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

                                   FORM 10-KSB

(Mark One)

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

         For the fiscal year ended December 31, 2003

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

         For the transition period from _________________ to __________________.

                         Commission File Number 0-29800

                                 VIRTGAME CORP.
        (Exact name of small business issuer as specified in its charter)

          DELAWARE                                      33-0716247
  (State of incorporation)                   (IRS Employer Identification No.)

                          6969 CORTE SANTA FE, SUITE A
                        SAN DIEGO, CALIFORNIA 92121-3270
                    (Address of principal executive offices)

                                 (858) 373-5001
                           (Issuer's telephone number)

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

          Title of each class                     Name of each exchange
          to be so registered                     on which registered

                 NONE                                      N/A

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

                         COMMON STOCK, $.00001 PAR VALUE
                                (Title of class)

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

         Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-K contained in this form, and will not 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/A or any amendment to
this Form 10-KSB. [ ]

         The issuer's revenues for the fiscal year ended December 31, 2003 were
$601,100.

         There were 31,868,410 shares of the issuer's common stock outstanding
as of March 26, 2004, and the aggregate market value of the common stock held by
non-affiliates on that date was approximately $16,900,000.

DOCUMENTS INCORPORATED BY REFERENCE:   None.

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



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                                TABLE OF CONTENTS

                                     PART I
                                                                            PAGE

ITEM 1.   Description of Business.........................................   1
ITEM 2.   Description of Properties.......................................   13
ITEM 3.   Legal Proceedings...............................................   13
ITEM 4.   Submission of Matters to a Vote of Security Holders.............   13

                                     PART II

ITEM 5.   Market for Common Equity, Related Stockholder Matters...........   14
ITEM 6.   Management's Discussion and Analysis of Financial Condition
             and Results of Operation.....................................   15
ITEM 7.   Financial Statements............................................   16
ITEM 8.   Changes In and Disagreements With Accountants on Accounting
             and Financial Disclosure.....................................   16
ITEM 8A.  Controls and Procedures.........................................   16

                                    PART III

ITEM 9.    Directors, and Executive Officers; Compliance With
              Section 16(a) of the Exchange Act...........................   17
ITEM 10.   Executive Compensation.........................................   18
ITEM 11.   Security Ownership of Certain Beneficial Owners and
              Management and Related Stockholder Matters..................   21
ITEM 12.   Certain Relationships and Related Transactions.................   22
ITEM 13.   Exhibits and Reports on Form 8-K...............................   23
ITEM 14.   Principal Accountant Fees and Services.........................   23

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                                     PART 1

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         We are a networked gaming software provider to the regulated gaming and
lottery industries. We offer to licensed casinos and sports wagering and lottery
operations a comprehensive suite of software products that provide:

         o        distribution of server-based casino games, sports wagering and
                  lotteries through various distribution channels, including
                  local area networks within a casino (such as over-the-counter,
                  stand-alone kiosks and in-room wagering) and wider area
                  networks such as online closed-loop Intranets or the Internet;

         o        open architecture supporting multiple operating system
                  platforms and databases that require no special or proprietary
                  hardware; and

         o        customer management solutions, including managerial and
                  financial reports and client data mining.

         Our business model is based on a strategy of developing a suite of next
generation software products for the traditional land-based or
"brick-and-mortar" gaming and lottery companies, including a turnkey solution
that will enable the operator to offer casino games, sports wagering and
lotteries online. We derive revenue through licensing and software development
fees, maintenance fees and transactional fees, and, wherever legally
permissible, participation in gaming revenue.

         We believe today's Internet is too unregulated and unjurisdictional to
be a suitable distribution channel for the regulated gaming and lottery
operators. We are taking a step-by-step approach to offer land-based casinos and
lottery operators a legal solution for remote gaming within their own licensed
jurisdiction. As the first step, we are deploying our open architecture gaming
products within the casino floor. We will then introduce our proprietary and
patented gaming distribution solution to extend the reach of the operator to
their customers remotely. We have developed ways to create private networks from
today's Internet infrastructures. Telecommunication companies have already spent
a tremendous amount of capital on the World Wide Web. Our strategy is to
capitalize on this sunk expense for the industry that spends billions of dollars
building casinos to attract customers, and pays very little to expand its
customer base. The states and governments are finding it difficult to stop the
offshore Internet gaming companies. The only practical way to deal with the
unlicensed Internet gaming operators is to allow the licensed and land-based
casinos to compete online in a secured and regulated environment. This will also
provide the opportunity for the states to tax this new source of gaming
revenues.

         On January 21, 2003, the United States Patent and Trademark Office
awarded us patent # 6,508,710 for "Gaming System with Location Verification".
The patent covers virtual gaming environments with verification of players'
location to regulate access to players in authorized locations. Also in January
2003, we licensed our sports wagering software to three of the casinos that
Herbst Gaming owns and operates in Nevada, including Terrible's Hotel Casino,
Terrible's Town Casino and Terrible's Lakeside Casino. In March 2003, we
licensed our sports wagering software to Casino MonteLago, which is being
developed by CIRI Lakeside Gaming Investors and opened in April 2003. The Casino
MonteLago is located adjacent to the Ritz-Carlton Hotel which opened in early
2003 in Lake Las Vegas Resort. In October 2002, we received manufacturer and
distributor licenses from the Nevada Gaming Commission, which are limited for 18
months and will expire in April 2004. On April 7, 2004 we received a
recommendation of approval by the state of Nevada Gaming Control Board for an
unrestricted gaming license without time imitations as a manufacturer and
distributor in the state. The recommendation will be heard and finalized by the
Nevada Gaming Commission on April 22, 2004.

         We believe that licensed gaming and lottery companies and the
legislators and regulators that govern them are interested in allowing for
online gaming in the U.S. provided that proper controls can be put in place. In
June 2002, the Nevada State legislature approved a bill allowing licensed
casinos to offer Internet gaming subject to the Nevada Gaming Nevada Gaming
Commission's ability to reasonably assure that wagers are accepted only from the
State of Nevada and other jurisdictions that allow Internet gaming. We believe
that the Nevada State Gaming Control Board and the Nevada Gaming Commission have
long been considered to be the premier gaming regulatory bodies in the U. S.,
and if the Nevada Gaming Commission facilitates Internet gaming, other
jurisdictions will follow.

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         Our goal is to position VirtGame as the leading provider of software
applications and solutions to the regulated gaming and lottery industries by
developing and integrating solutions to comply with the regulatory concerns. In
October 2000, we received approval from the Nevada State Gaming Control Board to
offer the Coast Hotels' closed loop wagering system, which was the first time
any U.S. gaming authority approved an online gaming opportunity. In July 2002,
Las Vegas Dissemination Company, the exclusive pari-mutuel systems operator to
the Nevada casino industry, agreed to serve as our exclusive distributor of our
sports and race book software products in Nevada. We have entered into contracts
with other licensed U.S. and foreign land-based gaming operators for purposes of
designing and operating online gaming opportunities.

REGULATORY ENVIRONMENT

         As a software development company, we do not operate Internet casinos,
sportsbooks or lotteries. Instead we have developed software products that are
currently in use by licensed and regulated casinos, sportsbooks and lotteries.
While we intend to derive income directly from gaming activities, we intend to
do so pursuant to arrangements with licensed casino, sportsbook and lottery
operators in full compliance with applicable federal and state law. However, as
a participant in the gaming industry, the regulatory environment in this
industry directly affects us particularly as it relates to online casino gaming,
sports wagering and lotteries.

         The U.S. Federal Interstate Wire Act provides language that, among
other things, makes it a crime to use interstate or international telephone
lines to transmit information assisting in the placing of wagers, unless the
wagering is authorized in the jurisdiction from which and into which the
transmission is made. Federal and state prosecutors and courts have consistently
applied the Wire Act to Internet-based gaming. Consequently, both land-based and
online gaming in the U.S. is prohibited unless authorized by the state from
which and into which the transmission is made. In summary, the regulation of
gaming in the U.S. is left to the states.

         We believe that states that permit land-based gaming have been
reluctant to sponsor or license online gaming within their jurisdictions out of
concern that they will not be able to prevent inappropriate persons from
participating. The Internet has traditionally defied attempts to prohibit
unlicensed offshore Internet casinos from offering their products in the U.S.
Likewise, the Internet has defied attempts to prevent U.S. residents from
wagering over those unregulated systems. We believe that the history of online
gaming in the U.S. and elsewhere has discouraged states and other foreign
governments from authorizing online gaming in their jurisdictions due to:

         o        the perceived inability to prevent people from outside their
                  jurisdiction from participating, thus risking the enmity of
                  other jurisdictions that offer competing gaming activities or
                  outlaw gaming altogether;

         o        the perceived inability to prevent minors and other
                  inappropriate persons located within their jurisdictions from
                  participating; and

         o        the perceived inability to offer online gaming and lotteries
                  over a secure environment.

         As noted above, in June 2002 Nevada passed legislation approving
Internet-based gaming subject to assurances that it can be jurisdictionally
policed. We believe that we offer a viable solution to the dilemma facing U.S.
regulators and legislators. Our suite of integrated software products offer
states a complete software solution that allows them or their licensees the
ability to offer to the state's residents gaming, sportsbook and lottery
products over a secure system that guarantees jurisdictional screening, identity
authentication and age verification.

         In furtherance of our commitment to the promotion of regulated online
gaming, we applied for and received manufacturer and distributor gaming licenses
in the State of Nevada on October 24, 2002, which were limited for 18 months and
will expire in April 2004. On April 7, 2004 we received a recommendation of
approval by the state of Nevada Gaming Control Board for an unrestricted gaming
license without time imitations as a manufacturer and distributor in the state.
The recommendation will be heard and finalized by the Nevada Gaming Commission
on April 22, 2004. In May 2002, the Province of Ontario, Canada granted us a
non-gaming related supplier license. We intend to file additional applications
for gaming licenses in other U.S. and foreign jurisdictions in the future. While
we do not believe that we require licensing by the gaming regulators, we believe
that the legalization of online gaming will require, among other things, the
regulation and supervision of the involved parties. We believe that licensing
will prove to be a considerable barrier to entry for our future competitors and
that our early efforts to obtain gaming licenses will give us a considerable
advantage over our competition and allow us to help shape the regulatory
landscape within which we will operate.

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PRODUCTS AND SERVICES

         We offer to regulated casinos and lotteries a suite of integrated
software products and services designed to provide:

         o        distribution of server-based casino games, sports wagering and
                  lotteries through various distribution channels, including
                  over-the-counter, stand-alone kiosks and online via
                  closed-loop Intranets or the Internet;

         o        open architecture supporting multiple operating system
                  platforms and databases that require no special proprietary
                  hardware;

         o        customer management solutions, including managerial and
                  financial reports and client data mining; and

         o        a secure environment that complies with gaming regulations,
                  including jurisdictional screening, age verification and
                  identity authentication.

         VIRTGAMESP(TM) SERVER SUITE

         Our software products are based on the VirtGameSP(TM), a proprietary
server platform from which all other members of the software suite operate. The
VirtGameSP(TM) is a highly scalable and customizable software system designed to
function as an integration hub, and can run on any secure network with most
modern operating systems, including Windows NT, Unix, Linux, Oracle and SQL.

         The VirtGameSP(TM) can be customized to accommodate the operator and
has been found to comply with the requirements of a licensed casino.

         The VirtGameSP(TM) server suite includes the following products:

         o        THE VIRTGAME MEDIA/WEB SERVER. This product acts as the engine
                  through which front-end access is gained. Graphical user
                  interfaces are customized for each branded entity and engage
                  the system through the VirtGame Game Server to the VirtGame
                  Community Server Platform.

         o        THE VIRTGAME GAME SERVER. This product provides game play and
                  game odds to the front end graphical user interfaces.

         o        THE VIRTGAME COMMUNITY SERVER. This product stores all data,
                  controls all game logic and security functionality and
                  interfaces with the operator's credit card processor, as well
                  as provides an extensive database management system that
                  collects and manages all gaming customer information and
                  marketing history.

         o        THE VIRTGAME ADMINISTRATIVE SERVER. This product allows the
                  independent operator to manage his casino from anywhere in the
                  world with instant, exclusive and secure Internet access to
                  his players' information, such as account balances, deposits
                  and withdrawals. This server provides international gaming
                  companies the capability to have centralized global risk
                  management for minimizing sports wagering book-making risks.

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         THE VIRTGAME PRODUCT SUITE

         The VirtGameSP(TM) acts as the foundation for the rest of the gaming
software products offered by us in much the same way that Microsoft's Windows
acts as a platform for the group of products in the Microsoft Office product
group. Thus, as Windows creates optimal value as a myriad of applications are
utilized by it, the VirtGameSP(TM) is the enabling agent for the entire product
group offered by us and the integration interface to existing systems.

         Set forth below is a description of our casino, sports wagering and
lottery products. All of the products can be deployed in-casino, either
over-the-counter or at a stand-alone kiosk, or remotely over the Internet.

         o        PRIMELINE(TM) SPORTS BOOK. PrimeLine(TM) Sports Book offers
                  the opportunity to bet on a variety of sporting events played
                  in the United States, Central and South America, Europe and
                  Asia. The sports wagering service is conducted by way of
                  proprietary software internally developed by us. The service
                  is one of only two sports book systems approved as an
                  over-the-counter sports book in Nevada and is the only one
                  which is both web and kiosk enabled.

         o        PRIMELINE(TM) RACE BOOK. PrimeLine(TM) Race Book offers a
                  pari-mutuel sports wagering service that allows the client to
                  wager on domestic and foreign horse races. The PrimeLine(TM)
                  Race Book can be deployed over-the-counter, at a stand-alone
                  kiosk or over the Internet.

         o        VIRTLOTTERY(TM). The VirtLottery(TM) software module is an
                  Internet platform that offers states and national lotteries
                  with an Internet distribution channel. The technology and
                  e-commerce system of this module allow state and national
                  lotteries to sell traditional lottery games to existing
                  lottery players over the Internet, maximizing the addressable
                  customer base. Furthermore, our VirtBorderControl(TM)
                  technology allows lottery games to be offered only to targeted
                  markets in targeted geographic regions to address
                  jurisdictional issues between state lotteries. While the
                  system is currently optimized for the Internet distribution
                  channel, it is capable of being deployed both as a kiosk and
                  as an over-the-counter application.

         o        VIRTCASINO(TM). Our VirtCasino(TM)software module is the
                  enabling technology to all of the current casino table games,
                  such as Blackjack, Baccarat, Craps, Roulette, Poker, PaiGow
                  Poker, Let It Ride, Keno and Slot Games. The front end of the
                  module presents integration options to a variety of
                  customizable graphic user interfaces, offering the opportunity
                  for branding, images, sounds, layout, customized games,
                  content and ease of development. The games have been designed
                  to evoke the sights and sounds similar to a Las Vegas style
                  casino. Computer graphics present the "lobby" of the virtual
                  casino, consisting of several menu items which the customer
                  can choose to enter. The customers use the Windows format of
                  commands to carry out gaming activities. The software module
                  offers audio features, including the sound of shuffling cards,
                  video poker machine pay-outs and general casino background
                  sounds.

         o        VIRTBORDERCONTROL(TM). The VirtBorderControl(TM)is a
                  geographically intelligent software module that provides
                  regulated casinos and lottery operators with the ability to
                  conduct identity authentication and screen their user base for
                  jurisdiction and age. It is the first closed-loop private
                  network to gain Nevada Gaming Control Board approval.
                  VirtBorderControl(TM)offers a complete solution for restricted
                  distribution of content through computer access.
                  VirtBorderControlTM can be configured to meet the requirements
                  of individual states, provinces or countries to allow only
                  legal users to gain access to content. Depending on the
                  requested restrictions, we can configure the checkpoint
                  business rules to meet the legal requirements of any given
                  product. The VirtBorderControl(TM)technology enables licensed
                  and regulated gaming companies to reach their customers within
                  permitted jurisdictional boundaries. The system employs a
                  multi-layer approach to jurisdictional control across the
                  Internet. The main backend consists of a database that we use
                  and update through multiple resources to determine where an
                  Internet user appears to be coming from. We also have a
                  proprietary browser that can further define the user's
                  location through a series of checks and router identification.

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CONTRACTS AND STRATEGIC RELATIONSHIPS

         CASINO MONTELAGO. In March 2003, we licensed our sports wagering
software to Casino MonteLago, which is being developed by CIRI Lakeside Gaming
Investors and opened in April 2003. The Casino MonteLago is located adjacent to
the Ritz-Carlton Hotel which opened in early 2003 in Lake Las Vegas Resort.

         HERBST GAMING. In January 2003, we licensed our sports wagering
software to three of the casinos that Herbst Gaming owns and operates in Nevada,
including Terrible's Hotel Casino, Terrible's Town Casino and Terrible's
Lakeside Casino.

         CASINO FANDANGO. In October 2003, we licensed our sports wagering
software to Casino Fandango, a new casino in Carson City, Nevada which opened
for operation in early 2004.

         LAS VEGAS DISSEMINATION COMPANY. Pursuant to an Exclusive
Distributorship Agreement dated July 1, 2002, we have appointed Las Vegas
Dissemination Company, Inc. ("LVDC") as the exclusive distributor of our
PrimeLineTM SportsBook and PrimeLineTM RaceBook in the State of Nevada. LVDC is
the exclusive pari-mutuel systems operator for Nevada casino race books. Our
goal is to place our PrimeLineTM SportsBook and PrimeLineTM RaceBook software
products in the over-the-counter and kiosk-wagering systems serviced by LVDC. We
believe that LVDC is uniquely qualified to be the exclusive distributor of our
sports book and race book software products. The same department within a casino
typically manages sports books and race books, and LVDC has established long
standing relationships with key management in every Nevada casino that operates
a race book. The agreement has an initial term of five years and is renewable by
LVDC subject to its satisfaction of certain minimum performance conditions. LVDC
has agreed to use its best efforts to market our software products to its
clientele throughout Nevada, and we have the ability to terminate the agreement
based on LVDC's failure to satisfy certain minimum performance conditions.

         In October 2000, we received approval from the Nevada Gaming Control
Board to offer the Coast wagering system as a closed-loop Intranet service to
Nevada residents. We believe that this was the first time any U.S. gaming
authority approved an online gaming opportunity.

         In December 2003we received regulatory approvals for deployment of
Sports Bet Xpress (SBX) in a live field trial. SBX is a closed-loop network that
enables sports wagering though terminals placed in participating Nevada bars and
taverns. SBX is designed to allow customers of any Las Vegas casino to access
their sports wagering accounts through this network of terminals, thus extending
the brand reach of participating casinos. In February 2004 Bally's Las Vegas
started hosting the SBX for the field trial for at least 30 days. The Nevada
Gaming Board requires a beta test of new gaming systems before a system can
receive final approvals. Under Nevada account wagering laws, players have to
first physically open an account with a casino, provide proof of age and Nevada
residency, and after funding their account they can then place a wager remotely.
SBX is distributed by United Coin Machine Company, a partner in the project.

COMPETITION

         We are not aware of any other company in the U.S. or elsewhere that is
engaged in the development of software designed to facilitate regulated online
gaming or lotteries. However, there are competitors that share markets with
specific software modules included in our software suite.

         o        VirtCasino(TM), as a stand-alone product, competes directly
                  with "turn-key" Internet casino providers.

         o        PrimeLine(TM) Sports Book and PrimeLine(TM) Race Book, as
                  stand-alone products, compete directly with the
                  over-the-counter system offered by American Wagering and
                  Scientific Games.

         We expect further development of competition in our space as it becomes
a sizable and lucrative sector. We expect potential competition to develop from
several areas, including casino operators' internal development teams, Internet
software providers, security technology providers and existing casino game
manufacturers such as International Game Technology, Inc., Multimedia Games and
Alliance Gaming.

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MARKETING

         Our customers are the U.S. and foreign operators of licensed casinos,
sportsbooks and lotteries. We market our products to these customers through our
participation in industry conferences and tradeshows and through direct
marketing efforts. We believe that our products and services are well known by
most operators of casinos and lotteries in the U.S. and to many casinos and
lottery operators worldwide.

         An important element of our business strategy is to promote changes in
federal and state law that allow for greater application of our software
products by the regulated casino, sportsbook and lottery industries. To this
end, we endeavor to educate state and federal legislators and state agencies
that regulate the U.S. gaming and lottery industries of our ability to offer
gaming, sportsbook and lottery products over a secure system that guarantees
jurisdictional screening. We also believe that gaming regulators are an
important source of licensing opportunities and in the past gaming regulators
have promoted our software solutions within their jurisdictions.

RESEARCH AND DEVELOPMENT

         We spent approximately $458,000 in research and development in 2003,
and approximately $451,000 in 2002, all of which were expensed. We intend to
conduct continuing development and innovation of our products in accordance with
changing consumer preferences, demographics, and the evolution of new
technologies. Our development strategy is to leverage our 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.

INTELLECTUAL PROPERTY

         We regard our technology as propriety and attempt to protect it by
relying on trademark, service mark, copyright and trade secret laws and
restrictions on disclosure and transferring title and other methods. We
generally enter into confidentiality or license agreements with our employees
and consultants, and generally control access to and distribution of our
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use our
proprietary information without authorization or to develop similar technology
independently.

         In January 2003, we received a patent from the U.S. Patent and
Trademark Office covering a process that verifies the geographic location of
players in an online gaming environment. We intend to pursue the registration of
our trademarks in the United States and internationally, and have registered in
the United States the trademark "VirtGame." Effective trademark, service mark,
copyright and trade secret protection may not be available in every country in
which our services are distributed or made available through the Internet, and
policing unauthorized use of our proprietary information will be difficult.

GAMING REGULATION

         GENERAL

         The manufacture, sale and distribution of networked gaming software is
subject to federal, state, tribal and local regulations in the United States and
foreign jurisdictions. While the regulatory requirements vary from jurisdiction
to jurisdiction, the majority of these jurisdictions require licenses,
registrations, permits, findings of suitability, documentation of qualification
including evidence of financial stability and/or other required approvals for
companies who manufacture and distribute networked gaming software, as well as
the individual suitability or licensing of officers, directors, major
stockholders and key employees. Laws of the various gaming regulatory agencies
generally serve to protect the public and ensure that gaming related activity is
conducted honestly, competitively, and free of corruption.

         Various gaming regulatory agencies have issued licenses allowing us to
manufacture and/or distribute our systems. We and our key personnel have
obtained or applied for all government licenses, permits, registrations,

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findings of suitability and approvals necessary allowing for the manufacture,
sale and distribution of our gaming software applications in the jurisdictions
where we do business. We have never been denied a gaming related license, nor
have our licenses been suspended or revoked.

          NEVADA REGULATION

          The manufacture, sale and distribution of gaming application software
in Nevada or for use outside Nevada is subject to the Nevada Gaming Control Act
and the regulations of the Nevada Gaming Commission (Commission), the Nevada
State Gaming Control Board (GCB), and the local laws, regulations and ordinances
of various county and municipal regulatory authorities (collectively referred to
as the Nevada gaming authorities). These laws, regulations and ordinances
primarily concern the responsibility, financial stability and character of
gaming device and/or gaming software manufacturers, distributors and operators,
as well as persons financially interested or involved in gaming operations. The
laws, regulations and supervisory procedures of the Nevada gaming authorities
seek to (i) prevent unsavory or unsuitable persons from having a direct or
indirect involvement with gaming at any time or in any capacity, (ii) establish
and maintain responsible accounting practices and procedures, (iii) maintain
effective control over the financial practices of licensees, including
establishing minimum procedures for internal fiscal affairs and the safeguarding
of assets and revenues, providing reliable record keeping and requiring the
filing of periodic reports with the Nevada gaming authorities, (iv) prevent
cheating and fraudulent practices, and (v) provide a source of state and local
revenues through taxation and licensing fees. Changes in these laws,
regulations, procedures, and judicial or regulatory interpretations could have
an adverse effect on our operations.

         Our Nevada gaming licenses require the periodic payment of fees and
taxes and are not transferable. Each type of gaming software application we sell
in Nevada must first be approved by the Commission and may require subsequent
modification. We must also report substantially all loans, leases, sales of
securities and similar financing transactions to the GCB and the Commission,
and/or have them approved by the Commission. We believe we have obtained all
required licenses and/or approvals necessary to carry on our business in Nevada.

         We are registered with the Commission as a publicly traded corporation
and are required periodically to submit detailed financial and operating reports
to the Commission and to furnish any other information that the Commission may
require.

         Our officers, directors and key employees who are actively engaged in
the administration or supervision of gaming and/or directly involved in our
gaming activities may be required to file applications with the Nevada gaming
authorities and may be required to be licensed or found suitable by them.

         The Nevada gaming authorities may investigate any individual who has a
material relationship or involvement with us in order to determine whether such
individual is suitable or should be licensed as a business associate of a gaming
licensee. The Nevada gaming authorities may deny an application for licensure or
finding of suitability for any cause deemed reasonable. A finding of suitability
is comparable to licensing and both require submission of detailed personal and
financial information followed by a thorough background investigation. The
applicant for licensing or a finding of suitability must pay all costs of the
investigation. We must report changes in licensed positions to the Nevada gaming
authorities. The Nevada gaming authorities may disapprove any change in position
by one of our officers, directors or key employees, or require us to suspend or
dismiss officers, directors or other key employees and sever all relationships
with such persons, including those who refuse to file appropriate applications
or whom the Nevada gaming authorities find unsuitable to act in such capacities.
Determinations of suitability or of questions pertaining to licensing are not
subject to judicial review in Nevada.

         We are required to submit detailed financial and operating reports to
the Commission. If it were determined that any Nevada gaming laws were violated
by us, our gaming licenses could be limited, conditioned, suspended or revoked,
subject to compliance with certain statutory and regulatory procedures. In
addition we, and any persons involved, may be subject to substantial fines for
each separate violation of the Nevada gaming laws at the discretion of the
Commission. The Commission also has the power to appoint a supervisor to operate
our gaming software production and management properties and, under certain
circumstances, earnings generated during the supervisor's appointment could be
forfeited to the State of Nevada. The limitation, conditioning or suspension of
our gaming licenses or the appointment of a supervisor could (and revocation of
our gaming licenses would) materially and adversely affect our gaming
operations.

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         The Commission may require any beneficial holder of our voting
securities, regardless of the number of shares owned, to file an application, be
investigated, and be found suitable, in which case the applicant would be
required to pay all of the costs and fees of the GCB investigation. If the
beneficial holder of voting securities who must be found suitable is a
corporation, partnership, or trust, it must submit detailed business and
financial information including a list of beneficial owners. Any person who
acquires more than 5% of our voting securities must report this to the
Commission. Any person who becomes a beneficial owner of more than 10% of our
voting securities must apply for a finding of suitability within 30 days after
the chairman of the GCB mails the written notice requiring this filing.

         Under certain circumstances, an Institutional Investor, as this term is
defined in the Commission regulations, which acquires more than 10%, but not
more than 15%, of our voting securities may apply to the Commission for a waiver
of these finding of suitability requirements, provided the institutional
investor holds the voting securities for investment purposes only. An
institutional investor will not be deemed to hold voting securities for
investment purposes unless the voting securities were acquired and are held in
the ordinary course of its business and not for the purpose of causing, directly
or indirectly (i) the election of a majority of our board of directors, (ii) any
change in our corporate charter, bylaws, management, policies or operations, or
(iii) any other action which the Commission finds to be inconsistent with
holding our voting securities for investment purposes only. The Commission
considers voting on all matters voted on by stockholders and the making of
financial and other informational inquiries of the type normally made by
securities analysts, and such other activities as the Commission may determine,
to be consistent with holding voting securities for investment purposes only. If
the beneficial holder of voting securities who must be found suitable is a
corporation, partnership, limited partnership, limited liability company or
trust, it must submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all costs of the GCB
investigation.

         Any person who fails or refuses to apply for a finding of suitability
or a license within 30 days after being ordered to do so by the Commission or
the chairman of the GCB may be found unsuitable. The same restrictions apply to
a record owner who fails to identify the beneficial owner, if requested to do
so. Any stockholder found unsuitable and who holds, directly or indirectly, any
beneficial ownership of our voting securities beyond that period of time as may
be prescribed by the Commission may be guilty of a criminal offense. We are
subject to disciplinary action, and possible loss of our approvals, if, after we
receive notice that a person is unsuitable to be a stockholder or to have any
other relationship with us or any of our licensed gaming subsidiaries, we (i)
pay that person any dividend or interest upon our voting securities, (ii) allow
that person to exercise, directly or indirectly, any voting right conferred
through securities held by that person, (iii) give remuneration in any form to
that person, for services rendered or otherwise, or (iv) fail to pursue all
lawful efforts to require the unsuitable person to relinquish his voting
securities for cash at fair market value. Additionally, the Clark County
authorities have taken the position that they have the authority to approve all
persons owning or controlling the stock of any corporation controlling a gaming
licensee.

         The Commission may, in its discretion, require the holder of any of our
debt securities to file an application, be investigated and be found suitable to
own any of our debt securities. If the Commission determines that a person is
unsuitable to own any of these securities, then pursuant to the Nevada gaming
laws, we can be sanctioned, including the loss of our approvals, if without
prior Commission approval, we: (i) pay to the unsuitable person any dividend,
interest, or any distribution whatsoever; (ii) recognize any voting right by the
unsuitable person in connection with these securities; (iii) pay the unsuitable
person remuneration in any form; or (iv) make any payment to the unsuitable
person by way of principal, redemption, conversion, exchange, liquidation, or
similar transaction.

         We are required to maintain a current stock ledger in Nevada that may
be examined by the Nevada gaming authorities at any time. If any of our
securities are held in trust by an agent or by a nominee, the record holder may
be required to disclose the identity of the beneficial owner to the Nevada
gaming authorities. A failure to make this disclosure may be grounds for finding
the record holder unsuitable. We are also required to render maximum assistance
in determining the identity of the beneficial owner. The Commission has the
power at any time to require our stock certificates to bear a legend indicating
that the securities are subject to the Nevada gaming laws and the regulations of
the Commission. To date, the Commission has not imposed this requirement on us.

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<PAGE>

         We may not make a public offering of our securities without the prior
approval of the Commission if the securities or their proceeds are intended to
be used to construct, acquire or finance gaming facilities in Nevada, or retire
or extend obligations incurred for such purposes.

         Changes in control of VirtGame through merger, consolidation,
acquisition of assets or stock, management or consulting agreements or any act
or conduct by a person whereby he obtains control, may not occur without the
prior investigation of the GCB and approval of the Commission. Entities seeking
to acquire control of us must satisfy the GCB and the Commission in a variety of
stringent standards prior to assuming control. The Commission may also require
controlling stockholders, officers, directors and other persons having a
material relationship or involvement with the entity proposing to acquire
control, to be investigated and licensed as part of the approval process
relating to the transaction.

         The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and other corporate
defense tactics that affect Nevada gaming licensees, and publicly-traded
corporations that are affiliated with those operations, may be injurious to
stable and productive corporate gaming. The Commission has established a
regulatory scheme to ameliorate the potentially adverse effects of these
business practices upon Nevada's gaming industry and to further Nevada's policy
to (i) assure the financial stability of corporate gaming operators and their
affiliates; (ii) preserve the beneficial aspects of conducting business in the
corporate form; and (iii) promote a neutral environment for the orderly
governance of corporate affairs. Approvals are, in certain circumstances,
required from the Commission before we can make exceptional repurchases of
voting securities above their current market price and before a corporate
acquisition opposed by management can be consummated. Nevada's gaming laws and
regulations also require prior approval by the Commission if we were to adopt a
plan of recapitalization proposed by our board of directors in opposition to a
tender offer made directly to our stockholders for the purpose of acquiring
control of us.

         License fees and taxes, computed in various ways depending on the type
of gaming or activity involved, are payable to the State of Nevada and to the
cities and counties where we conduct operations. Depending on the particular fee
or tax involved, these fees and taxes are payable either monthly, quarterly or
annually. Annual fees are payable to the State of Nevada to renew our Nevada
gaming licenses.

         Any person who is licensed, required to be licensed, registered,
required to be registered, or is under common control with such persons
(collectively referred to as licensees), and who proposes to participate in the
conduct of gaming operations outside of Nevada is required to deposit with the
GCB, and thereafter maintain, a revolving fund in the amount of $10,000 to pay
the expenses of investigation by the GCB of the licensee's participation in
foreign gaming. This revolving fund is subject to increase or decrease at the
discretion of the Commission. As a licensee, we are required to comply with
certain reporting requirements imposed by the Nevada gaming laws. We are also
subject to disciplinary action by the Commission if we knowingly violate any
laws of the foreign jurisdiction pertaining to our foreign gaming operation,
fail to conduct our foreign gaming operations in accordance with the standards
of honesty and integrity required of Nevada gaming operations engage in any
activity or enter into any association that is unsuitable because it poses an
unreasonable threat to the control of gaming in Nevada, reflects or tends to
reflect discredit or disrepute upon the State of Nevada or gaming in Nevada, or
is contrary to the gaming policies of Nevada, engage in any activity or enter
into any association that interferes with the ability of the State of Nevada to
collect gaming taxes and fees, or employ, contract with or associate with any
person in the foreign gaming operation who has been denied a license or a
finding of suitability in Nevada on the ground of personal unsuitability, or who
has been found guilty of cheating at gambling.

EMPLOYEES

         As of the date of this report, we employed eleven full-time employees,
and two full-time consultants, four of whom are involved in administration and
nine are involved in software development and engineering.

FACILITIES

         Our executive offices are located in San Diego, California and consist
of approximately 3,300 square feet of leased premises. The lease for these
premises expires in February 2005 and provides for monthly rent of approximately
$3,135. Our office in Las Vegas is on a month-to-month basis with monthly rent

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<PAGE>

of $1,350. We believe our existing facilities in San Diego satisfy our present
and foreseeable needs but our Las Vegas office may need to be expanded as we
increase our customer and product base in Nevada.

LITIGATION

         There are no pending legal proceedings to which we or our properties
are subject.

ITEM 1A.  CAUTIONARY STATEMENT REGARDING FUTURE RESULTS, FORWARD-LOOKING
INFORMATION AND CERTAIN IMPORTANT FACTORS

         We make written and oral statements from time to time regarding our
business and prospects, such as projections of future performance, statements of
management's plans and objectives, forecasts of market trends, and other matters
that are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Statements containing the words or phrases "will likely result," "are expected
to," "will continue," "is anticipated," "estimates," "projects," "believes,"
"expects," "anticipates," "intends," "target," "goal," "plans," "objective,"
"should" or similar expressions identify forward-looking statements, which may
appear in documents, reports, filings with the Securities and Exchange
Commission, news releases, written or oral presentations made by officers or
other representatives made by us to analysts, stockholders, investors, news
organizations and others, and discussions with management and other
representatives of us. For such statements, we claim the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.

         Our future results, including results related to forward-looking
statements, involve a number of risks and uncertainties. No assurance can be
given that the results reflected in any forward-looking statements will be
achieved. Any forward-looking statement made by or on behalf of us speaks only
as of the date on which such statement is made. Our forward-looking statements
are based upon assumptions that are sometimes based upon estimates, data,
communications and other information from suppliers, government agencies and
other sources that may be subject to revision. Except as required by law, we do
not undertake any obligation to update or keep current either (i) any
forward-looking statement to reflect events or circumstances arising after the
date of such statement, or (ii) the important factors that could cause our
future results to differ materially from historical results or trends, results
anticipated or planned by us, or which are reflected from time to time in any
forward-looking statement which may be made by or on behalf of us.

         In addition to other matters identified or described by us from time to
time in filings with the SEC, there are several important factors that could
cause our future results to differ materially from historical results or trends,
results anticipated or planned by us, or results that are reflected from time to
time in any forward-looking statement that may be made by or on behalf of us.
Some of these important factors, but not necessarily all important factors,
include the following:

         WE HAVE A HISTORY OF LOSSES, EXPECT TO INCUR ADDITIONAL LOSSES AND MAY
NEVER ACHIEVE PROFITABILITY. We commenced revenue producing operations in
September 1997. However, during our fiscal year ended December 31, 2003, we
generated only $601,100 of revenue and realized a net loss $1,233,443. From our
inception of revenue producing operations in September 1997 through December 31,
2003, we incurred an accumulated deficit of $23,291,178. We have yet to generate
profits from operations and consequently we are unable to predict with any
certainty whether our operations will become a commercially viable business. In
order for us to become profitable, we will need to generate and sustain a
significant amount of revenue while maintaining reasonable cost and expense
levels.

         WE WILL REQUIRE ADDITIONAL CAPITAL IN ORDER TO CARRY OUT OUR PLAN OF
OPERATIONS, BUT WE DO NOT HAVE ANY COMMITMENTS TO OBTAIN SUCH CAPITAL AND WE CAN
NOT ASSURE YOU THAT WE WILL BE ABLE TO OBTAIN ADEQUATE CAPITAL AS AND WHEN
REQUIRED. On December 31, 2003, we completed a private placement offering from
which we received net proceeds of approximately $1,374,585. We believe that our
working capital as of the date of this report will be sufficient to satisfy our
estimated working capital requirements through the end of the current fiscal

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<PAGE>

year ending December 31, 2004. However, we believe that we will need significant
additional working capital in order to fund our continued gaming software
development during fiscal 2005 and, if necessary, to finance future losses from
operations as we endeavor to build revenue and reach a profitable level of
operations. We plan to raise additional required funds through various financing
sources by issuing additional shares of our securities. However, there can be no
guarantees that such funds will be available on commercially reasonable terms,
if at all. Should we be unable to raise the required funds, our ability to
continue as a going concern may be jeopardized. In that case, those persons who
had subscribed for our shares would be subject to heightened risk losing their
entire investment.

         WE DO NOT HAVE A SIGNIFICANT OPERATING HISTORY AND, AS A RESULT, THERE
IS A LIMITED AMOUNT OF INFORMATION ABOUT US ON WHICH TO MAKE AN INVESTMENT
DECISION. Throughout most of our history, our primary business focus has been
the operation of casino-style gaming operations over the Internet. In 2000, we
decided to wind up our Internet casino operations and focus on developing and
licensing software products for the regulated casino, sports wagering and
lottery industries. As of the date of this report, we have completed the
development of a suite of software products that offer the regulated gaming and
lottery industries a complete turnkey solution for conducting server-based
casino, sports wagering and lottery operations over-the-counter, at stand-alone
kiosks and remotely via both closed-loop Intranet and the Internet. We have
entered into a few contracts for the provision of turnkey solutions to
land-based casinos and lottery operators. However, we have not derived a
significant amount of revenue from these activities and these activities remain
a relatively new pursuit for us. Accordingly, there is little operating history
upon which to judge our current operations.

         IF OUR GAMING PRODUCTS ARE NOT ACCEPTED IN THE COMPETITIVE MARKET FOR
NETWORKED GAMING SOFTWARE, WE MAY BE UNABLE TO COMPETE IN THE GAMING SOFTWARE
MARKET. Our success as a gaming software supplier is dependent upon numerous
factors, including our ability to design, manufacture, market and service
networked gaming software that achieves player and casino acceptance while
maintaining product quality and acceptable margins. If our software fails to be
accepted by the gaming market and we are otherwise unable to develop gaming
software that offers technological advantages, we will be unable to generate the
revenues necessary to compete effectively. Consequently, the results of our
operations could suffer.

         AN ADVERSE CHANGE AFFECTING THE GAMING INDUSTRY, SUCH AS A CHANGE IN
GAMING REGULATIONS OR A DECREASE IN THE RATE OF GROWTH AND POPULARITY OF CASINO
OR INTERNET GAMING, WILL NEGATIVELY IMPACT OUR PROFITABILITY AND OUR POTENTIAL
FOR GROWTH. Our ability to grow our business and operate profitably is
substantially dependent upon the expansion of the gaming and Internet gaming
industry and factors that are beyond our control. These factors include, among
others:

         o        the pace of development;

         o        changes in gaming regulation; and

         o        the continued popularity of casino gaming as a leisure
                  activity.

         An adverse change in any of these political, legal and other factors
may negatively impact our results of operations.

         OUR FAILURE TO OBTAIN OR RETAIN REQUIRED GAMING LICENSES COULD PREVENT
US FROM EXPANDING OUR MARKET AND PROHIBIT US FROM GENERATING REVENUE IN CERTAIN
JURISDICTIONS. In the United States, the manufacture and distribution of
networked gaming software is subject to numerous federal, state, provincial,
tribal, international and local regulations. In particular, we are currently
subject to extensive regulation in Nevada and the Canadian province of Ontario.
These regulations are constantly changing and evolving, and may curtail gaming
in various jurisdictions in the future, which would decrease the number of
jurisdictions from which we can generate revenues.

         Together with our key personnel, we undergo extensive investigation
before each jurisdictional license is issued. Our networked gaming software is
subjected to independent testing and evaluation prior to approval from each
jurisdiction in which we do business. Generally, regulatory authorities have
broad discretion when granting, renewing or revoking these game approvals and
licenses. Our failure to obtain or retain a required license or approval in one
jurisdiction could negatively impact our ability to obtain or retain required
licenses and approvals in other jurisdictions. The failure to obtain or retain a

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<PAGE>

required license or approval in any jurisdiction would decrease the geographic
areas where we may operate and generate revenues, decrease our share in the
gaming marketplace and put us at a disadvantage compared with our competitors.
Consequently, the market price of our common stock may suffer.

         Regulatory authorities may require stockholders to submit to background
investigations and respond to questions from regulatory authorities, and may
deny a license or revoke our licenses based upon their findings. These licensing
procedures and background investigation may inhibit potential investors from
becoming significant stockholders.

         THE FUTURE REVENUE GROWTH OF OUR GAMING BUSINESS DEPENDS ON OUR ABILITY
TO IMPROVE THE EFFECTIVENESS AND BREADTH OF OUR SALES ORGANIZATIONS. We will
need to improve the effectiveness and breadth of our sales operations nationally
and internationally in order to increase market awareness and sales of our
gaming products. Our gaming products require sophisticated sales efforts
targeted at selected people within the gaming industry. Competition for
qualified sales personnel is intense, and we might not be able to hire the kind
and number of sales personnel we are targeting. In addition, we will need to
effectively train and educate our sales force if we are to be successful in
selling into the gaming market.

         A SIGNIFICANT PART OF OUR FUTURE PLAN OF OPERATIONS IS TO OFFER TO THE
REGULATED GAMING INDUSTRY A SOFTWARE SOLUTION THAT WILL ENABLE IT TO PROVIDE
SERVER-BASED CASINO GAMES, SPORTS WAGERING AND LOTTERIES OVER THE INTERNET AND
CLOSED-LOOP INTRANETS, HOWEVER THIS IS NOT AN ESTABLISHED INDUSTRY AND NO ONE TO
DATE HAS SUCCESSFULLY CONDUCTED ONLINE GAMING ON A LARGE SCALE. While the gaming
and lottery industries are well-established and have recently experienced
significant growth and profitability, online and interactive gaming applications
are relatively recent developments and remain an unproven segment of the
industry. To our knowledge, no business has conducted regulated gaming or
lottery operations on an ongoing and large scale basis over either the Internet
or a closed-loop Intranet. The incipient nature of this industry segment and the
number of well-capitalized companies likely to seek entry into the market
present a number of special risks both to us and to our current and potential
future customers, including

         o        the risk that a competitor will be able to implement standards
                  of operations that will, in effect, become the industry
                  standard, thus inhibiting market acceptance of competing
                  operations;

         o        the possibility that gaming technology will experience a rapid
                  succession of material developments resulting in a technology
                  "leap frog" effect that outdates existing technologies and
                  standards every few years; and

         o        laws and regulations may be imposed in jurisdictions in which
                  we or our customers operate which prohibit or regulate such
                  services in a manner which negatively affects profitability.

         IN ADDITION TO THE FACT THAT ONLINE GAMING IS AN INCIPIENT INDUSTRY, AT
THE PRESENT TIME IT IS FOR THE MOST PART PROHIBITED IN ALL 50 STATES. Federal
and state prosecutors and courts have consistently applied the U.S. Wire Act and
similar state laws to Internet-based gaming. Consequently, both land-based and
online gaming in the U.S. is prohibited unless authorized by the state from
which and into which the transmission is made. We believe that states that
permit land-based gaming have been reluctant to sponsor or license online gaming
within their jurisdictions out of concern that they will not be able to prevent
inappropriate persons from participating. We believe that we offer a viable
solution to the dilemma facing U.S. regulators and legislators, and we have
received approval from the Nevada Gaming Control Board to offer on behalf of a
chain of Las Vegas casinos an online closed-loop wagering system. However, there
is, to our knowledge, no pending legislation that would legalize Internet-based
gaming or lotteries to any significant degree.

         WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS AND WE MAY INCUR
SIGNIFICANT COSTS IN ATTEMPTING TO DO SO. Our success and ability to compete are
dependent to a significant degree on our proprietary technology. We rely on a
combination of copyright, trade secret and trademark laws, as well as
confidentiality and licensing agreements to protect our proprietary rights.
However, it may be possible for a third party to copy or otherwise obtain and
use our software or other proprietary information without authorization or to

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<PAGE>

develop similar software independently. In addition, litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could have a material adverse
affect on our business, financial condition and operating results.

         THE MARKET FOR OUR STOCK IS LIMITED. Our common stock is traded on the
OTC Bulletin Board under the symbol "VGTI.OB". On March 26, 2004, the last
reported sale price of our common stock on the OTC Bulletin Board was $0.53 per
share. However, we consider our common stock to be "thinly traded" and any last
reported sale prices may not be a true market-based valuation of the common
stock. There can be no assurance that an active market for our common stock will
develop. In addition, the stock market in general, and internet and technology
companies in particular, have experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance
of such companies.

         OUR COMMON STOCK IS CONSIDERED TO BE A "PENNY STOCK" AND, AS SUCH, THE
MARKET FOR OUR COMMON STOCK MAY BE FURTHER LIMITED BY CERTAIN SEC RULES
APPLICABLE TO PENNY STOCKS. As long as the price of our common stock remains
below $5.00 per share or we have a net tangible assets of $2,000,000 or less,
our common shares are likely to be subject to certain "penny stock" rules
promulgated by the SEC. Those rules impose certain sales practice requirements
on brokers who sell penny stock to persons other than established customers and
accredited investors (generally institutions with assets in excess of $5,000,000
or individuals with net worth in excess of $1,000,000). For transactions covered
by the penny stock rules, the broker must make a special suitability
determination for the purchaser and receive the purchaser's written consent to
the transaction prior to the sale. Furthermore, the penny stock rules generally
require, among other things, that brokers engaged in secondary trading of penny
stocks provide customers with written disclosure documents, monthly statements
of the market value of penny stocks, disclosure of the bid and asked prices and
disclosure of the compensation to the brokerage firm and disclosure of the sales
person working for the brokerage firm. These rules and regulations adversely the
affect the ability of brokers to sell our common shares and limit the liquidity
of our securities.

ITEM 2.  DESCRIPTION OF PROPERTIES

         Our executive offices are located in San Diego, California and consist
of approximately 3,300 square feet of office space for monthly rent of $3,135.
Our current Las Vegas office is approximately 1,000 square feet of office space
for monthly rent of $1,350.

ITEM 3.  LEGAL PROCEEDINGS

         We are not a party in any litigation and have no knowledge of any
pending legal proceedings in any court or agency of government or government
authority.

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

         No matters were submitted during the fourth quarter of 2003 to a vote
of security holders through the solicitation of proxies or otherwise.

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                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

         Our common stock trades on the OTC Bulletin Board under the symbol
"VGTI.OB." The following table shows the high and low bid information of our
common stock for the periods indicated as reported by the OTC Bulletin Board.
These prices do not include retail markup, markdown or commission and may not
represent actual transactions.

                                                        HIGH            LOW
                2002:
                First quarter....................   $      .54      $      .29
                Second quarter...................          .44             .24
                Third quarter....................          .36             .12
                Fourth quarter...................          .55             .23

                2003:
                First quarter....................   $      .48      $      .25
                Second quarter...................          .53             .28
                Third quarter....................          .85             .50
                Fourth quarter...................          .82             .61

         We consider our common stock to be thinly traded and, accordingly,
reported sale prices may not be a true market-based valuation of our common
stock.

STOCKHOLDERS

         As of March 26, 2004, there were approximately 150 record holders of
our common stock and 1,011 of beneficial holders of Stock.

DIVIDENDS

         We have not paid any cash dividends on our common stock since our
inception and do not contemplate paying dividends on our common stock in the
foreseeable future. It is anticipated that earnings, if any, will be retained
for the operation of our business. Although to we do not plan to pay dividends
on our common stock, to the extent that we do so in the future, the holders of
our Series A convertible preferred stock and Series B convertible preferred
stock will be entitled to participate in such dividends on a pro rata basis. In
that case, the dividends payable to the preferred stockholders would be
determined as if the preferred stock had been converted to common stock on the
record date for determining the stockholders entitled to receive the dividends.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

         Item 11 of this report includes information about the securities
underlying outstanding options and securities remaining available for issuance
under our equity compensation plans as of December 31, 2003.

RECENT SALES OF UNREGISTERED SECURITIES

         Between November 2003 and December 2003, we sold a total of 17.05 units
to 6 accredited investors in a private placement offering pursuant to Section
4(2) of the Securities Act of 1933, as amended, and Rule 506 thereunder. The
offering price was $100,000 per unit, resulting in total gross proceeds of
$1,705,000. Each unit consisted of 100 shares of our Series B convertible
preferred stock and warrants to purchase 35,714 shares of our common stock at a
exercise price of $0.70 per share. McMahan Securities Co. L.P. acted as

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<PAGE>

placement agent for the offering and received commissions equal to 10% of the
gross proceeds from the sale of the units, a warrant to purchase 243,571 shares
of our common stock for $0.70 per share and a non-accountable expense allowance
of $120,000. Information about previous unregistered sales of our securities by
the company is contained in our Quarterly Reports on form 10-QSB filed with the
SEC.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

         During 2002 and 2003, we received a total of $6,263,780 of funds from
the private placement sale of our equity securities and the exercise of
outstanding options. Of this amount, over $3,700,000 was raised in the last six
months of 2003, including net proceeds of $1,374,585 received in December 2003
from the sale of units consisting of Series B preferred stock and warrants to
purchase common stock, and net proceeds of $2,488,760 received in July 2003 from
the sale of units consisting of Series A preferred stock and warrants to
purchase common stock.

         These funds acquired from these private placements have been, and will
be, applied towards our plan of operation as a software provider to the gaming
and lottery industries and our pursuit of a gaming manufacturer and distributor
license in Nevada and a gaming related supplier license in Ontario, Canada. We
will continue to focus on the development of gaming software applications and
licensing opportunities for regulated casinos and sports wagering and lottery
operations. Over the last six months, we have responded to several requests for
gaming and lottery application proposals in the U.S. and Canada. Our plan of
operations is to provide software application services and license our software
products to distributors of restricted on-line content, including casinos,
sports wagering systems and state and national lotteries. Our goal is to be the
leading back-end application software provider to the licensed and land-based
gaming industry.

RESULTS OF OPERATIONS

         YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

         Our net revenues increased from $314,856 to $601,100 for the year ended
December 31, 2003 compared to the prior year. Operating expenses from operations
decreased by 36% for the year ended December 31, 2003 to $1,985,185 compared to
$3,096,469 in the prior year. The decrease was primarily due to lower licensing,
legal, and advertising fees.

         Interest income increased to $6,079 for the year ended December 31,
2003 compared to $516 for the prior year due to higher cash positions during
2003. Interest expense decreased to $14,812 for the year ended December 31, 2003
compared to $52,683 for the prior year, due to lower notes payable during the
2003 year.

         Net loss for the year ending December 31, 2003 decreased 54% to
$1,233,443 or $0.04 per share, on 29,852,088 weighted average shares
outstanding, compared with a loss in 2002 of $2,707,186, or $0.11 per share, on
24,091,248 weighted average shares outstanding.

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

         Our net revenues decreased from $589,227 to $314,856 for the year ended
December 31, 2002 compared to the prior year. Operating expenses from continuing
operations increased by 12% for the year ended December 31, 2002 to $3,096,469
compared to $2,772,446 in the prior year. The increase was primarily due to
$123,000 of expense from variable options and higher gaming license fees offset
by $128,016 of debt forgiveness income. 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 increased to $516 for the year ended December 31, 2002
compared to $460 for the prior year. Interest expense increased to $52,683 for
the year ended December 31, 2002 compared to $39,547 for the prior year, due to
higher average notes payable balances outstanding during the year.

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<PAGE>

         Net loss for the year ending December 31, 2002 increased 22% to
$2,707,186, or $0.11 per share, on 24,091,248 weighted average shares
outstanding, compared with a loss in 2001 of $2,212,894, or $0.14 per share, on
15,537,933 weighted average shares outstanding.

LIQUIDITY AND CAPITAL RESOURCES

         We had a working capital of $2,497,063 at December 31, 2003, an
improvement of $3,116,594 in working capital compared to the working capital
deficit of $619,531 as of December 31, 2002.

         Our plan of operations over the next 12 months includes the continued
pursuit of our goal to position VirtGame as the leading provider of software
applications and solutions to the regulated gaming and lottery industries by
developing and integrating solutions to comply with the regulatory concerns. We
believe that our working capital as of the date of this report will be
sufficient to satisfy our estimated working capital requirements at our current
level of operations for the next twelve months.

         We believe that we will need significant additional working capital in
order to fund our continued gaming software development during 2005 and, if
necessary, to finance possible future losses from operations as we endeavor to
build revenue and reach a profitable level of operations. We plan to raise
additional required funds through various financing sources by issuing
additional shares of our securities. However, as of the date of this report we
have no plans or commitments for the sale of our securities. If we are unable to
raise the required capital, there will be a severe impact on our financial
condition that would jeopardize our ability to continue as a going concern.

         We do not have any off-balance sheet financing arrangements or
liabilities.

RECENT ACCOUNTING STANDARDS

         In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123" ("SFAS 148"), which provides alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock based employee compensation. The standard amends the disclosure
requirement of SFAS 123 to require prominent disclosure in both annual and
interim financial statements about the method of accounting for stock based
employee compensation and the effect of the method used on the reported results.

         In April 2003, FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 requires that contracts with comparable
characteristics be accounted for similarly. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of this Statement did
not have an effect on the consolidated financial statements.

         In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 146"). SFAS No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). SFAS No. 150 is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The adoption of
this Statement did not have a material effect on the consolidated financial
statements.

         In January 2003, FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 is effective for variable
interest entities created after January 31, 2003. FIN 46 is an interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. In December 2003, FASB published a revision to FIN 46 ("46R")
to clarify some of the provisions of FIN 46 and to exempt certain entities from
its requirements. The adoption of this interpretation did not have an impact on
our financial condition or results of operations.

ITEM 7.  FINANCIAL STATEMENTS

         Our financial statements and related notes are contained on pages F-1
to F-23 of this report. The index to such items is included in Item 13.

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

         Not applicable.

ITEM 8A. CONTROLS AND PROCEDURES

         Our disclosure controls and procedures are designed to ensure that
information required to be disclosed in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission and that such information is accumulated and communicated to
our management, as appropriate, to allow timely decisions regarding required
disclosure. Our Chief Executive Officer and Chief Financial Officer has reviewed
the effectiveness of our disclosure controls and procedures and has concluded
that the disclosure controls and procedures are effective as of the end of the
period covered by this report. There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the last day they were evaluated.

         It should be noted that any system of controls, however well designed
and operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems, there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. As a small organization with 13 full time
employees, the effectiveness of our controls heavily depends on the direct
involvement of our Chief Executive Officer and Chief Financial Officer.

                                       16



<PAGE>

                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT.

Set forth below are our directors and officers:

NAME                             AGE                  POSITION
------------------------------- ----- -----------------------------------------
Bruce Merati...................   46   Chief Executive Officer, Chief Financial
                                       Officer, Secretary and Director
Glenn E. Wichinsky.............   51   President, General Counsel and Director
General Paul A. Harvey.........   66   Director

         MR. MERATI was appointed as our Chief Executive Officer in August 2003,
and he also continues to serve as our Chief Financial Officer, a position he has
held since July 27, 1998. Mr. Merati served as our President from September 2002
through August 2003. Mr. Merati has also served on our board of directors since
June 2002. From July 1997 to July 1998, Mr. Merati served as the controller of
The Weekend Exercise Company, Inc., a designer and marketer of women's and
girls' athletic apparel and casual sportswear located in San Diego, California.
Mr. Merati is a Certified Public Accountant and a Chartered Accountant in
England and Wales and spent seven years as an auditor with the London office of
PricewaterhouseCoopers.

         MR. WICHINSKY has served as our President and General Counsel since
September 1, 2003. He has served on our board of directors since July 2003. Mr.
Wichinsky has been actively engaged in the Nevada gaming industry since 1979. He
has been granted gaming licenses for his management and equity participation in
Westronics, Inc., a licensed manufacturer, distributor and operator of gaming
equipment in the State of Nevada; as a nonrestricted licensee as a general
partner of the Mardi Gras Casino in Las Vegas; and, most recently licensed, as a
co-owner and operator of the Regency Casino located in Laughlin, Nevada. Mr.
Wichinsky attended the University of the Pacific, McGeorge School of Law in
Sacramento, California, earning a Juris Doctor degree in 1982. Mr. Wichinsky is
a member of the Nevada and Florida bars.

         GENERAL HARVEY was appointed as a director of VirtGame in November
2003. General Harvey was Executive Director of the Mississippi Gaming Commission
from 1993 through 1998. He is currently a consultant to the gaming, hotel and
resort industry and is on the board of directors of the National Center for
Responsible Gaming and serves as an outside director on the board of directors
of Riviera Hotel and Casino. He spent 32 years on active duty in the United
States Air Force where he held numerous command positions throughout the United
States, Europe, Africa and the Middle East.

         As a condition of our manufacturers and distributors license from the
Nevada Gaming Commission, each of our directors, executive officers and
controlling stockholders must be licensed by the Nevada Gaming Commission. The
individual licensing process is lengthy and expensive. Mr. Merati and Mr.
Wichinsky have received individual licenses from the Nevada Gaming Commission
and General Harvey has an application on file with the Commission. The Nevada
Gaming Commission will allow us to appoint executive officers and directors in
advance of their approval provided that such person immediately commences the
licensing approval process. We are actively pursuing additional officers and
directors who are already licensed by the Nevada Gaming Commission.

         In addition to the requirements of the Nevada Gaming Commission, the
Ontario Gaming Commission requires us to obtain their prior approval of the
appointment of any persons as an executive officer, director or controlling
shareholder. Mr. Merati and Mr. Najor have been approved by the Ontario Gaming
Commission. Mr. Wichinsky serves as an executive officer and on our Board of
Director. Mr. Wichinsky has also been approved by the Ontario Gaming Commission.

                                       17



<PAGE>

AUDIT COMMITTEE FINANCIAL EXPERT

         We do not have an audit committee. The Board has determined, however,
that Mr. Merati meets the criteria of an "audit committee financial expert" as
that term is defined in the SEC rules. Mr. Merati is the Chief Executive Officer
and Chief Financial Officer of VirtGame and therefore he is not "independent"
under applicable SEC rules. The SEC rules provide that audit committee financial
experts do not have any additional duties, obligations or liabilities and are
not considered experts for purposes of the Securities Act of 1933.

CODE OF ETHICS

         We have adopted a code of ethics that applies to the principal
executive officer and principal financial and accounting officer. We will
provide to any person without charge, upon request, a copy of our code of
ethics. Requests may be directed to our principal executive offices at 6969
Corte Santa Fe, Suite A, San Diego, California 92121-3270.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our officers and directors and those persons who beneficially own more
than 10% of our outstanding shares of common stock to file reports of securities
ownership and changes in such ownership with the Securities and Exchange
Commission. Officers, directors and greater than 10% beneficial owners are also
required by rules promulgated by the SEC to furnish us with copies of all
Section 16(a) forms they file.

         Based solely upon a review of the copies of such forms furnished to us,
we believe that during 2003 all Section 16(a) filing requirements applicable to
our officers, directors and greater than 10% beneficial owners were complied
with except that Veritas-Scalable Investment Products Fund LLC filed to timely
failed an initial Form 3.

ITEM 10. EXECUTIVE COMPENSATION.

         The following table sets forth the compensation paid by us to our chief
executive officer and to all other executive officers for services rendered
during the fiscal years ended December 31, 2003, 2002 and 2001.

<TABLE>
<CAPTION>
                                           ANNUAL COMPENSATION             LONG TERM COMPENSATION
                                    ---------------------------------   ---------------------------
                                                                        RESTRICTED    COMMON SHARES   ALL OTHER
                                                                          STOCK        UNDERLYING      COMPEN-
    NAME AND POSITION      YEAR      SALARY       BONUS       OTHER     AWARDS ($)       OPTIONS       SATION
---------------------------------------------------------------------------------------------------------------
<S>                        <C>      <C>         <C>          <C>          <C>          <C>               <C>
Bruce Merati,              2003     $156,644       --        $35,728        --           700,000         --
CEO, CFO AND               2002      108,333    $14,250       34,471        --           600,000         --
SECRETARY                  2001       81,250       --          --         $32,400      1,000,000         --

Glenn Wichinsky            2003       32,769       --          500          --           150,000         --
PRESIDENT AND              2002        --          --          --           --             --            --
GENERAL COUNSEL            2001        --          --          --           --             --            --
</TABLE>

EMPLOYMENT AGREEMENTS

         BRUCE MERATI. In October 2003, we entered into a two-year employment
agreement with our chief executive officer and chief financial officer, Bruce
Merati. The agreement provides for a base annual salary of $200,000, of which
$35,000 is deferred until we have two consecutive cash flow positive quarters.
The agreement also provides for bonuses of five percent of net profit generated
by new products for which we receive regulatory approval, up to a maximum of
$250,000 per year, plus a car allowance of $500 per month. The employment
agreement also provides for our grant of an option to purchase 700,000 common
shares, at an exercise price of $0.62 per share, exercisable for 5 years,
becoming fully exercisable on July 1, 2005. The agreement expires on July 1,
2005, but will be automatically renewed for an additional two year term unless
either party elects not to renew at least 90 days prior to the expiration date.

                                       18


<PAGE>

         GLENN E. WICHINSKY. In September 2003, we entered into a one-year
employment agreement with Glenn Wichinsky to serve as our President and General
Counsel. The agreement provides for annual salary of $120,000, plus a bonus of
$20,000 if certain milestones are achieved. Pursuant to the agreement, we
granted Mr. Wichinsky an option to purchase 100,000 shares of our common stock
at an exercise price of $0.66 per share. The option becomes fully vested in
September 2004 and has a term of five years. Upon his appointment to our board
of directors in June 2003, Mr. Wichinsky was also granted an option to purchase
50,000 shares of our common stock at an exercise price of $0.50. The option
becomes fully vested in June 2004 and has a term of five years. We also pay Mr.
Wichinsky a car allowance of $500 per monthly.

<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
                                                     INDIVIDUAL GRANTS
                            ----------------------------------------------------------------------
                              NUMBER OF SECURITIES       % OF TOTAL OPTIONS        EXERCISE OR
                               UNDERLYING OPTIONS     GRANTED TO EMPLOYEES IN       BASE PRICE        EXPIRATION
          NAME                    GRANTED (#)               FISCAL YEAR               ($/SH)             DATE
--------------------------  ------------------------- -------------------------  -----------------  ---------------
<S>                                 <C>                         <C>                   <C>              <C>
Bruce Merati.............           700,000                     74%                   $0.62            10/01/08
Glenn E. Wichinsky.......            50,000                      5%                   $0.50            07/14/08
                                    100,000                     11%                   $0.66            09/01/08
</TABLE>

<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
                                                                                                     VALUE OF
                                                                         NUMBER OF SECURITIES       UNEXERCISED
                                                                              UNDERLYING           IN-THE-MONEY
                                                                          UNEXERCISED OPTIONS       OPTIONS AT
                                                                          AT FISCAL YEAR-END      FISCAL YEAR-END
                             SHARES ACQUIRED                                 EXERCISABLE/          EXERCISABLE/
          NAME                 ON EXERCISE          VALUE RECEIVED           UNEXERCISABLE       UNEXERCISABLE (1)
--------------------------  ------------------    --------------------   ----------------------  ------------------
<S>                                 <C>                    <C>             <C>                   <C>
Bruce Merati.............           0                      0               2,215,000/700,000     $886,000/$21,000
Glenn E. Wichinsky.......           0                      0                       0/150,000            $0/$7,500
</TABLE>

(1)      Calculated based upon a last reported sale price of $0.65 per share on
         December 31, 2003.

         COMPENSATION OF DIRECTORS. All of our directors receive reimbursement
for out-of-pocket expenses for attending board of directors meetings. We intend
to appoint additional members to the board of directors, including outside or
non-officer members to the board. Any future outside directors may receive an
attendance fee for each meeting of the board of directors. From time to time we
may also engage certain future outside members of the board of directors to
perform services on our behalf and we will compensate such persons for the
services which they perform.

LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS

         The Delaware General Corporation Law provides that corporations may
include a provision in their certificate of incorporation relieving directors of
monetary liability for breach of their fiduciary duty as directors, provided
that such provision shall not eliminate or limit the liability of a director (i)
for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful payment

                                       19



<PAGE>

of a dividend or unlawful stock purchase or redemption, or (iv) for any
transaction from which the director derived an improper personal benefit. Our
certificate of incorporation provides that directors are not liable to us or our
stockholders for monetary damages for breach of their fiduciary duty as
directors to the fullest extent permitted by Delaware law. In addition to the
foregoing, our bylaws provide that we may indemnify directors, officers,
employees or agents to the fullest extent permitted by law and we have agreed to
provide such indemnification to each of our directors.

         The above provisions in our certificate of incorporation and bylaws and
in the written indemnity agreements may have the effect of reducing the
likelihood of derivative litigation against directors and may discourage or
deter stockholders or management from bringing a lawsuit against directors for
breach of their fiduciary duty, even though such an action, if successful, might
otherwise have benefited us and our stockholders. However, we believe that the
foregoing provisions are necessary to attract and retain qualified persons as
directors.

         Insofar as indemnification for liabilities arising under the 1933 Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the 1933 Act and is, therefore, unenforceable.

                                       20



<PAGE>

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

         The following table sets forth certain information regarding the
beneficial ownership of our common stock as of the date of this report by:

         o        each person who is known by us to be the beneficial owner of
                  more than five percent (5%) of our issued and outstanding
                  shares of common stock;

         o        each of our directors, executive officers and nominees to
                  become directors; and

         o        all directors and executive officers as a group.

<TABLE>
<CAPTION>
                  NAME AND ADDRESS                             NUMBER OF SHARES                PERCENTAGE OWNED
------------------------------------------------------    ---------------------------    -----------------------------
<S>                                                               <C>                               <C>
Bruce Merati                                                      2,556,426                         5.99%
6969 Corte Santa Fe, Suite A
San Diego, CA  92121
Glenn Wichinsky                                                      --                              --
6969 Corte Santa Fe, Suite A
San Diego, CA  92121

General Paul A. Harvey                                              100,000                           *
6969 Corte Santa Fe, Suite A
San Diego, CA  92121

ICM Asset Management, Inc.                                        2,875,000                         6.96%
601 West Main Avenue, Suite 600
Spokane, WA 99201

Veritas-Scalable Investment Products Fund LLC                     5,368,598                         9.99%
500 W. Putnam Avenue
Greenwich, CT 06830

Lighthouse Financial Group, LLC                                   2,309,217                         5.41%
420 Lexington Avenue, Suite 360
New York, NY 10170

Deutsche Bank AG                                                  3,023,684                         7.28%
31 W. 52nd St., 16th Floor
New York, NY 10019

Directors and executive officers as a group                       2,556,426                         5.99%
</TABLE>

* Represents less than 1%.

In reviewing the above table, please keep in mind:

         o        2,215,000 of the 2,556,426 common shares beneficially owned by
                  Mr. Merati represent common shares underlying presently
                  exercisable options.

         o        The 100,000 shares beneficially owned by Mr. Harvey represent
                  common shares underlying presently exercisable options.

         o        The percentage amounts for each reported party assume total
                  outstanding common shares of 40,460,461. This is based on
                  31,868,410 common shares issued and outstanding as of the date
                  of this report, plus 6,156,340 shares of common stock issuable
                  upon conversion of our outstanding Series A preferred stock
                  and 2,435,711 shares of common stock issuable upon conversion
                  of our outstanding Series B preferred stock. The percentage
                  amounts also give effect to the issuance of common shares
                  underlying presently exercisable options and warrants held by
                  the reported party.

                                       21



<PAGE>

         o        The amounts shown for ICM Asset Management, Inc. include
                  2,156,250 shares beneficially owned by Koyah Leverage
                  Partners, L.P., 546,250 shares beneficially owned by Koyah
                  Partners, L.P. and 172,500 shares beneficially owned by Raven
                  Partners, L.P. ICM Asset Management, Inc., Koyah Leverage
                  Partners, L.P., Koyah Partners, L.P., Raven Partners, L.P. and
                  the other persons or entities listed in the footnotes to the
                  Selling Stockholders' table disclaim beneficial ownership in
                  these securities except to the extent of the such entity's or
                  person's pecuniary interest in these securities and disclaim
                  membership in a group with any other entity or person within
                  the meaning of Rule 13d-5(b)(1) under the Securities Exchange
                  Act of 1934, as amended.

         o        Veritas-Scalable Investment Products Fund LLC is contractually
                  restricted from beneficially owning more than 9.99% of the
                  outstanding shares of our common stock. As a result,
                  Veritas-Scalable Investment Products Fund LLC may not convert
                  shares of our preferred stock into common stock or exercise
                  warrants to purchase our common stock to the extent that,
                  after giving effect such conversion or exercise, its ownership
                  of our common stock would exceed this 9.99% limitation. In the
                  absence of this contractual limitation, Veritas-Scalable
                  Investment Products Fund LLC would beneficially own
                  approximately 12.87% of our common stock, including common
                  shares underlying preferred shares and warrants held by such
                  shareholder.

         o        The amounts shown for Lighthouse Financial Group, LLC include
                  657,790 shares beneficially owned by Jeffrey J. Morfit,
                  230,838 shares beneficially owned by Robert J. Bradley and
                  241,650 shares beneficially owned by Joseph D. Diaco.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

         The following provides information concerning compensation plans under
which equity securities of the Company are authorized for issuance.

<TABLE>
<CAPTION>
                                              (a)                    (b)                          (c)
                                                                                         NUMBER OF SECURITIES
                                                                                         REMAINING AVAILABLE
                                                                                         FOR FUTURE ISSUANCES
                                     NUMBER OF SECURITIES        WEIGHED-AVERAGE             UNDER EQUITY
                                      TO BE ISSUED UPON         EXERCISE PRICE OF         COMPENSATION PLANS
                                         EXERCISE OF           OUTSTANDING OPTIONS,     (EXCLUDING SECURITIES
                                     OUTSTANDING OPTIONS,           WARRANTS                  REFLECTED
       PLAN CATEGORY                 WARRANTS AND RIGHTS           AND RIGHTS              IN COLUMN (A))
--------------------------------    ----------------------    ---------------------    -----------------------
<S>                                        <C>                       <C>                     <C>
Equity compensation plans
approved by security holders                  --                      --                         --

Equity compensation plans not
approved by security holders               7,553,600                 $0.32                   2,946,400
</TABLE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         In January 2002, we entered into a two-year employment agreement with
our then president and chief executive officer, Scott Walker. The agreement
provided for a base salary of $150,000. Pursuant to the agreement, we granted
Mr. Walker options to purchase 400,000 common shares, of which, 200,000 shares
are exercisable at $0.50 per share, and 200,000 shares are exercisable at $1.00
per share, which is $0.50 lower than the $1.50 exercise price stated in the
employment agreement because of a subsequent agreement with Mr. Walker. The
agreement also provided for certain performance-based bonuses. The agreement
terminated by mutual agreement of the parties effective in September 2002.
Pursuant to a separation agreement finalized with Mr. Walker in August 2003, we
paid Mr. Walker a lump-sum of $50,000 and issued to him 500,000 shares of our
common stock in exchange for the cancellation of his additional option to
purchase 600,000 shares at an exercise price of $0.25 per share. We also agreed
to pay Mr. Walker's health insurance costs through January 2004.

                                       22



<PAGE>

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

         FINANCIAL STATEMENTS. The following financial statements are included
         in this report on the pages indicated:
<TABLE>
<CAPTION>
<S>                                                                                                     <C>
         Report of Independent Auditors.........................................................................F-1
         Balance Sheets at December 31, 2003 and 2002...........................................................F-2
         Statements of Operations for the years ended December 31, 2003 and 2002................................F-4
         Statement of Changes in Stockholders' Equity for the years ended December 31, 2003 and 2002............F-5
         Statements of Cash Flows for the years ended December 31, 2003 and 2002................................F-7
         Notes to Financial Statements..................................................................F-9 to F-23
</TABLE>

         EXHIBITS. The exhibits to this Annual Report on Form 10-KSB are listed
in the Exhibit Index contained at pages E-1 to E-2 of this report. Each
management contract or compensatory plan or arrangement is identified in the
Exhibit Index by an asterisk. We will furnish a copy of any exhibit to a
stockholder who requests a copy in writing. We reserve the right to charge a
reasonable fee to cover our costs. Requests should be sent to: Bruce Merati,
Chief Executive Officer, 6969 Corte Santa Fe, Suite A, San Diego, California
92121-3270.

         REPORTS ON FORM 8-K. We did not file any reports on Form 8-K during the
last quarter of 2003.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         Our board of directors has selected PKF as independent accountants to
audit our books, records and accounts for the fiscal year 2004. PKF previously
audited our financial statements and during the two fiscal years ended December
31, 2003 and 2002.

AUDIT AND NON-AUDIT FEES

         Aggregate fees for professional services rendered to the VirtGame by
PKF for the years ended December 31, 2003 and 2002 were as follows:

              Services Provided                             2003          2002
              ----------------------------------------   ----------   ----------
              Audit Fees...........................      $  27,430    $  23,684
              Audit Related Fees...................      $   5,331    $      --
              Tax Fees.............................      $   4,000    $   6,183
              All Other Fees.......................      $   7,963    $     538
                      Total........................      $  44,724    $  30,405

         AUDIT FEES. The aggregate fees billed for the years ended December 31,
2003 and 2002 were for the audits of our financial statements and reviews of our
interim financial statements included in our annual and quarterly reports.

         AUDIT RELATED FEES. There were no fees billed for the years ended
December 31, 2003 and 2002 for the audit or review of our financial statement
that are not reported under Audit Fees.

         TAX FEES. The aggregate fees billed for the years ended December 31,
2003 and 2002 were for professional services for tax compliance, tax advice and
tax planning.

         ALL OTHER FEES. The aggregate fees billed for the years ended December
31, 2003 and 2002 were for services other than the services described above.
These services include review of SEC filings.

                                       23



<PAGE>

PRE-APPROVAL POLICIES AND PROCEDURES

         We have implemented pre-approval policies and procedures related to the
provision of audit and non-audit services. Under these procedures, our board of
directors pre-approves both the type of services to be provided by PKF and the
estimated fees related to these services.

                                       24



<PAGE>

                                   SIGNATURES

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

                                                VIRTGAME CORP.

Dated:  March 30, 2004                          By    /s/  Bruce Merati
                                                      --------------------------
                                                      Bruce Merati,
                                                      Chief Executive Officer

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

<TABLE>
<CAPTION>
           Signatures                                   Title                            Date
----------------------------------     ---------------------------------------    ------------------
<S>                                    <C>                                          <C>

     /s/  Bruce Merati                 Chief Executive Officer, Chief               March 30, 2004
----------------------------------     Financial Officer and Director
Bruce Merati                           (principal executive officer, principal
                                       financial and accounting officer)

     /s/  Glenn E. Wichinsky           President and General Counsel, Director      March 26, 2004
----------------------------------
Glenn E. Wichinsky

     /s/  Paul A. Harvey               Director                                     March 26, 2004
----------------------------------
Paul A. Harvey
</TABLE>

                                                 25



<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 Subsidiary (the "Company") as of December 31, 2003 and
2002 and the related consolidated statements of operations, shareholders' equity
(deficit) 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 Subsidiary as of December 31, 2003 and 2002, 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.

San Diego, California                               PKF
February 27, 2004                                   Certified Public Accountants
                                                    A Professional Corporation

                                      F-1



<PAGE>

                                 VIRTGAME CORP.
                                 AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2003 and 2002

                                     ASSETS
                                     ------

                                                         2003            2002
                                                     -----------     -----------

Current assets:
 Cash and cash equivalents                           $2,629,219      $   60,343
 Accounts receivable                                    161,808         107,992
 Prepaid expenses and other current assets               47,227           7,309
 Subscription receivable                                     --         125,000
                                                     -----------     -----------
 Total current assets                                 2,838,254         300,644
                                                     -----------     -----------

Noncurrent assets:
 Deposits                                                 6,379           9,799
 Property and equipment, net                             57,650          35,028
 Capitalized software, net                              923,326         656,641
                                                     -----------     -----------
 Total noncurrent assets                                987,355         701,468
                                                     -----------     -----------

 Total assets                                        $3,825,609      $1,002,112
                                                     ===========     ===========

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

                                      F-2



<PAGE>
<TABLE>
                                                   VIRTGAME CORP.
                                                   AND SUBSIDIARY
                                            CONSOLIDATED BALANCE SHEETS
                                             DECEMBER 31, 2003 and 2002
<CAPTION>

                                       LIABILITIES AND SHAREHOLDERS' DEFICIT
                                       -------------------------------------

                                                                                         2003              2002
                                                                                    -------------     -------------
<S>                                                                                 <C>               <C>
Current liabilities:
 Accounts payable                                                                   $    168,468      $    245,466
 Accrued expenses                                                                        172,723           410,966
 Current portion of capital lease obligation                                                  --             2,653
 Notes payable                                                                                --           261,090
                                                                                    -------------     -------------
 Total current liabilities                                                               341,191           920,175
                                                                                    -------------     -------------

Shareholders' equity:
 Preferred stock, $.0001 par value, 10,000,000
    shares authorized,
    Series A , 3,000 shares issued and outstanding;                                            1                --
    Series B , 1,705 shares issuable                                                          --                --
 Common stock, $.00001 par value; 100,000,000 shares authorized; 30,130,044 and
    26,427,828 shares issued and outstanding in 2003 and 2002, respectively;
    1,087,055 and 1,887,165 issuable in 2003 and 2002, respectively
                                                                                             312               283
 Additional paid-in capital                                                           26,841,283        19,901,674
 Receivable from exercise of options                                                     (66,000)          (66,500)
 Accumulated deficit                                                                 (23,291,178)      (19,753,520)
                                                                                    -------------     -------------

 Total shareholders' equity                                                            3,484,418            81,937
                                                                                    -------------     -------------

 Total liabilities and shareholders' equity                                         $  3,825,609      $  1,002,112
                                                                                    =============     =============

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

                                                        F-3
</TABLE>



<PAGE>
<TABLE>
                                         VIRTGAME CORP.
                                         AND SUBSIDIARY
                             CONSOLIDATED STATEMENTS OF OPERATIONS
                         For the years ended December 31, 2003 and 2002
<CAPTION>

                                                                     2003              2002
                                                                -------------     -------------
<S>                                                             <C>               <C>
Revenue:                                                        $    601,100      $    314,856

Operating expenses:
  Salaries and payroll expenses                                      325,149           536,751
  Research and development                                           458,014           451,270
  Variable award stock-based compensation                            123,000           123,000
  Other operating expenses                                         1,079,022         1,985,448
                                                                -------------     -------------
  Total expenses from operations                                   1,985,185         3,096,469
                                                                -------------     -------------
   Loss from operations before financial
    expense and income taxes                                      (1,384,085)       (2,781,613)

Financial income (expense):
  Interest income                                                      6,079               516
  Other income                                                       162,718           130,150
  Interest expense                                                   (14,812)          (52,683)
                                                                -------------     -------------
  Net financial expense                                              153,985            77,983
                                                                -------------     -------------
   Loss from operations before income taxes                       (1,230,100)       (2,703,630)

Income tax expense                                                    (3,343)           (3,556)
                                                                -------------     -------------
   Net loss                                                     $ (1,233,443)     $ (2,707,186)
                                                                =============     =============
Basic and diluted net loss per share                            $      (0.04)     $      (0.11)
                                                                =============     =============

Shares used to compute basic and diluted net loss per share       29,852,088        24,091,248
                                                                =============     =============

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

                                              F-4
</TABLE>



<PAGE>
<TABLE>
                                                           VIRTGAME CORP.
                                                           AND SUBSIDIARY
                                           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                           For the years ended December 31, 2003 and 2002
<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, 2001                          20,026,116   $        200   $ 17,610,788   $    (95,500)   $(17,046,334)   $    469,154

Issuance of common stock for
 cash, net of issuance costs:
 January 2002 through March 2002             3,274,000             33        838,466             --              --         838,499

Fair value of stock options issued to
 employees                                          --             --        106,850             --              --         106,850

Issuance of common stock for
 cash, net of issuance costs:
 October 2002 through December 2002          2,284,286             25        569,975             --              --         570,000

Issuance of common stock, cash
 received during January 2003                  250,000              1        124,999             --              --         125,000

Issuance of common stock to
 and exercise of options by
 consultants for services rendered
 net of issuance costs                       2,052,191             20        413,100        (37,500)             --         375,620

Issuance of common stock for
 conversion of notes payable                   313,000              3         85,647             --              --          85,650

Issuance of common stock to
 satisfy accounts payable for
 services rendered                             115,400              1         28,849             --              --          28,850

Payment of receivable for stock
 issued for services rendered                       --             --             --         66,500              --          66,500

Net loss for the year ended
 December 31, 2002                                  --             --             --             --      (2,707,186)     (2,707,186)
                                          -------------  -------------  -------------  -------------   -------------   -------------
Balance, December 31, 2002, as
previously presented                        28,314,993            283     19,778,674        (66,500)    (19,753,520)        (41,063)

Adjustment for stock options                        --             --        123,000             --              --         123,000
                                          -------------  -------------  -------------  -------------   -------------   -------------
Balance, December 31, 2002, restated        28,314,993   $        283   $ 19,901,674   $    (66,500)   $(19,753,520)   $     81,937
                                          =============  =============  =============  =============   =============   =============

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

                                                                F-5
</TABLE>



<PAGE>
<TABLE>
                                                           VIRTGAME CORP.
                                                           AND SUBSIDIARY
                                     CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
                                           For the years ended December 31, 2003 and 2002
<CAPTION>

                                       Series A                                            Receivable
                                    Preferred Stock        Common Stock        Additional     from
                                  ------------------  ----------------------    Paid-In     Exercise     Accumulated
                                   Shares    Amount      Shares      Amount     Capital    of Options      Deficit          Total
                                  --------  --------  -----------  ---------  ------------  ---------   -------------   ------------
<S>                                 <C>     <C>       <C>          <C>        <C>           <C>         <C>             <C>
Balance forwarded
 December 31, 2002, restated           --   $    --   28,314,993   $    283   $19,901,674   $(66,500)   $(19,753,520)   $    81,937

Exercise of options by
 consultants for services
 rendered net of issuance costs        --        --    1,060,000         11       273,989         --              --        274,000

Issuance of common stock
 to consultants for services
 rendered net of issuance costs        --        --    1,026,316         10       309,612        500              --        310,122

Issuance of common stock, cash
 received during April 2003            --        --      657,895          6       249,994         --              --        250,000

Issuance of common stock, cash
 received during December 2002         --        --      157,895          2            --         --              --              2

Issuance of preferred stock,
 cash received during July 2003
 net of issuance costs              3,000         1           --         --     2,304,214         --              --      2,304,215

Proceeds from series B
 preferred stock issuable, cash
 received during December 2003,
 net of issuance costs                 --        --           --         --     1,374,585         --              --      1,374,585

Beneficial conversion
 feature of preferred offering         --        --           --         --     2,304,215         --      (2,304,215)            --

Adjustment for stock options           --        --           --         --       123,000         --              --        123,000

Net loss for the year
 ended December 31, 2003               --        --           --         --            --         --      (1,233,443)    (1,233,443)
                                  --------  --------  -----------  ---------  ------------  ---------   -------------   ------------
Balance, December 31, 2003          3,000   $     1   31,217,099   $    312   $26,841,283   $(66,000)   $(23,291,178)   $ 3,484,418
                                  ========  ========  ===========  =========  ============  =========   =============   ============

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

                                                                F-6
</TABLE>



<PAGE>
<TABLE>
                                    VIRTGAME CORP.
                                    AND SUBSIDIARY
                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                    For the years ended December 31, 2003 and 2002
<CAPTION>

                                                             2003              2002
                                                         ------------     ------------
<S>                                                      <C>              <C>
Cash flows from operating activities:
 Net loss                                                $(1,233,443)     $(2,707,186)
 Adjustments to reconcile net loss to net cash flows
  used in operating activities:
   Bad debt                                                       --           36,400
   Gain on forgiveness of debt                              (162,716)        (128,016)
   Depreciation and amortization                             332,113          334,157
   Issuance of common stock, options and warrants
   for consulting fees and compensation                      433,122          671,970
   Changes in operating assets and liabilities:
   Increase in:
    Accounts receivable                                      (53,816)         (76,042)
    Prepaid expenses and other current assets                (39,918)          (6,672)
    Decrease in deposits                                       3,420               --
   Increase (decrease) in:
    Accounts payable and accrued expenses                   (268,613)         190,055
                                                         ------------     ------------
 Net cash flows used in operating activities                (989,851)      (1,685,334)
                                                         ------------     ------------

Cash flows from investing activities:
 Purchase of property and equipment                          (44,853)         (11,830)
 Capitalization of software development costs               (576,567)          (5,954)
                                                         ------------     ------------
 Net cash flows used in investing activities                (621,420)         (17,784)
                                                         ------------     ------------

Cash flows from financing activities:
 Net proceeds from the issuance of common stock              524,000        1,408,499
 Net proceeds from the issuance of preferred stock         3,678,800               --
 Receipt of option exercise receivable                       125,000          250,000
 Borrowings on notes payable                                      --          104,400
 Payments on notes payable                                  (145,000)          (4,700)
 Principal payments under capital lease                       (2,653)          (6,783)
                                                         ------------     ------------
 Net cash flows provided by financing activities           4,180,147        1,751,416
                                                         ------------     ------------

Net increase in cash and cash equivalents                  2,568,876           48,298

Cash and cash equivalents at beginning of year                60,343           12,045
                                                         ------------     ------------

Cash and cash equivalents at end of year                 $ 2,629,219      $    60,343
                                                         ============     ============

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

                                         F-7
</TABLE>



<PAGE>
<TABLE>

                                                VIRTGAME CORP.
                                                AND SUBSIDIARY
                                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                For the years ended December 31, 2003 and 2002
<CAPTION>

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

                                                                                  2003              2002
                                                                             --------------    --------------
<S>                                                                          <C>               <C>
Cash paid during the period for:

 Interest                                                                    $       8,088     $          --
                                                                             ==============    ==============

 Income taxes                                                                $       3,343     $       3,556
                                                                             ==============    ==============

Supplemental disclosures of non-cash investing and financing activities:

 Receivable from exercise of options                                         $          --     $     162,500
                                                                             ==============    ==============

 Retirement of debt and accounts payable for stock issued                    $       1,348     $     114,500
                                                                             ==============    ==============

Beneficial conversion feature of preferred offering                          $   2,304,215     $          --
                                                                             ==============    ==============

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

                                                     F-8
</TABLE>



<PAGE>

                                 VIRTGAME CORP.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002

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

       ORGANIZATION AND BUSINESS

       VirtGame Corp. (the "Company," formerly Virtgame.com Corp.) 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 a provider of open architecture gaming software to the
       regulated gaming and lottery industries and offers licensed casinos,
       sports wagering and lottery operations a comprehensive suite of software
       products. VirtGame's solution is based on an open architecture supporting
       multiple operating system platforms and databases that requires no
       special or proprietary hardware and provides distribution of server-based
       casino games, sports wagering and lotteries through various distribution
       channels, including local networks with a casino, such as
       over-the-counter, stand alone kiosks and in-room wagering, and wide area
       networks such as online closed loop Intranets or the Internet.

       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 subsidiary, Primeline Gaming Technologies,
       Inc., a California Corporation. All significant intercompany accounts and
       transactions have been eliminated in consolidation.

       FINANCIAL INSTRUMENTS

       The carrying amounts reported in the consolidated balance sheets for
       cash, 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.

                                      F-9



<PAGE>

                                 VIRTGAME CORP.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002

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

       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. 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, 2003 and 2002 the Company recorded $0 in deferred
       revenues.

       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.

                                      F-10



<PAGE>

                                 VIRTGAME CORP.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002

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

       STOCK BASED COMPENSATION

       In December 2002, the Financial Accounting Standards Board (FASB) issued
       Statement of Financial Accounting Standards No. 148 "Accounting for
       Stock-Based Compensation Transition and Disclosure an Amendment of FASB
       Statement No. 123" (SFAS 148). SFAS 148 amends SFAS 123, "Accounting for
       Stock-Based Compensation" (SFAS 123), to provide alternative methods of
       transition for an entity that voluntarily changes to the fair value based
       method of accounting for stock-based employee compensation. It also
       amends the disclosure provisions of SFAS 123 to require prominent
       disclosure about the effects on reported net income of an entity's
       accounting policy decisions with respect to stock-based employee
       compensation. Finally, SFAS 148 amends APB Opinion No. 28, Interim
       Financial Reporting, to require disclosure about those effects in interim
       financial information. At December 31, 2003, the Company has stock-based
       employee compensation plans, which are described more fully in Note 8.
       The Company accounts for those plans under the recognition and
       measurement principles of APB Opinion No. 25, "Accounting for Stock
       Issued to Employees" (APB No. 25), and related Interpretations. No
       stock-based employee compensation cost is reflected in net income, as all
       options granted under those plans had an exercise price equal to the
       market value of the underlying common stock on the date of grant.
       However, certain options had been repriced resulting in compensation
       adjustments, which have been reflected in net income. The following table
       illustrates the effect on net income and earnings per share if the
       Company had applied the fair value recognition provisions of SFAS 123, to
       stock-based employee compensation.

        Under SFAS 148, the fair value of each option granted during the years
        ended December 31, 2003 and 2002 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.

                                      F-11



<PAGE>

                                 VIRTGAME CORP.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002

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

      Had compensation cost for all awards been determined based on the fair
      value method as prescribed by SFAS 123, reported net loss and loss per
      common share would have been as follows:

<TABLE>
<CAPTION>
                                                    December 31,       December 31,
                                                        2003               2002
                                                   --------------     --------------
<S>                                                <C>                <C>
Net loss:
     As reported                                   $  (1,233,443)     $  (2,707,186)
                                                   --------------     --------------

     Add: Stock based employee compensation
          included in reported net income, net
          of related tax effects                              --             63,312

     Deduct: Total stock based employee
          compensation expense determined
          under fair value method, net of
          related tax effects                                 --             76,761
                                                   --------------     --------------

     Proforma                                      $  (1,233,443)     $  (2,720,635)
                                                   ==============     ==============

Basic and diluted net loss per share:
     As reported                                   $       (0.04)     $       (0.11)
                                                   ==============     ==============

     Proforma                                      $       (0.04)     $       (0.11)
                                                   ==============     ==============
</TABLE>

       ADVERTISING COSTS

       The Company charges the cost of advertising to expense as incurred.
       Advertising costs for the years ended December 31, 2003 and 2002, were
       approximately $2,707 and $17,875, respectively.

       CAPITALIZED SOFTWARE

       Effective January 1, 1999, the Company adopted Statement of Position 98-1
       ("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, 2003 and 2002 was approximately $310,000 and
       $282,000, respectively. Research and development costs expensed for the
       years ended December 31, 2003 and 2002 were approximately $458,000 and
       $451,000, respectively.

                                      F-12



<PAGE>

                                 VIRTGAME CORP.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002

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

       CONCENTRATIONS OF MAJOR CUSTOMERS

       Sales to four customers represented 100% of revenues during the years
       ended December 31, 2003 and 2002. These customers represented 100% of
       accounts receivable at December 31, 2003 and 2002, 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, 2003 and 2002, options and warrants to purchase 8,764,043
       and 5,623,500 common shares, respectively, were anti-dilutive and have
       been excluded from the weighted average share computation.

       OTHER COMPREHENSIVE INCOME

       For the years ended December 31, 2003 and 2002, 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.

       DISCLOSURE ABOUT SEGMENTS

       The Company has determined that it operates in one segment.

                                      F-13



<PAGE>

                                 VIRTGAME CORP.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002

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

       RECENT ACCOUNTING STANDARDS

       In December 2002, the FASB issued Statement No. 148, "Accounting for
       Stock Based Compensation - Transition and Disclosure - an amendment of
       FASB Statement No. 123" ("SFAS 148"), which provides alternative methods
       of transition for a voluntary change to the fair value method of
       accounting for stock based employee compensation. The standard amends the
       disclosure requirement of SFAS 123 to require prominent disclosure in
       both annual and interim financial statements about the method of
       accounting for stock based employee compensation and the effect of the
       method used on the reported results.

       In April 2003, FASB issued Statement No. 149, "AMENDMENT OF STATEMENT 133
       ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS 149"). SFAS No.
       149 amends and clarifies financial accounting and reporting for
       derivative instruments, including certain derivative instruments embedded
       in other contracts (collectively referred to as derivatives) and for
       hedging activities under SFAS No. 133, "ACCOUNTING FOR DERIVATIVE
       INSTRUMENTS AND HEDGING ACTIVITIES." SFAS No. 149 requires that contracts
       with comparable characteristics be accounted for similarly. SFAS No. 149
       is effective for contracts entered into or modified after June 30, 2003,
       and for hedging relationships designated after June 30, 2003. The
       adoption of this Statement did not have an effect on the consolidated
       financial statements.

       In May 2003, the FASB issued Statement No. 150, "ACCOUNTING FOR CERTAIN
       FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND
       EQUITY" ("SFAS 146"). SFAS No. 150 establishes standards for how an
       issuer classifies and measures certain financial instruments with
       characteristics of both liabilities and equity. It requires that an
       issuer classify a financial instrument that is within its scope as a
       liability (or an asset in some circumstances). SFAS No. 150 is effective
       for financial instruments entered into or modified after May 31, 2003,
       and otherwise is effective at the beginning of the first interim period
       beginning after June 15, 2003. The adoption of this Statement did not
       have a material effect on the consolidated financial statements.

       In January 2003, FASB issued Interpretation No. 46 (FIN 46),
       "Consolidation of Variable Interest Entities." FIN 46 is effective for
       variable interest entities created after January 31, 2003. FIN 46 is an
       interpretation of Accounting Research Bulletin No. 51, "Consolidated
       Financial Statements." FIN 46 requires a variable interest entity to be
       consolidated by a company if that company is subject to a majority of the
       risk of loss from the variable interest entity's activities or entitled
       to receive a majority of the entity's residual returns or both. In
       December 2003, FASB published a revision to FIN 46 ("46R") to clarify
       some of the provisions of FIN 46 and to exempt certain entities from its
       requirements. The adoption of this interpretation did not have an impact
       on our financial condition or results of operations.

       RESTATEMENT

       The presentation of deferred compensation has been restated as additional
       paid in capital based upon provisions of the stock option agreement. This
       change in presentation results in no change in net income or earnings per
       share for 2002 or 2003.

                                      F-14



<PAGE>

                                 VIRTGAME CORP.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002

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

       Property and equipment consists of the following at December 31:

                                                       2003             2002
                                                   ------------     ------------

                Computer hardware                  $   127,818      $   340,863
                Office furniture and equipment          32,663           72,994
                                                   ------------     ------------

                                                       160,481          413,857

                Less: accumulated depreciation        (102,831)        (378,829)
                                                   ------------     ------------

                                                   $    57,650      $    35,028
                                                   ============     ============

NOTE 3 - CAPITALIZED SOFTWARE
-----------------------------

       Capitalized software consists of the following at December 31:

                                                       2003             2002
                                                   ------------     ------------

                Computer software                  $ 1,970,638      $ 1,410,307
                Less: accumulated amortization      (1,047,312)        (753,666)
                                                   ------------     ------------

                                                   $   923,326      $   656,641
                                                   ============     ============

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

       Accrued expenses consists of the following at December 31:

                                                       2003             2002
                                                   ------------     ------------

               Accrued payroll                     $    49,909      $   106,283
               Accrued interest                             --           44,564
               Accrued severance                            --          231,250
               Accrued other                           122,814           28,869
                                                   ------------     ------------

                                                   $   172,723      $   410,966
                                                   ============     ============

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

       During the year ended December 31, 2002, the Company issued a $60,000
       convertible note payable which is convertible into the Company's common
       stock at the Company's discretion. The conversion rate of the note is
       based on the lower of $0.25 per share or the 10-day weighted average
       stock price immediately before conversion. The note holder retains the
       right to convert the note into stock, if the note is prepaid. The note is
       senior debt and bears an interest rate of 18% per annum and matured on
       January 5, 2003. During the year ended December 31, 2003, the Company
       issued 250,000 shares of the Company's common stock for the conversion of
       all outstanding principal and interest under the note.

                                      F-15



<PAGE>

                                 VIRTGAME CORP.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002

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

       OPERATING LEASES

       During 2002 the Company signed a lease for its office facilities under a
       non-cancelable operating lease through February 2005. The lease calls for
       monthly payments of approximately $2,970.

       CAPITAL LEASE

       The Company leased computer equipment under capital lease agreements,
       with an imputed interest rate of 13.97%, due in monthly installments of
       approximately $700 through April 2003.

       During each of the years ended December 31, 2003 and 2002, the Company
       recorded amortization expense on leased equipment of approximately
       $2,300.

       At December 31, 2003, the annual future minimum lease payments under
       operating leases are as follows:

                                                            Operating
                                                              Leases
                                                          -------------
                  2004                                    $     40,170
                  2005                                           6,750
                                                          -------------
                  Total minimum lease payments            $     46,920
                                                          =============

       Rental expense for office facilities for the years ended December 31,
       2003 and 2002 totaled approximately $35,000 and $54,000, respectively.

       EMPLOYMENT AGREEMENTS

       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. In September 2002 the
       employment agreement was amended as the CFO/COO assumed the CEO role.
       Terms of the agreement were modified to increase the executive's base
       annual salary to $150,000, provide for an incentive of a 10% stock bonus
       for each share issued under financing that the executive was responsible
       for during the fourth quarter of 2002 and a portion of the executive's
       options to purchase 615,000 shares of common stock were repriced from
       $0.50 to $0.25 a share. In addition, the executive was granted an option
       to purchase 600,000 shares of common stock at $0.25 per share which are
       all vested at December 31, 2002. This agreement was terminated and
       replaced by an agreement dated October 6, 2003, effective July 1, 2003.

                                      F-16



<PAGE>

                                 VIRTGAME CORP.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002

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

       In October 2003, the Company entered into a two-year employment agreement
       with the Chief Executive Officer and Chief Financial Officer ("CEO and
       CFO" both titles belonging to one individual). The agreement provides for
       an annual base salary of $200,000, of which $35,000 is deferred until the
       Company reaches two consecutive cash flow profitable quarters, as
       described in the employment agreement. In addition, the CEO and CFO is to
       receive a bonus of 5% of net profit generated by new products for which
       the Company receives regulatory approval, not to exceed $250,000 per
       year. This bonus agreement ceases with termination of employment. The
       agreement also provides for the Company to issue non-compensatory options
       to purchase 700,000 shares at $0.62 per share. The options vest July 1,
       2005 and are exercisable for five years regardless of the CEO and CFO's
       status with the Company. In addition, the employment agreement contains
       an anti-dilution provision for certain cases.

       On September 1, 2003 the Company entered into a one year employment
       agreement with an individual to serve as President and General Counsel
       for the Company. Terms of the agreement provide for an annual base salary
       of $120,000 and a bonus of $20,000 provided certain financial milestones
       are met. In addition the agreement provides for the Company to issue
       non-compensatory options to purchase 100,000 shares of the Company's
       common stock for $0.66 per share. The options vest ratably over a five
       years from the date of grant.

       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 provided 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.
       In September 2002 the Company terminated its agreement with the CEO and
       negotiated a severance agreement whereby the Company agreed to pay the
       former CEO's salary through the end of 2003. In addition, the Company
       agreed to reimburse the former CEO for certain expenses incurred as CEO.
       The total amount agreed to was $231,250 and is included in accrued
       liabilities as of December 31, 2002. This amount was paid off during
       2003.

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

                                      F-17



<PAGE>

                                 VIRTGAME CORP.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002

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

       demand and provide for interest at a fixed rate of 12% per annum. The
       principal balance outstanding was $85,000 as of December 31, 2002, and
       total interest expense incurred by the Company on these related party
       notes payable for the year ended December 31, 2002 was approximately
       $12,000. In 2002, the Company negotiated an agreement with the note
       holder whereby all interest was forgiven. Accordingly the Company has not
       accrued interest on the note in 2002 and has recognized debt forgiveness
       income of approximately $29,000 (Note 10). In July 2003, the note was
       paid in full along with $1,900 in accrued interest.

       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, 2002, had a
       balance of $116,090 and accrued interest of approximately $40,100,
       respectively. As of September 30, 2003, the note was subject to the
       Statute of Limitations. As of December 31, 2003 the Company determined
       that the amount would not be collected by the former vendor, due to the
       statute of limitations expiring, and accordingly reversed the remaining
       balance and accrued interest. These amounts are included in other income
       in the accompanying consolidated statement of operations (Note 10).

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,
       2003.

       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 held
       subscriptions receivable of $345,500 at December 31, 2001 in connection
       with the exercise of these options. During 2002 year the Company received
       $316,500 of these subscriptions.

       During the year ended December 31, 2002, the Company issued 2,052,191
       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

                                      F-18



<PAGE>

                                 VIRTGAME CORP.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002

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

       fund current year operations, consultation for providing strategic
       relationships and other consulting services. The Company recorded an
       expense of $375,620, for these transactions and held a subscription
       receivable in the amount of $37,500 for the balance as of December 31,
       2002. As of December 31, 2003 this amount is $37,000.

       During the year ended December 31, 2002, the Company issued 115,400
       shares to satisfy certain accounts payable valued at approximately
       $45,000 and recorded debt forgiveness of $16,150.

       During the year ended December 31, 2003, the Company issued 3,765,000
       warrants in conjunction with financing arrangements entered into during
       2002 and 2003. All of the warrants are immediately exercisable and expire
       within five years from the date of issuance. The warrants were issued at
       exercise prices that exceed the stock's market value at the time of
       grant.

       During the year ended December 31, 2003, the Company issued 2,086,316
       options to acquire the Company's common stock to various consultants, a
       former employee and investment bankers as compensation for services
       performed. These options were fully vested and were exercised. Proceeds
       from the exercise of these options amounted to $584,122.

       STOCK ISSUED FOR CASH

       During the year ended December 31, 2002, the Company issued 5,808,286
       shares of its common stock in exchange for cash and a subscription
       receivable, pursuant to five private placements executed during the year.
       Cash proceeds from the private placements, net of issuance costs,
       amounted to approximately $1,408,500 and have been used to fund current
       operations. At December 31, 2002 the Company held a subscription
       receivable of $125,000 from one individual, which was paid during January
       2003. In connection with the private placements the Company issued
       224,000 shares of common stock to its investment bankers as compensation
       for services rendered.

       During the year ended December 31, 2003, the Company issued 657,895
       shares of its common stock in exchange for $250,000 in a private
       placement agreement. There were no issuance costs associated with this
       transaction.

       During the year ended December 31, 2003, the Company issued 120 units of
       Series A convertible preferred stock (each unit consisting of 25 shares
       of Series A convertible preferred stock and warrants to purchase 35,000
       shares of common stock) pursuant to a private placement completed in July
       2003. Cash proceeds from the private placement, net of issuance costs
       amounted to approximately $2,304,000. Because the conversion price ($0.38
       per share) was below the trading price ($0.78 per share) on the day the
       financing closed and because the shares were immediately convertible the
       Company fully amortized the beneficial conversion element upon closing of
       the private placement. As a result the Company recorded a beneficial
       conversion of approximately $2,304,000.

                                      F-19



<PAGE>

                                 VIRTGAME CORP.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002

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

       During December 2003, the Company completed a private placement that
       raised approximately $1,375,000, net of issuance costs. The private
       placement was Units, each consisting of 100 shares of Series B
       convertible preferred stock and warrants to purchase 35,714 shares of
       common stock at a price of $0.70 per share. As of December 31, 2003 the
       preferred shares were not issued.

       STOCK ISSUED UPON CONVERSION OF NOTES PAYABLE

       During the year ended December 31, 2002, the Company issued 313,000
       shares of common stock relative to the conversion of convertible notes
       payable, and exercised warrant rights in the amount of $85,650.

       ADJUSTMENT FOR OPTION AWARDS

       During the year ended December 31, 2002, the Company reduced the exercise
       price of 615,000 options to purchase common stock, previously issued to
       the CEO. Under APB No. 25 the intrinsic value of the option has been
       changed which has triggered variable accounting for these options. The
       provisions of APB No. 25 require the Company to reevaluate the amount of
       compensation at the end of each quarter or reporting period. For the year
       ended December 31, 2003 the difference between the exercise price and the
       fair market value of the Company's common stock has increased by $0.20
       per share. Accordingly, the Company has recorded compensation for the
       year of $123,000 in the accompanying consolidated financial statements.
       (See Note 1).

       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.

       The Company has elected to account for nonqualified grants and grants
       under its Plan following APB No. 25, SFAS 148, which amended SFAS 123,
       and related interpretations. Accordingly, compensation costs of
       approximately $0 and $107,000 have been recognized for nonqualified
       options for the years ended December 31, 2003 and 2002, respectively.

                                      F-20



<PAGE>

                                 VIRTGAME CORP.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002

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

       A summary of the activity of the stock options for the years ended
       December 31, 2003 and 2002 is as follows:

<TABLE>
<CAPTION>
                                                  Year ended                          Year ended
                                               December 31, 2003                   December 31, 2002
                                        -------------------------------     -------------------------------
                                                            Weighted                            Weighted
                                                            Average                             Average
                                                            Exercise                            Exercise
                                            Shares            Price            Shares             Price
                                        -------------------------------     -------------------------------
<S>                                        <C>            <C>                  <C>            <C>
      Outstanding at beginning
         of period                         7,424,600      $       0.27         5,848,200      $       0.28
      Granted                              1,700,000              0.45         2,375,400              0.29
      Cancelled                                   --                --           (16,000)             0.10
      Exercised                           (1,250,000)             0.22          (568,000)             0.23
      Expired                               (321,000)             0.55          (215,000)             0.34
                                        -------------     -------------     -------------     -------------

      Outstanding at end of period         7,553,600      $       0.32         7,424,600      $       0.27
                                        =============     =============     =============     =============

      Exercisable at end of period         6,603,600      $       0.32         7,424,600      $       0.27
                                        =============     =============     =============     =============

      Weighted-average fair value of
         options granted during the
         period                                           $       0.45                        $       0.29
                                                          =============                       =============

      Weighted-average remaining
         contractual life of options
         outstanding at end of period                        2.7 years                           3.2 years
                                                          =============                       =============
</TABLE>

      The following table summarizes information about stock options outstanding
      as of December 31, 2003:

<TABLE>
<CAPTION>
        Range of            Number          Weighted-average     Weighted-average       Number           Weighted-average
        Exercise         Outstanding,           Remaining            Exercise         Exercisable,           Exercise
         Prices          end of period      Contractual Life           Price          end of period            Price
      -------------    -----------------    -----------------    ----------------    ----------------    ----------------
<S>                        <C>                  <C>                   <C>               <C>                   <C>
       $0.11-0.25          5,703,600            2.5 years             $0.22             5,703,600             $0.22
        0.32-0.66          1,650,000            3.6 years              0.56               700,000              0.49
        1.00-1.00            200,000            3.1 years              1.00               200,000              1.00
      -------------    -----------------    -----------------    ----------------    ----------------    ----------------
       $0.11-1.00          7,553,600            2.7 years              0.32             6,603,600             $0.32
      =============    =================    =================    ================    ================    ================
</TABLE>

       The following table summarizes information about stock purchase warrants
       outstanding as of December 31, 2003.

          Range of        Number of       Weighted-average     Weighted-average
          Exercise        Warrants            Remaining           Exercise
           Prices        Outstanding      Contractual Life          Price
       --------------    ------------     ----------------     ----------------
       $ 0.22 - 0.38       2,099,443           3.2 years         $       0.32
         0.40 - 0.75       2,065,000           4.4 years                 0.57
         2.00 - 5.00         150,000           0.3 years                 4.40
       --------------    ------------     ----------------     ----------------

       $ 0.22 - 5.00       4,314,443           3.6 years         $       0.58
       ==============    ============     ================     ================

                                      F-21



<PAGE>

                                 VIRTGAME CORP.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002

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>
                                                                   2003             2002
                                                               ------------     ------------
<S>                                                            <C>              <C>
      Deferred tax assets:
         Net operating loss carryforwards                      $ 6,394,000      $ 5,391,000
         Compensation items                                        909,000        1,132,000
         Startup costs capitalized for income tax purposes              --           75,000
         Other                                                          --            7,000
                                                               ------------     ------------
            Gross deferred tax assets                            7,303,000        6,605,000

            Deferred tax liabilities                              (206,000)              --
                                                               ------------     ------------

            Less valuation allowance                            (7,097,000)      (6,605,000)
                                                               ------------     ------------

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

       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 $492,000 from 2002.

       As of December 31, 2002, the Company has net operating loss carryforwards
       for both federal and state income tax purposes. Federal net operating
       loss carryforwards totaling approximately $15,661,000 expire through
       2023. State net operating loss carryforwards totaling approximately
       $15,649,000 expire through 2013. Under federal and California law 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:

                                                    2003               2002
                                               ---------------   ---------------

      Income tax benefit at statutory rate     $      435,000    $      948,000
      Change in valuation allowance                  (492,000)       (1,164,000)
      Nondeductible expenses                          (10,000)           (1,000)
      State income taxes, net                          72,000           158,000
      Other                                            (8,343)           55,444
                                               ---------------   ---------------

                                               $       (3,343)   $       (3,556)
                                               ===============   ===============

                                      F-22



<PAGE>

                                 VIRTGAME CORP.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002

NOTE 10 - OTHER INCOME
----------------------

       During the year ended December 31, 2003 and 2002, the Company recognized
       approximately $162,700 and approximately 128,000, respectively, of income
       through the forgiveness of a note payable and the forgiveness of interest
       upon the recognition of the Statute of Limitations with regards to a
       licensing agreement described in Note 7.

                                      F-23



<PAGE>
<TABLE>
                                                    VIRTGAME CORP.
                                            EXHIBIT INDEX TO ANNUAL REPORT
                                                    ON FORM 10-KSB
                                         FOR THE YEAR ENDED DECEMBER 31, 2003
<CAPTION>

ITEM
 NO.        DESCRIPTION                                                         METHOD OF FILING
----        ----------------------------------------------   --------------------------------------------------------
<S>         <C>                                              <C>
3.1         Certificate of Incorporation, as amended on      Incorporated by reference to Exhibit 3.1 to the
            June 20, 1996 and January 21, 1997.              Registrant's Registration Statement on 10-SB dated
                                                             August 3, 1998.

3.2         Amended and Restated Bylaws.                     Incorporated by reference to Exhibit 3.2 to the
                                                             Registrant's Registration Statement on 10-SB dated
                                                             August 3, 1998.

3.3         Certificate of Amendment dated October 26,       Incorporated by reference to Exhibit 3.3 to the
            1998 to Certificate of Incorporation.            Registrant's Registration Statement on 10-SB/A dated
                                                             December 21, 1998.

3.4         Certificate of Amendment dated August 25, 1999   Incorporated by reference to Exhibit 3.6 to Registration
            to Certificate of Incorporation.                 Statement on Form SB-2 filed on September 26, 2003.

3.5         Certificate of Amendment dated January 28,       Incorporated by reference to an exhibit to the
            2002 to Certificate of Incorporation.            Registrant's Definitive Information Statement dated
                                                             January 28, 2002.

3.6         Certificate of Designations of Series A          Incorporated by reference to Exhibit 3.8 to Registration
            Preferred Stock.                                 Statement on Form SB-2 filed on September 26, 2003.

3.7         Certificate of Designations of Series B          Incorporated by reference to Exhibit 3.9 to Pre-Effective
            Preferred Stock.                                 Amendment No. 1 to Registration Statement filed on
                                                             January 12, 2004

10.1        Software Development, Service and License        Incorporated by reference to Exhibit 10.9 to the
            Agreement dated January 20, 2000 between the     Registrant's Annual Report on Form 10-KSB for the fiscal
            Registrant and Coast Hotels and Casinos, Inc.    year ended December 31, 1999.

10.2        Agreement dated August 15, 2001 between the      Incorporated by reference to Exhibit 10.2 to Registration
            Registrant and Codere LLC.                       Statement on Form SB-2 filed on September 26, 2003.

10.3*       Employment Agreement dated January 1, 2002       Incorporated by reference to Exhibit 10.14 to the
            between the Registrant and Scott A. Walker.      Registrant's Annual Report on Form 10-KSB for the fiscal
                                                             year ended December 31, 2001

10.4*       VirtGame Corp. 2002 Stock Option and Grant       Incorporated by reference to Exhibit 10.1 to the
            Plan.                                            Registrant's Registration Statement on Form S-8 dated
                                                             February 8, 2002.

10.5        Exclusive Distributorship Agreement dated July   Incorporated by reference to Exhibit 10.6 to Registration
            1, 2002 between the Registrant and Las Vegas     Statement on Form SB-2 filed on September 26, 2003.
            Dissemination Company, Inc.

10.6        Financial Advisory Agreement dated January 2,    Incorporated by reference to Exhibit 10.15 to the
            2003 between the Registrant and Lighthouse       Registrant's Annual Report on Form 10-KSB for the fiscal
            Financial Group, LLC.                            year ended December 31, 2002.

                                                          E-1



<PAGE>

10.7        Co-Placement Agent Agreement dated March 31,     Incorporated by reference to Exhibit 10.16 to the
            2003 between the Registrant and Lighthouse       Registrant's Annual Report on Form 10-KSB for the fiscal
            Financial Group, LLC and  Keane Securities       year ended December 31, 2002.
            Co., Inc. and McMahan  Securities Co. L.P.

10.8        Placement Agent Agreement dated October 28,      Incorporated by reference to Exhibit 10.9 to
            2003 between the Registrant and McMahan          Pre-Effective Amendment No. 1 filed on January 12, 2004
            Securities Co. L.P., as amended.

10.9*       Employment Agreement between VirtGame Corp.      Incorporated by reference to Exhibit 10.1 to the
            and Bruce Merati dated October 6, 2003.          Registrant's Quarterly Report on Form 10-Q for the
                                                             quarter ended September 30, 2003.

10.10*      Employment Agreement between VirtGame Corp.      Incorporated by reference to Exhibit 10.2 to the
            and Glenn E. Wichinski dated September 1, 2003.  Registrant's Quarterly Report on Form 10-Q for the
                                                             quarter ended September 30, 2003.

21          List of Subsidiaries.                            Incorporated by reference to Exhibit 21.1 to Registration
                                                             Statement on Form SB-2 filed on September 26, 2003

23          Consent of PKF.                                  Filed herewith.

31.1        Certification of Chief Executive Officer         Filed herewith.
            pursuant to Section 302 of the Sarbanes-Oxley
            Act of 2002.

31.2        Certification of Chief Executive Officer         Filed herewith.
            pursuant to Section 302 of the Sarbanes-Oxley
            Act of 2002.

32          Certification of Chief Executive Officer and     Filed herewith.
            Chief Financial Officer pursuant to 18 U.S.C.
            ss.1350, as adopted pursuant to Section 906
            of the Sarbanes-Oxley Act of 2002.

------------------------
* Indicates a management contract or compensatory plan or arrangement.

                                                         E-2
</TABLE>