unsecured, due on demand and provide for interest at a fixed
rate of 12% per annum. The principal balance outstanding was $85,000 as of
December 31, 2001 and 2000, and total interest expense incurred by the Company
on these related party notes payable for the years ended December 31, 2001 and
2000 was approximately $12,000 and $10,000, respectively. During the year ended
December 31, 2001, the Company borrowed $4,700 from two of its employees. These
notes do not bear interest and are payable on demand. During the year ended
December 31, 2001, the Company entered into a rental agreement with a
shareholder, whereby the Company would lease a corporate house on a
month-to-month basis. The shareholder received $15,000 as rent and 30,000
options as part of this arrangement

         In 1997, the Company adopted a stock option plan (the "Plan") under
which options to purchase up to 500,000 shares of common stock may be granted to
officers, employees or directors of the Company, as well as consultants,
independent contractors or other service providers of the Company. Both
"incentive" and "nonqualified" options may be granted under the Plan. Incentive
options may be granted at an exercise price equal to the fair market value of
the shares at the date of grant while nonqualified options may be granted at an
exercise price determined by the Board of Directors. Individual option
agreements will contain such additional terms as may be determined by the Board
of Directors at the time of the grant. The Plan provides for grants of options
with a term of up to 10 years. Incentive options must be granted with exercise
prices equal to the fair market value on the date of grant, except that
incentive options granted to persons owning stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company may not
be granted at less than 110% of the fair market value on the date of grant. The
Company amended the Plan to increase the number of options to purchase 5,000,000
shares of common stock in 2000 and in 2001 increased the number of options to
purchase 10,000,000 shares of common stock.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         a) Exhibits - The following exhibits were filed on December 10, 1998 as
            exhibits to the Company's 10-SB/A.

         3.1   Certificate of Incorporation of the Company; filed as exhibit to
               the Company's 10-SB/A dated December 21, 1998
         3.2   Bylaws of the Company; filed as exhibit to the Company's 10-SB/A
               dated December 21, 1998
         3.3   Certificate of amendment to Certificate of incorporation of the
               Company; filed on Definitive Information Statement dated July 7,
               1999
         4.1   Specimen of Common Stock Certificate; filed as exhibit to the
               Company's 10-SB/A dated December 21, 1998
         10.1  Securities Purchase Agreement dated September 5, 1996 between the
               Company and Unistar Entertainment, Inc.; filed as exhibit to the
               Company's 10-SB/A dated December 21, 1998
         10.2  Settlement Agreement and Mutual General Release between the
               Company and CasinoWorld Holdings, Ltd, dated February 26, 1997;
               filed as exhibit to the Company's 10-SB/A dated December 21, 1998
         10.3  Settlement Agreement and Mutual General Release between the
               Company and Unistar Entertainment, Inc. dated March 6, 1997;
               filed as exhibit to the Company's 10-SB/A dated December 21, 1998
         10.4  Employment Agreement dated September 1, 1997 between the Company
               and Joseph R. Paravia; filed as exhibit to the Company's 10-SB/A
               dated December 21, 1998

                                       13
<PAGE>

         10.5  Virtual Gaming Technologies, Inc. 1997 Stock Option Plan; filed
               as exhibit to the Company's 10-SB/A dated December 21, 1998
         10.6  Employment agreement dated September 2 1999, between the Company
               and Leo I. George; filed as exhibit to 10-KSB dated March 30,
               2000.
         10.7  Employment agreement dated November 2 1999, between the Company
               and Joseph R. Paravia; filed as exhibit to 10-KSB dated March 30,
               2000.
         10.8  Securities Acquisition Agreement dated December 20, 1999 between
               the Company and Primeline Technologies, Inc.; filed as exhibit to
               10-KSB dated March 30, 2000.
         10.9  Software development agreement dated January 20, 2000 between the
               Company and Coast Resort; filed as exhibit to 10-KSB dated March
               30, 2000.
         10.10 Employment Agreement dated July 1, 2001 between the Company and
               Bruce Merati, filed as exhibit to this report.
         10.11 Consulting Agreements between the Company and MCOM Management
               dated June 11, 2001 and December 12, 2001, filed as exhibit to
               this report.
         10.12 Private Placement Agreement with Lighthouse Financial Group LLC
               dated April 18, 2001 filed as exhibit to this report.
         10.13 Placement Agent Agreement and its Amendments with Lighthouse
               Financial Group LLC dated June 7, 2001, August 25, 2001 and
               October 1,2001 filed as exhibit to this report.
         10.14 Employment Agreement dated January 1, 2002 between the Company
               and Scott A. Walker, filed as exhibit to this report
         21.1 List of Subsidiaries; filed as exhibit to the Company's 10-SB/A
              dated December 21, 1998

         b) Reports on Form 8-K. The Company filed a report of Form 8-K on
            January 19, 1999 relating to the change of the Registrant's
            independent auditors for the fiscal year ended December 31, 1998.
            Reports on Form 8-K. The Company filed a report of Form 8-K on March
            29,2000 relating to acquisition of Primeline Gaming Technologies,
            Inc.

SIGNATURES

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

VirtGame Corp.
--------------
(Registrant)


Date:  March 29, 2002    By: /s/ Scott A. Walker
                             ---------------------------------------------------
                             President, Chief Executive Officer and Director

Date:  March 29, 2002    By: /s/ Bruce Merati
                             ---------------------------------------------------
                             Chief Operating Officer and Chief Financial Officer


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


Date:  March 29, 2002    By: /s/ Leo I. George
                             ---------------------------------------------------
                             Chairman of the Board


Date:  March 29, 2002    By: /s/ Scott A. Walker
                             ---------------------------------------------------
                             Director

                                       14