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

                                   FORM 10-QSB

[X]    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
       OF 1934.
                For the quarterly period ended Seotember 30, 2003

[ ]    TRANSITION REPORT UNDER SECTION 13 OR 15(d)  OF THE  EXCHANGE ACT For the
       transition period from to .

                           Commission File No: 0-12382

                              Alpha Virtual, Inc.
              ----------------------------------------------------
                         (formerly Perceptronics, Inc.)
             (Exact name of Registrant as specified in its Charter)



             Delaware                                      95-2577731
  -------------------------------                    ----------------------
  (State or other jurisdiction of                      (I.R.S. Employer
   incorporation or organization)                    Identification Number)


            555 S. flower Street, suite 4670, Los Angeles, CA  90071
            --------------------------------------------------------
            (Address of Principal Executive Offices)        Zip Code

       Registrant's telephone number, including area code: (310) 432-6200
           Securities registered pursuant to Section 12(b) of the Act:

                                      NONE

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

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

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


The  number  of  shares  outstanding  of the  Registrant's  common  stock  as of
September 30, 2003 was 5,912,846.

Transitional Small Business Disclosure Format (check one):  Yes        No  X
                                                               -----     -----


                                     1 of 25
<PAGE>





                                      INDEX
                                      -----


                       ALPHA VIRTUAL, INC. AND SUBSIDIARY


PART I.  FINANCIAL INFORMATION
------------------------------
Item 1.  Financial Statements

         Consolidated Balance sheets, September 30, 2003 and
         December 31, 2002.                                                 3

         Consolidated Statements of operations, three months
         ended September 30,2003 and 2002 and nine months ended September
         30, 2003 and 2002                                                  5

         Consolidated Statements of cash flows, nine months
         ended September 30, 2003 and 2002                                  6

         Notes to financial statements.                                     7

Item 2. Management's  Discussion and Analysis of Financial Condition
        and Results of Operations.                                         16

PART II. OTHER INFORMATION
--------------------------
Item 6.  Exhibits and Reports on Form 8-K.                                 23























                                    2 of 25

<PAGE>



                          Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

                       ALPHA VIRTUAL, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS



                                                Sept 30, 2003  December 31, 2002
                                                    (Unaudited)       (Audited)
                                                   ------------    ------------
ASSETS:
Current Assets:
--------------
Cash and cash equivalents                          $    162,504    $     22,664
Receivables, net of allowance of $105,117 as of           5,001              -
 September 30, 2003
Other receivables                                       119,408             300
Related party receivables                               222,832          27,556
Prepaid expenses & other current assets                   5,833          45,133
                                                   ------------    ------------

Total current assets:                                   515,578          95,653

Equipment & Leasehold Improvements, at cost              67,999          91,490
Less accumulated depreciation and amortization          (48,007)        (42,073)
                                                   ------------    ------------
                                                         19,992          49,417

Other Assets                                              5,000              -
                                                   ------------    ------------

TOTAL ASSETS                                       $    540,570    $    145,070
                                                   ============    ============

















                  See Notes to Financial Statements (Unaudited)

                                     3 of 25
<PAGE>


                       ALPHA VIRTUAL, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                                   (Continued)



                                                Sept 30, 2003  December 31, 2002
                                                    (Unaudited)       (Audited)
                                                   ------------    ------------

LIABILITIES AND SHAREHOLDERS' DEFICIT:
Current Liabilities:
-------------------
Accounts payable                                    $   372,397    $    188,971
Accrued expenses                                        226,379         109,016
Accrued compensation                                     30,000              -
Deferred Compensation                                   178,155         140,618
Due to Related Parties                                  265,244         189,947
Other accrued liabilities                                     -          33,350
Short term debt -                                       439,600          45,000
Loans payable to shareholders                            28,000              -
Rate reserve                                            100,000              -
Current portion of capital lease                              -           5,423
                                                   ------------    ------------
Total current liabilities:                            1,639,775         678,975

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

Total Liabilities                                     1,639,775         678,975



COMMITMENTS AND CONTIGENCIES

SHAREHOLDERS' DEFICIT:
         Common Stock, par value $.001 per share,  authorized 60,000,000 shares,
          5,912,846  shares at September  30, 2003 and 4,259,496 at December 31,
          2002

Issued and outstanding                                    5,912           4,259
Deferred compensation                                  (300,599)       (477,141)
Additional paid in capital                            4,548,791       5,129,790
Accumulated deficit                                  (5,353,309)     (5,200,813)
                                                   ------------    ------------

TOTAL SHAREHOLDERS' DEFICIT                          (1,099,205)       (533,905)
                                                   ------------    ------------

TOTAL LIABILITIES AND SHAREHOLDERS'
DEFICIT                                            $    540,570    $    145,070
                                                   ============    ============


                  See Notes to Financial Statements (Unaudited)

                                     4 of 25

<PAGE>


                       ALPHA VIRTUAL, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

                            Three Months Ended             Nine Months Ended
                                September 30,                  September 30,

                               2003          2002*          2003        2002*
                       ------------  ------------    ------------  ------------
Net Sales              $     34,335  $    101,889    $    265,835  $    241,181
Cost of Sales                     -        44,388    $     40,800  $     64,388
                       ------------  ------------    ------------  ------------

Gross Profit                 34,335        57,501         225,035       176,793

Costs and expenses:
Selling, general and
  administrative            280,448       292,797         390,019     1,503,054
Research & development            -        12,226               -       112,066
                       ------------  ------------    ------------  ------------

Operating loss             (246,113)     (247,522)       (164,984)   (1,438,327)

Other income/(expense)         (213)       (7,460)         (7,171)      (11,880)

Net Loss                   (246,326)     (254,982)       (172,155)   (1,450,207)
Income tax provision              -             -               -             -
                       ------------  ------------    ------------  ------------

Net loss               $   (246,326) $   (254,982)       (172,155)   (1,450,207)
                       ============  ============    ============  ============

Basic and Diluted  Loss per share:

                       $      (0.04) $      (0.06)   $      (0.03) $      (0.38)

                       ============  ============    ============  ============


Weighted average common shares outstanding :



                          5,879,513     3,841,435       5,094,504     3,841,435
                       ============  ============    ============  ============

*Amounts for 2002 refer to Esstec, Inc. only






                  See Notes to Financial Statements (Unaudited)

                                     5 of 25

<PAGE>

                       ALPHA VIRTUAL, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (UNAUDITED)          Nine Months Ended
                                                   September 30    September 30
                                                       2003            2002*
CASH FLOWS FROM OPERATING ACTIVITIES               ------------    ------------
Net loss                                          $   (172,155)   $  (1,448,991)
Adjustments to reconcile net loss to net cash
Provided by operating activities:
Depreciation and amortization                            3,851           30,025
Stock based compensation                                              1,021,364
Common stock issued for services                                         76,477
Common stock issued as interest expense                                  12,660

(Increase)/decrease in
   Accounts receivables                                 (5,001)          (8,326)
   Prepaid expenses                                     39,300            4,613
   Other receivables                                  (119,108)         (33,710)
   Related Party receivables                          (195,276)           3,933
   Other assets                                         (5,000)          23,699
Increase/(decrease) in
   Accounts payable                                    183,426           31,846
   Accrued expenses                                    117,363            8,870
   Due to related parties                               75,297           91,944
   Deferred compensation                                37,537          111,937
   Accrued compensation                                 30,000              -
   Rate Reserve                                        100,000
   Other accrued liabilities                           (38,773)
                                                  ------------     ------------
Net cash provided by operating activities:              23,461         (137,351)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets                                (6,300)            (668)
                                                  ------------     ------------
Net cash used by investing activities                   (6,300)            (668)

CASH FLOWS FROM FINANCING ACTIVITIES
Deferred Offering costs                                                (111,450)
Proceeds from exercise of warrants                                      160,477
Proceeds from sale of common stock                     200,000           85,000
Proceeds from short term debt                          254,600
Repayment of debt                                      (45,000)
Advance from parent                                   (286,921)
                                                  ------------     ------------
Net cash provided in financing activities              122,679          134,027
NET INCREASE (DECREASE) IN CASH                        139,840           (5,208)
                                                  ------------     ------------
Cash, beginning of period                         $     22,664     $      9,384
Cash, end of period                                    162,504            4,176
                                                  ============     ============
Cash paid during period for income taxes                     0                0
Cash paid during period for interest expense                 0                0

*amounts for 2002 refer to esstec, Inc. only

                  See Notes to Financial Statements (Unaudited)
                                     6 of 25

<PAGE>


                       ALPHA VIRTUAL, INC. AND SUBSIDIARY
                          NOTES TO FINANCIAL STATEMENTS

NOTE A - UNAUDITED FINANCIAL STATEMENTS

The  unaudited  financial  statements  have been  prepared  in  conformity  with
generally accepted accounting  principles and include all adjustments which are,
in the opinion of management, necessary for fair presentation of the results for
the  interim  periods  presented.  All such  adjustments  are, in the opinion of
management,  of a normal  recurring  nature.  Results for the nine-month  period
ended September 30, 2003 are not necessarily indicative of the operating results
to be expected for the full year.

Certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have been condensed or omitted. It is suggested that these financial  statements
are read in conjunction with the financial statements and notes thereto included
in the Company's report on Form 8-K/A filed on October 23, 2003.

The merger of the Company with Esstec,  Inc. has been accounted for as a reverse
acquisition  under the purchase method of accounting  since the  shareholders of
Esstec, Inc. obtained control of the consolidated entity.  Accordingly,  Esstec,
Inc.was  treated as the acquirer and Alpha  Virtual,  Inc. as the acquiree  with
Esstec,  Inc. being treated as the continuing entity. The continuing company has
changed its fiscal  year end to December  31st.  the  accompanying  consolidated
financial statements include the results of Esstec, Inc. for all periods and the
results of Alpha Virtual, Inc. beginning on the merger date.



NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of the Company:  Alpha Virtual,  Inc., (the "Company")  develops and
markets innovative,  real-time Web collaboration products for business, consumer
entertainment,  education,  and government markets. The Company's patent pending
OneViewTM   product  platform  meets  the  growing  demand  for  new  multi-user
interactivity-integrating   browser,  Instant  Messaging,  and  real-time  group
collaboration  in an on-demand  basis.  On October 31, 2002,  the Alpha Virtual,
Inc. terminated all but one of its employees.  Alpha Virtual, Inc. closed a sale
and  license-back  agreement  regarding  sale and  license  back of its One View
product.  Except for this sale and re-license  agreement,  Alpha  Virtual,  Inc.
ceased all of its prior  operating  activities.  Its  principal  activities  are
directed to reducing its liabilities and seeking possible acquisitions.

On April 28, 2003, Alpha Virtual, Inc. and EssTec, Inc., a privately-held Nevada
corporation entered into an Agreement and Plan of Merger. In accordance with the
Merger,  on May 8, 2003, the Registrant,  through its  wholly-owned  subsidiary,
Alpha Acquisition Corporation, a Nevada corporation, acquired EssTec in exchange
for  4,276,162  shares  of  the  Registrant's   Common  Stock.  The  transaction
contemplated  by the  Agreement  was intended to be a "tax-free"  reorganization
pursuant to the  provisions  of Section  351 and  368(a)(1)(A)  of the  Internal
Revenue Code of 1986, as amended. See note N.



                                    7 of 25
<PAGE>

                               ALPHA VIRTUAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

On July 10th,  2003,  Alpha Virtual,  Inc.  announced that it has entered into a
binding  Letter of Intent to acquire  all key assets of  Veridicom,  Inc.  for a
combination of cash and shares of common stock.  The closing of the  transaction
has changed to purchase  all of the shares of  Veridicom,  Inc. in exchange  for
3,500,000 shares of Alpha virtual,  Inc. common stock and is anticipated  within
the next 30 days and  subject to a  definitive  asset  purchase  agreement.  The
purchase will include the purchase of all of Veridicom's  intellectual property,
patents and patent applications,  methodology, and other key technologies. Under
the terms of the  purchase,  the  shareholders  of  Veridicom,  Inc. will retain
certain licensing rights to use the technology.

Veridicom  designs,  manufactures  and  distributes  the FPS200 digital  silicon
fingerprint  sensor and  matching  fingerprint  algorithms,  used by PC OEMs and
other makers of personal security devices.  Veridicom also provides sensors to a
variety of hardware PC peripherals engineered to protect information accessed on
a PC or remotely through a network.  Based on security and biometric  standards,
these devices  include USB  peripherals,  PCMCIA cards and  smart-card  readers.
Veridicom also provides (SDK Software Development Kits) and application software
that  complements  its  authentication  devices,  enabling a  complete  personal
security solution.


Basis of Presentation:  The accompanying financial statements have been prepared
in conformity with generally accepted accounting  principles,  which contemplate
continuation  of the Company as a going  concern.  The Company has  continued to
sustain operating losses and requires  substantial amounts of working capital to
support its operations. At September 30, 2003 current liabilities exceed current
assets by $1,124,197.  The Company  continues to have  difficulty in meeting its
obligations  as they  become  due.  The  ability of the  Company to operate  its
business and  generate  sufficient  positive  cash flows is dependent on raising
additional  investment  capital  to  fund  development  of  commercial  software
products.  The Company's financial  statements do not include any adjustments to
reflect the possible future effects on the  recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern.

Cash Equivalents: All highly liquid investments maturing in three months or less
when purchased are considered cash equivalents.

Equipment and Leasehold  Improvements:  Equipment and leasehold improvements are
stated at cost.  Depreciation of equipment is provided for by the  straight-line
method  over  their  estimated  useful  lives,  which  range  from 3 to 5 years.
Amortization of leasehold  improvements is provided by the straight-line  method
over the shorter of the useful lives or the terms of the leases.

Revenue Recognition: Sales of services are recorded when performed in accordance
with  contracts.  Revenues  from  long-term  contracts  are  recorded  using the
percentage-of-completion (cost-to-cost) method of accounting. Under this method,
sales are recorded as costs (including general and  administrative  expenses) as
incurred,  plus a portion of the profit expected to be realized on each contract
in the  ratio  that  costs  incurred  to date  bear to total  estimated  cost at


                                    8 of 25
<PAGE>

                               ALPHA VIRTUAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

completion.  Revenues  from software  sales are recorded in accordance  with SOP
97-2 "Software Revenue Recognition", which requires that revenue recognized from
software  arrangements  be allocated to the various  elements of the arrangement
based on the  relative  fair  value  values of the  elements,  such as  software
products, upgrades,  enhancements,  post contract customer support, installation
or training.  Revenue from product  services are recognized at the time services
are  provided.  The Company has been  developing  and  marketing  their  OneView
software products and services.

Income Taxes:  Provisions  for federal and state income taxes are  calculated on
reported  financial  statement  income  based  on  the  current  tax  law.  Such
provisions  differ from the amounts  currently  payable because certain items of
income and expense, known as temporary differences,  are recognized in different
tax periods  for  financial  reporting  purposes  than for income tax  purposes.
Deferred  income taxes are the result of the  recognition  of tax benefits  that
management  expects  to  realize  from the  utilization  of net  operating  loss
carryforwards. The amounts recorded are net of valuation allowance and represent
management's estimate of the amount that is more likely than not to be realized.

Cash Equivalents: All highly liquid investments maturing in three months or less
when purchased are considered as cash equivalents.

Equipment and Leasehold  Improvements:  Equipment and leasehold improvements are
stated at cost.  Depreciation of equipment is provided for by the  straight-line
method  over  their  estimated  useful  lives,  which  range  from 3 to 5 years.
Amortization  of leasehold  improvements  is provided  for by the  straight-line
method over the shorter of the useful lives or the terms of the leases.


NOTE C - RECEIVABLES

At September 30, 2003 and December 31, 2002 there were  $105,117 of  receivables
that represent  amounts from services  performed and royalties from the Eidetics
sale.  These amounts have been  completely  reserved as collection from Eidetics
may prove difficult.


NOTE D - SHORT TERM DEBT


As of September 30, 2003 and December 31, 2003 the Company had loans outstanding
of  $28,000 to various  shareholders.  These  loans are past due as of March 31,
2002. The loans are convertible to common stock at $0.15 per share at the option
of the note  holder.  $10,000 of the notes were  converted  into  66,665  shares
(13,333  shares after the  November  2002 stock split) in the fiscal year ending
March 31, 2002. These loans are past due as of September 30, 2003.

On  July  9,  2002,  the  Company  entered  into  a  Restated  Multiple  Advance
Convertible Promissory Note (the "Note") with its principal shareholder ("GAC").
The Note provides up to $425,000 of term debt to the Company maturing on July 9,
2003 at an interest rate of 11.5 percent.  As of December 31, 2002,  the Company


                                    9 of 25
<PAGE>

                               ALPHA VIRTUAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

amended the note and had borrowed an aggregate  of $435,000  from GAC,  $110,000
during the three month period ended December 31, 2002. The Note is  convertible,
at the  election of GAC,  into the  Company's  common stock at a price per share
equal to 30% of the average  trading  price for the twenty  business  day period
prior  to date of  conversion.  The  Note is  secured,  pursuant  to a  Security
Agreement,  by all of the Company's computer software programs. The terms of the
note require  repayment on demand,  but in no event,  earlier than July 9, 2003.
The  Company  has not repaid  the note and has  concluded  discussions  with the
noteholder  to sell its OneView  product in  exchange  for  cancellation  of the
$435,00 note.


As of June 30, 2003 the company had short term debt of $185,000 due Jan 4, 2004.
The loans can be converted by the company into common Stock at $1.00/ per share.
The loans bear interest at 11% which will be waived if the loan is converted.

As of September 30, 2003 the company had additional  short term debt of $254,600
due Jan 4, 2004, or $439,600 in total. The loans can be converted by the company
into common Stock at $1.00/ per share. The loans bear interest at 11% which will
be waived if the loan is converted.



NOTE E--LEASES AND COMMITMENTS

DCAA--Audit: The Company's books and records are subject to audit by the Defense
Contract Audit Agency (DCAA).  At September 30, 2003. there is a DCAA audit open
of a large multi-year contract which was completed in 1994. The Company believes
the costs charged to this contract should not result in adjustments in excess of
the $100,000  reserved for possible  contract price adjustments at September 30,
2003. The amount  reserved is believed to be adequate and is included in current
liabilities.


NOTE F--RECENT ACCOUNTING PROUNCEMENTS

In August 2001, the FASB issued SFAS No. 143,  "Accounting for Asset  Retirement
Obligations,"  effective  for  years  beginning  after  June  15,  2002,  or the
Company's  fiscal year 2004.  SFAS No. 143 addresses  financial  accounting  and
reporting for obligations  associated with the retirement of tangible long-lived
assets  and  the  associated  asset  retirement   costs.  It  applies  to  legal
obligations associated with the retirement of long-lived assets that result from
the  acquisition,  construction,  development and (or) the normal operation of a
long-lived  asset,  except for certain  obligations of lessees.  The adoption of
this  Statement  will not have a significant  impact on the Company's  financial
statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," effective for years beginning after December 15,
2001, or the Company's  fiscal year 2003.  SFAS No. 144 superseded SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to


                                    10 of 25
<PAGE>

                               ALPHA VIRTUAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

be Disposed of" and the accounting  and reporting  provisions of APB Opinion No.
30,  "Reporting  the  Effects  of  Disposal  of a  Segment  of a  Business,  and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 retains the requirements of SFAS No. 121 to recognize an impairment loss
only if the carrying amount of a long-lived  asset is not  recoverable  from its
undiscounted  cash  flows and to measure an  impairment  loss as the  difference
between the  carrying  amount and the fair value of the asset.  The  adoption of
SFAS No. 144 in fiscal 2003 did not have a  significant  impact on the Company's
financial statements.

In April 2002, the FASB issued SFAS No. 145,  "Rescission of SFAS Nos. 4, 44 and
64,  Amendment  of  SFAS  No.  13,  and  Technical   Corrections."  Among  other
provisions,  SFAS No. 145 rescinds both SFAS No. 4, "Reporting  Gains and Losses
from  Extinguishment  of Debt,"  and the  amendment  of SFAS No. 4, SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145
also amends SFAS No. 13,  "Accounting for Leases," to eliminate an inconsistency
between the accounting for  sale-leaseback  transactions  and the accounting for
certain lease modifications that have economic effects similar to sale-leaseback
transactions.   SFAS  No.  145  also   amends   other   existing   authoritative
pronouncements  to make various  technical  corrections,  clarify  meanings,  or
describe their applicability  under changed  conditions.  The provisions of SFAS
No. 145 are applicable for fiscal years beginning  after,  transactions  entered
into after and financial statements issued on or subsequent to May 15, 2002. The
Company does not believe that SFAS No. 145 will have a significant impact on its
financial statements.

In June 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit or Disposal  Activities." SFAS No. 146 addresses financial  accounting
and  reporting  for  costs  associated  with  exit or  disposal  activities  and
nullifies  Emerging  Issues Task Force Issue No. 94-3 ("EITF 94-3"),  "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity  (including Certain Costs Incurred in a  Restructuring)."  SFAS No. 146
requires  that a  liability  for a cost  associated  with an  exit  or  disposal
activity be  recognized  when the  liability  is  incurred.  Under EITF 94-3,  a
liability for an exit cost, as defined in EITF 94-3,  was recognized at the date
of commitment to an exit or disposal plan.  SFAS No. 146 also  establishes  that
fair value is the  objective  for  initial  measurement  of the  liability.  The
provisions  of SFAS  No.  146 are  effective  for  exit or  disposal  activities
initiated  after  December 31, 2002.  The Company does not believe that SFAS No.
146 will have a significant impact on its financial statements.

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of Indebtedness of Others." FIN 45 clarifies the  requirements  for a
guarantor's  accounting  for and  disclosures of certain  guarantees  issued and
outstanding. It also specifies that a guarantor is required to recognize, at the
inception of the  guarantee,  a liability  for the fair value of the  obligation
undertaken in issuing the  guarantee,  although it does not prescribe a specific
approach for subsequently  measuring the guarantor's  recognized  liability over
the term of the guarantee. FIN 45 also specifies certain disclosures required to
be made in interim and annual financial  statements  related to guarantees.  The


                                    11 of 25
<PAGE>

                               ALPHA VIRTUAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

recognition  and  measurement  provisions of FIN 45 are effective for guarantees
issued or modified after December 31, 2002. The accounting for guarantees issued
prior to this date is not affected.  Disclosure  requirements  are effective for
financial statements of interim or annual period ending after December 15, 2002.
The  adoption  of FIN 45 does not have a  significant  impact  on the  Company's
financial statements.

In December  2002,  the FASB issued SFAS No. 148,  "Accounting  for  Stock-Based
Compensation  -  Transition  and   Disclosure,"   which  amends  SFAS  No.  123,
"Accounting for Stock-Based  Compensation,"  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.  The Statement also amends
the  disclosure  provisions of SFAS No. 123 to require  prominent  disclosure in
both annual and  interim  statements  of the  effects on reported  results of an
entity's  accounting  policy  decisions  with  respect to  stock-based  employee
compensation.  The  disclosure  provisions  of SFAS No.  148 are  effective  for
financial  statements  for fiscal  years ending  after  December  15, 2002.  The
Company has included the  required  disclosures  elsewhere in this note and will
include  the  disclosures  required  in  interim  statements  in  its  financial
statements for the first quarter of fiscal 2004. Currently, the Company does not
intend to change its accounting for stock-based compensation.

In  January   2003,   the  FASB  issued   Interpretation   No.  46  ("FIN  46"),
"Consolidation of Variable Interest Entities," which addresses the consolidation
of  business  enterprises  (variable  interest  entities),  to which  the  usual
condition of consolidation,  a controlling  financial interest,  does not apply.
FIN 46 requires an entity to assess its equity  investments to determine if they
are variable  interest  entities.  As defined in FIN 46, variable  interests are
contractual,  ownership or other interests in an entity that change with changes
in the entity's net asset value.  Variable interests in an entity may arise from
financial   instruments,   service  contracts,   guarantees,   leases  or  other
arrangements  with the variable  interest  entity.  An entity that will absorb a
majority of the variable  interest entity's expected losses or expected residual
returns,  as defined in FIN 46, is  considered  the primary  beneficiary  of the
variable  interest  entity.  The primary  beneficiary  must include the variable
interest  entity's  assets,   liabilities  and  results  of  operations  in  its
consolidated  financial  statements.  FIN 46 is  immediately  effective  for all
variable interest entities created after January 31, 2003. For variable interest
entities created prior to this date, the provisions of FIN 46 must be applied no
later than the  beginning of the  Company's  third  quarter of fiscal 2004.  The
Company  does not  believe  that FIN 46 will  have a  significant  impact on its
financial statements.

NOTE G--REVERSE STOCK SPLIT

On October 31, 2002 the Company consummated a 1-for-5 reverse stock split of its
outstanding  common  shares.  The par value of the stock  remained  at $.001 per
share. All references in these notes to the financial statements to common stock
or average number of common shares outstanding reflect the value of common stock
after the effects of the 1-for-5 reverse split. The Company's common stock began
trading on the OTCBB under the symbol "AVUL" at that time.


                                    12 of 25
<PAGE>

                               ALPHA VIRTUAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

On April 14, 2003, the Company  consummated a 1-for-7 reverse stock split of its
outstanding  common  shares.  The par value of the stock  remained  at $.001 per
share. All references in these notes to the financial statements to common stock
or average number of common shares outstanding reflect the value of common stock
after the effects of the 1-for-7  reverse  split.  The  Company's  common  stock
currently is trading on the OTCBB under the symbol "AVRT".


NOTE H -LICENSE AGREEMENT

Effective October 31 2002, the Company entered into a License Agreement with its
principal shareholder,  Global Alpha Corporation ("GAC") wherein GAC was granted
an exclusive license to the Company's  software and systems commonly referred to
as the "IC3D Framework" (the "System). The System encompasses  substantially all
of the Company's  software  including  software  developed to support multi-user
online collaborative  interactivity in a broad variety of applications employing
a variety of virtual media over a number of networks  including the Internet and
intra-nets.  Under the  Agreement,  GAC will pay to the Company a license fee of
ten  percent of the revenue  generated  from the sale or use of the System up to
$1,000,000,  nine percent up to $2,000,000,  eight percent up to $3,000,000 and,
thereafter,  seven percent of the revenue generated.  A minimum,  annual license
fee of $25,000 for the year ending  December 31, 2002 and December 31, 2003 must
be paid to maintain the exclusive license.  At March 31, 2003 the annual license
fee of $25,000 for 2002 had not been paid and the Company has waived the license
fee based on discussions  with GAC setting off the license fee against the short
term debt of $435,000  owed by the Company to GAC.  The Company  ihas  concluded
discussions  with  GAC  to  sell  the  IC3D/OneView   product  in  exchange  for
cancellation of the $435,000  convertible  note owed by Alpha Virtual,  Inc. and
the $25,000  license fee owed by GAC.  Accordingly,  the $25,000 license fee was
not accrued in the books of the Company.


NOTE I--OPERATING EXPENSES OF THE COMPANY

On October 31, 2002, the Company  terminated  all but one of its employees;  and
except for a license  agreement  of its  OneView  product,  it ceased all of its
prior operating activities.  The licensee,  Global Alpha Corporation ("GAC") had
paid all software related and overhead expenses including rent, telephone,  etc.
through  June 30,  2003.  The Company  continues  to pay  professional  fees and
expenses  related  to  administration  of  a  public  company.  Alpha  Virtual's
principal activities are
directed toward reducing its liabilities,  administering its subsidiary  company
and to seeking possible acquisitions.










                                    13 of 25
<PAGE>

                               ALPHA VIRTUAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

NOTE J--SUBSEQUENT EVENTS AND ACQUISITIONS

Acquisition of Esstec

On April 28, 2003, Alpha Virtual,  Inc. (the  "Registrant") and EssTec,  Inc., a
privately-held Nevada corporation, entered into an Agreement and Plan of Merger.
In  accordance  with the Merger,  on May 8, 2003,  the  Registrant,  through its
wholly-owned subsidiary,  Alpha Acquisition  Corporation,  a Nevada corporation,
acquired  EssTec in exchange for  4,276,162  shares of the  Registrant's  Common
Stock.  The  transaction  contemplated  by the  Agreement  was  intended to be a
"tax-free"  reorganization  pursuant  to  the  provisions  of  Section  351  and
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended.

The stockholders of EssTec (aggregating approximately 100) now own approximately
74% of the  Registrant's  common stock  outstanding as of May 8, 2003 (excluding
any additional  shares  issuable upon  outstanding  options,  warrants and other
securities convertible into our common stock).

Description of EssTec

EssTec was  incorporated  on February 11, 2000 as a  wholly-owned  subsidiary of
Converge  Global,  Inc.,  with separate  operations,  employees,  facilities and
management.  EssTec was  incorporated in the state of Nevada as "Essential Tech,
Inc.".  Essential  Tech (Pvt.) Ltd, a 98%-owned  sister  subsidiary  of Converge
based in Pakistan, became its direct subsidiary in February 2000. Essential Tech
(Pvt.) Ltd was  incorporated  in August 1999 to take  advantage  of the benefits
offered by the Pakistan  labor  force,  but prior to February  2000,  it had not
commenced operations and there had been no material activity in the company. 80%
of  its  software  development  is  conducted  through  EssTec's  subsidiary  in
Pakistan. The remaining 20% of development, and 100% of its sales and marketing,
are conducted directly through its US office.

On October 6, 2000,  EssTec  changed its name to EssTec,  Inc. In December 2000,
both Converge and EssTec executed a debt conversion agreement, in which Converge
agreed to settle an  outstanding  debt to EssTec in the amount of  $800,000  for
services  performed,  in exchange for which EssTec  received  255,782  shares of
common stock, which was subsequently cancelled. Converge then distributed all of
its  remaining  shares  of  EssTec's  common  stock to a number  of  outstanding
debtholders of Converge,  retaining no interest in EssTec.  EssTec does not have
any current relationship with Converge.

Through the year ended December 31, 2001, EssTec conducted business  exclusively
as a technology  consulting  service,  providing  general  software  development
services  for   businesses,   and  focusing  on  the   development  of  wireless
applications  for  mobile  devices  such  as  mobile  phones,  personal  digital
assistants and handheld  computers to streamline the business  operations of our
clients.  Commencing  in  2002,  EssTec  refocused  its  business  to a  mix  of
consulting services and product-based  technology  development,  focusing on the
creation of proprietary software platforms.  All of EssTec's product development
work  for  both its  proprietary  applications  and its  consulting  clients  is
conducted through its off-shore development center in Lahore,  Pakistan.  EssTec


                                    14 of 25
<PAGE>

                               ALPHA VIRTUAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

uses this center to employ skilled  software  developers and technicians who are
proficient in the major programming  languages,  but at substantially lower cost
than an  on-shore  competitor  would have to pay for a similar  level of skilled
labor.  EssTec U.S.  operations  consist  primarily  of  management  and project
managers,  who serve as liaisons between EssTec's clients and its developers and
technicians in Pakistan.

While EssTec still  maintains  its  wireless  and project  consulting  business,
EssTec has also begun research and development on several different  proprietary
applications and products that EssTec believes will experience  market demand in
several industry segments.  EssTec intends to focus on mobile  technologies that
complement its existing suite of products, and anticipates both developing these
technologies as well as acquiring  companies with  technologies  that complement
EssTec's and are financially advantageous.

Letter of Intent to Acquire Veridicom

On July 10th,  2003,  Alpha Virtual,  Inc.  announced that it has entered into a
binding  Letter of Intent to acquire  all key assets of  Veridicom,  Inc.  for a
combination of cash and shares of common stock.  This agreement has been changed
to a purchase of all of the  outstanding  shares of Veridicom,  Inc. in exchange
for 3,500,000  shares of the common stock of Alpha Virtual,  Inc. The closing of
the transaction is anticipated within the next 30 days.

Veridicom  designs,  manufactures  and  distributes  the FPS200 digital  silicon
fingerprint  sensor and  matching  fingerprint  algorithms,  used by PC OEMs and
other makers of personal security devices.  Veridicom also provides sensors to a
variety of hardware PC peripherals engineered to protect information accessed on
a PC or remotely through a network.  Based on security and biometric  standards,
these devices  include USB  peripherals,  PCMCIA cards and  smart-card  readers.
Veridicom also provides (SDK Software Development Kits) and application software
that  complements  its  authentication  devices,  enabling a  complete  personal
security solution.




















                                    15 of 25
<PAGE>



Item 2. Management's  discussion and analysis of financial condition and results
of operations.

Going Concern Qualification

The  following  discussion  is  based  on  the  financial  statements  contained
elsewhere  in this  report.  The  financial  statements  have been  prepared  in
conformity with generally  accepted  accounting  principles,  which  contemplate
continuation of the Company as a going concern.  The financial statements do not
include  any   adjustments  to  reflect  the  possible  future  effects  on  the
recoverability and  classification of assets or the amounts and  classifications
of the liabilities that may result from the possible inability of the Company to
continue as a going concern. See Note B of Notes to Financial Statements.

Business

Since fiscal 2001,  our business  refocus has been  entirely on  developing  new
commercial  products in the area of Internet  collaboration.  Our patent-pending
OneView(TM)  product  platform  meets  the  growing  demand  for new  multi-user
interactivity  - integrating  browser,  Instant  Messaging,  and real-time group
collaboration  in an on-demand  basis.  OneView allows users to immediately form
groups and explore Web sites  together,  sharing the same experience at the same
time, whether they are located in the next room or half way around the world. As
such, it is the fastest,  most convenient way to collaborate  synchronously over
the Internet today.


On October 31, 2002, the Company  terminated  all but one of its employees;  and
except for its license  agreement  (above) it ceased all of its prior  operating
activities.  Its  principal  activities  have  been  directed  to  reducing  its
liabilities and seeking possible acquisitions. Acquisition of Esstec

On April 28, 2003, Alpha Virtual, Inc. and EssTec, Inc., a privately-held Nevada
corporation,  entered into an Agreement and Plan of Merger.  In accordance  with
the Merger, on May 8, 2003, the Registrant, through its wholly-owned subsidiary,
Alpha Acquisition Corporation, a Nevada corporation, acquired EssTec in exchange
for  4,276,162  shares  of  the  Registrant's   Common  Stock.  The  transaction
contemplated  by the  Agreement  was intended to be a "tax-free"  reorganization
pursuant to the  provisions  of Section  351 and  368(a)(1)(A)  of the  Internal
Revenue Code of 1986, as amended.

The stockholders of EssTec (aggregating approximately 100) now own approximately
74% of the  Registrant's  common stock  outstanding as of May 8, 2003 (excluding
any additional  shares  issuable upon  outstanding  options,  warrants and other
securities convertible into our common stock).

Letter of Intent to Acquire Veridicom

On July 10th,  2003,  Alpha Virtual,  Inc.  announced that it has entered into a
binding  Letter of Intent to acquire  all key assets of  Veridicom,  Inc.  for a
combination of cash and shares of common stock.  This agreement has been changed
to a purchase  agreement for 100% of the shares of  Veridicom,  Inc. in exchange


                                    16 of 25
<PAGE>

for 3,500,000  shares od common stock of Alpha Virtual,  Inc.The  closing of the
transaction is anticipated within the next 30 days.

Description of the Business of EssTec,Inc.

EssTec was  incorporated  on February 11, 2000 as a  wholly-owned  subsidiary of
Converge  Global,  Inc.,  with separate  operations,  employees,  facilities and
management.  EssTec was  incorporated in the state of Nevada as "Essential Tech,
Inc.".  Essential  Tech (Pvt.) Ltd, a 98%-owned  sister  subsidiary  of Converge
based in Pakistan, became its direct subsidiary in February 2000. Essential Tech
(Pvt.) Ltd was  incorporated  in August 1999 to take  advantage  of the benefits
offered by the Pakistan  labor  force,  but prior to February  2000,  it had not
commenced operations and there had been no material activity in the company. 80%
of  its  software  development  is  conducted  through  EssTec's  subsidiary  in
Pakistan. The remaining 20% of development, and 100% of its sales and marketing,
are conducted directly through its US office.

On October 6, 2000,  EssTec  changed its name to EssTec,  Inc. In December 2000,
both Converge and EssTec executed a debt conversion agreement, in which Converge
agreed to settle an  outstanding  debt to EssTec in the amount of  $800,000  for
services  performed,  in exchange for which EssTec  received  255,782  shares of
common stock, which was subsequently cancelled. Converge then distributed all of
its  remaining  shares  of  EssTec's  common  stock to a number  of  outstanding
debtholders of Converge,  retaining no interest in EssTec.  EssTec does not have
any current relationship with Converge.

Through the year ended December 31, 2001, EssTec conducted business  exclusively
as a technology  consulting  service,  providing  general  software  development
services  for   businesses,   and  focusing  on  the   development  of  wireless
applications  for  mobile  devices  such  as  mobile  phones,  personal  digital
assistants and handheld  computers to streamline the business  operations of our
clients.  Commencing  in  2002,  EssTec  refocused  its  business  to a  mix  of
consulting services and product-based  technology  development,  focusing on the
creation of proprietary software platforms.  All of EssTec's product development
work  for  both its  proprietary  applications  and its  consulting  clients  is
conducted through its off-shore development center in Lahore,  Pakistan.  EssTec
uses this center to employ skilled  software  developers and technicians who are
proficient in the major programming  languages,  but at substantially lower cost
than an  on-shore  competitor  would have to pay for a similar  level of skilled
labor.  EssTec U.S.  operations  consist  primarily  of  management  and project
managers,  who serve as liaisons between EssTec's clients and its developers and
technicians in Pakistan.

While EssTec still  maintains  its  wireless  and project  consulting  business,
EssTec has also begun research and development on several different  proprietary
applications and products that EssTec believes will experience  market demand in
several industry segments.  EssTec intends to focus on mobile  technologies that
complement its existing suite of products, and anticipates both developing these
technologies as well as acquiring  companies with  technologies  that complement
EssTec's and are financially advantageous.






                                    17 of 25
<PAGE>

Product Development

         EssFlow

In 2001,  following the downturn in the economy, and particularly the technology
sector,  EssTec decided to shift its business  focus from  consulting to product
development.  The sale of consulting services is generally considered a far less
scalable  and  profitable  enterprise  than  sales  of  products.   EssTec  then
determined  that  it  would  be  in  its  best  interests  to  develop  specific
technologies  based on its  consulting  knowledge and  experience,  which EssTec
could then use to move into  direct  product  sales.  With this in mind,  EssTec
started  working  on the  development  of a software  platform  that can then be
customized for each client's needs. This platform was named EssFlow Systems.

EssFlow  Systems can be modified based on client and industry  needs.  The first
suite of products  based on EssFlow  Systems was  completed  in April 2002.  The
particular benefit of EssTec's  technology is that it allows individuals who are
not organized  under one company  structure to share and collaborate on the same
information.  If all  participants  were under the same company  structure,  the
issue of a central database could be handled  internally by a company  intranet.
However,  many projects require  individuals from various  companies to interact
with and  manipulate  the same  information  from one  database,  which  becomes
complicated and complex without a central intranet. EssFlow endeavors to resolve
this  issue  by  allowing  outside  collaborators  to have the  same  access  to
information as internal intranet users. EssFlow allows outsiders in.

The EssFlow platform essentially consists of the following components:

   o   A complex  registration system registering  permitted users and levels of
       access,

   o   An  information  sharing  system  which  allows work product to be shared
       among registered users,

   o   A scheduling  system to provide both communal and individual  calendaring
       of work and meetings,

   o   A billing  system  which allows all  registered  users to be put into one
       system,  either  manually or  automatically,  and  provide  access to the
       billing lists to all registered users, and

   o   A collection system notifying registered users of outstanding collectable
       bills due by other registered users, and automatically submitting letters
       of notice, or other desired responses, as set up by the billing party.

Application and usage of EssFlow  System's  functions would differ from industry
to industry,  and company to company.  This necessitates  development of product
suites specific to different  industries.  EssTec  customizes the  registration,
information, scheduling, billing, and collection systems to meet these different
needs.  EssTec has found,  however,  that  industries  tend to require  specific
customizations of these systems,  which EssTec can further modify according to a
specific  client's  needs.  EssTec  decided  to  initially  concentrate  on  two
industries, namely the healthcare and entertainment industries.



                                    18 of 25
<PAGE>

         MedFlow

MedFlow is EssTec's suite of products targeted for the healthcare industry.  The
entire  suite is  completed  using the EssFlow  Systems.  The MedFlow  system is
designed to replace the traditional paper-based communication and filing systems
endemic to the health care industry with an electronic  system,  allowing health
care providers, insurance representatives, hospital or clinic agents and billing
services to electronically integrate communications,  files and billing into one
secure  location  accessible via the Internet.  MedFlow has an easily  navigated
user  interface,  which  permits  individuals  with  only a  minimal  amount  of
technical  skill to use the product.  As the needs of each MedFlow client grows,
the  system  is  scalable,  in that  new  features  can be  added  or  modified,
preventing costly system replacements.

On December 2, 2001, EssTec was retained by Crescent Diagnostic Medical Group, a
related party, to develop a customized version of MedFlow,  targeted towards the
worker  compensation  industry.  The President and Medical  Director of Crescent
Diagnostic,  Dr. Sana Khan, is also a director of EssTec. This agreement expired
in April 2002. On July 15, 2002, EssTec entered into a two-month  agreement with
Crescent  Diagnostics to enhance the system EssTec  developed for Crescent,  for
which EssTec was paid an  additional  $28,000.  EssTec has not  experienced  any
significant  adverse  consequences  as a  result  of  its  completion  of  these
agreements, and does not anticipate experiencing any such consequence.

On November 15, 2002, EssTec was retained by Medflow Solutions,  Inc., a related
party, to customize  Medflow product as per their needs. The Director of Medflow
Solutions,  Inc.,  Mr.  Abdul L.  Saquib,  is also an  officer  of  EssTec.  The
agreement expired in February 2003 but was extended through December 2003.


         EnterFlow

EssTec is also pursuing an EnterFlow  platform based on the EssFlow  Systems for
the entertainment  industry.  EssTec has entered into agreements in principle to
develop three niche products in the EnterFlow platform.


Film and Television Industry and Production

This industry typically involves a number of different departments and personnel
working  from  different  locations  to  produce a film or  television  project.
EssTec's  product is intended to permit all of the  individuals  involved in the
production  access to the  project  through a  user-friendly  interface  via the
Internet  and/ or a  wireless  personal  digital  assistant,  each of  which  is
password-protected.  EssTec's  system is intended to also allow each producer to
access multiple  different  production  projects within the system with a single
mouse  click.  EnterFlow  is  designed  to store and access  all  aspects of the
production  project,  including  budgets,  scripts,  and  digital  pictures  for
casting,  streaming  dailies  (footage of film shot on any  particular  day) and
information from web cameras deployed on the project set.

EssTec intends to market its EnterFlow  product to clients in the  entertainment
industry,  ranging from  independent  producers and studios to large studios and
networks  that  want to  monitor  entire  production  slates  and keep an online
archive of easily referenced materials.

                                    19 of 25
<PAGE>


Recording Industry and Production

EssTec also intends to market its EnterFlow  product to the recording  industry,
particularly record companies and individual record producers.  This industry is
similar to the film and television industry in that it involves multiple parties
and departments for record production.  EnterFlow is intended to enable users in
the  industry in the various  stages of  pre-production  (including  rehearsal),
track selection,  producer selection, studio selection, and session musician and
equipment  hire to access  information  regarding  budget  updates,  scheduling,
travel,  equipment  hire,  rough mixes,  and other  creative and  administrative
elements which are continuously updated in real time.


Post-Production and Distribution Industry

EssTec  intends  to market  its  EnterFlow  product  to a third  segment  of the
entertainment  industry,  the  post-production  and  distribution  aspect of the
industry. Once a recording project is delivered to a record company, a myriad of
departments get involved in taking the finished product to market. This includes
manufacturing,  promotion,  domestic and international  marketing and promotion,
and may require additional editing including the addition or revision of musical
tracks  or  remixing  of  existing  tracks.  Each  of  these  processes  must be
coordinated  between the record company,  the artist, the producer,  and various
attorneys, managers,  publishers,  merchandisers and touring personnel. EssTec's
product  intended  to be further  developed  to address  the needs of the record
companies to manage the progress and workflow of completed.


Consulting Services

EssTec  intends to  continue to provide  its  consulting  services to small- and
mid-size  companies both  domestically  and  internationally.  EssTec's  general
consulting services, which previously generated 100% of its revenues, consist of
identification and resolution of the company's information technology needs.

As a result of EssTec's  new business  focus,  EssTec also  provides  consulting
services  to  its  software  customers.  EssTec's  EssFlow  product  is  not  an
"off-the-shelf"  product which is simply purchased in a store and installed in a
company's system. The EssFlow suite of products provide general templates for an
industry,  and EssTec  uses its  consulting  services to  customize  the product
purchased  for both the  industry  needs of the client,  as well as the specific
needs of the company.


Facilities And Equipment

EssTec's  headquarters  are  located in a facility  in  Bellflower,  California.
EssTec has been  permitted to use these  premises  rent-free for the duration of
its contract with  Crescent  Diagnostics,  which  expired in October  2002.  The
contract has since expired, but Crescent has verbally agreed to permit EssTec to
remain in its present facility on present terms indefinitely. EssTec also leases
a 2500 square foot office space in Lahore,  Pakistan. The lease on this facility
is for a term through July 31, 2002,  but has been extended until July 31, 2003.


                                    20 of 25
<PAGE>


The rental payment is approximately $460 per month. EssTec believes that it will
be able to extend the lease terms or find alternative  space without incurring a
material cost.


Employees

As of the date of this report, EssTec has a total of 12 employees,  all of which
are full-time.  Two employees work in its United States facility, and 10 work in
its Pakistan facilities.

As of June 30, 2003, Alpha Virtual had one employee.


Critical Accounting Policies

On October 31, 2002, the Company  terminated  all but one of its employees;  and
except for a license agreement, it ceased all of its prior operating activities.
Its  principal  activities  have been directed to reducing its  liabilities  and
seeking possible  acquisitions.  The operations of the Company are minimal,  all
research and development costs have been expensed and potential  royalties to be
received from the sale of the PGTS training system have been full reserved.  The
Company  believes that there are no alternative  accounting  policies  which, if
implemented,  would change the  presentation  of the  financial  statements,  as
presented.

FORWARD LOOKING

Forward Looking Statements

Except for the historical  information  contained  herein,  this report contains
forward-looking  statements  (identified  by the  words  "estimate,"  "project,"
"anticipate,"  "plan," "expect,"  "intend,"  "believe,"  "hope,"  "strategy" and
similar  expressions) which are based on Management's  current  expectations and
speak only as of the date made. These forward-looking  statements are subject to
various risks, uncertainties and factors, including,  without limitation,  those
described below,  that could cause actual results to differ  materially from the
results anticipated in the forward-looking statements.


RESULTS OF OPERATIONS

Net Sales.  Net sales for the nine month period ended September 30, 2003, all of
which were from Esstec, Inc., were $265, 835 versus $241,181.  Net sales for the
three-month period ended September 30, 2003 were $34,335 versus $101,889 for the
three month period  during  2002..  Alpha  Virtual is in a state of  transition.
Esstec Inc sales are from the sale of its Medflow products.

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative expenses for the nine months ending September 30, 2003 were $390,
019 compared to $1,503,054  for the same period during 2002.  during 2002 Esstec
had $890,000 of non-cash  compensation  expenses.  Expenses for the three months
ending  September  30,  2003 were 280,  448  (including  Alpha  Virtual)  versus
$292,797 during 2002 without Alpha Virtual).

                                    21 of 25
<PAGE>

Liquidity  and  Capital  Resources.   The  Company  is  experiencing  continuing
liquidity  problems due to a lack of revenues and the absence of cash  reserves.
At  September  30,  2003  cash  balance  of  $162,504  was the  result of equity
investments  made during the quarter ended  September 30, 2003 and revenues from
Esstec,  Inc.contracts  and fees.  The  majority  of that cash has been used for
operations

The Company requires  significant  additional financing from external sources to
be able to fund the development of enhancements to its OneView product suite and
to provide for marketing and sales personnel and related expenses to gain market
acceptance of its commercial  Esstec,  Inc.software  products.  Although we were
successful in the prior fiscal year in obtaining  private equity  financing that
fulfilled our capital  requirements at planned expense levels,  we cannot assure
that the Company will be able to raise the  additional  monies  required to fund
operations  in the  current  fiscal year and  thereafter.  We also are unable to
provide assurances that our commercial  software products will start to generate
significant levels of revenue or that we will become profitable. Also, the terms
of any  financing  could be  unfavorable  to the  Company  and  dilutive  to its
shareholders.

FORWARD LOOKING STATEMENTS

The Company  hereby  incorporates  by  reference  "Forward  Looking  Statements"
contained in the  "Management's  Discussion And Analysis Of Financial  Condition
And Results Of Operations" of the Company's Form 8-K/A dated October 23, 2003.



                           Part II. OTHER INFORMATION

ITEM 3. LEGAL PROCEEDINGS

On March 28, 2003 Alpha Virtual,  Inc. and Global Alpha Corporation,  one of the
company's main shareholders filed a lawsuit in Superior Court against Dan Mapes,
a former CEO of Alpha  Virtual,  Inc. The lawsuit  alleges a breach of fiduciary
duty,  negligence,  fraud and  breach of  contract  claiming  that Mapes did not
devote his efforts to Alpha Virtual's product  development and market strategies
or maximize the profit of the business. An amount of damages has been
determined, but the outcome of this lawsuit and collectability of damages cannot
be determined at this time.

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

On  September  24,  2002, a majority of the  Company's  shareholders  approved a
one-for-five reverse stock split. After required filings with the Securities and
Exchange  Commission  and  notice  to  all  shareholders  of  the  Company,  the
one-for-five  reverse  stock split  became  effective  on October 31,  2002.  In
connection with the reverse stock split, the Company's common stock traded under
the trading symbol: "AVUL."

On  April  14,  2003,  a  majority  of the  Company's  shareholders  approved  a
one-for-seven  reverse stock split.  After required  filings with the Securities
and Exchange  Commission  and notice to all  shareholders  of the  Company,  the
one-for-seven  reverse  stock  split  became  effective  on April 14,  2003.  In


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connection with the reverse stock split,  the Company's  common stock now trades
under the new trading symbol:  "AVRT." Sales of Unregistered  Securities ITEM 5.
SALES OF UNREGISTERED SECURITIES

In June 2003, Alpha Virtual,  Inc. issued 50, 794 common shares to two investors
in exchange for $200,000.  The shares bear the normal restrictive legend and the
two investors are considered to be sophisticated investors.

In August and September 2003, Alpha Virtual, Inc. issued 66,666 common shares to
three investors in exchange for $300,000. The shares bear the normal restrictive
legend and the two investors are considered to be sophisticated investors.


Item 6. Exhibits and Reports on Form 8-K

INDEX TO EXHIBITS

 (a)Exhibit Index  (Management  contracts,  compensation  plans and arrangements
    are identified by (*).

   3.1    Certificate of Incorporation, as amended (1)
   3.2    By-Laws amended. (1)
* 10.1    1992 Stock Option Plan (8)
* 10.2    Employment Agreement  with  Gershon Weltman dated August 1, 1989
          and First Amendment dated October 22, 1991. (9)
* 10.3    1988 Directors' Stock Option Plan. (8)
* 10.4    Second  Amendment  to  Employment Agreement with Gershon Weltman
          dated August 27, 1996. (2)
* 10.5    Employment  agreement  with  Thomas Lubaczewski dated January 1,
          1997. (3)
  10.6    Loan  Agreement  and  note  dated September 23, 1997 between the
          Company and The Pacific Bank. (4)
  10.7    1999 Stock Option Plan (5)
  10.8    1999 Stock Option Plan for Non-Employee Directors (5)
  10.9    Employment Agreement with Richard Moskowitz dated January 3,2000
          and Memorandum of Agreement dated November 19, 1999. (6)
 10.10    Employment Agreement with Andreas Kemkes dated February 4, 2000.
          (10)
 10.11    Stock Compensation Plan for Consultants (7)
 10.18    Securities  Purchase  Agreement  entered  into between the Company and
          certain investors to be named by Manhattan Capital Partners, LLC dated
          November 6, 2002.
 10.19    Registration  Rights  Agreement  entered  into between the Company and
          certain investors to be named by Manhattan Capital Partners, LLC dated
          November 6, 2002.
 10.20    Consulting  Agreement  to be entered  into  between  the  Company  and
          Manhattan  Capital  Partners,  LLC upon the  receipt of the Company of
          $300,000 pursuant to a Securities  Purchase  Agreement  (Exhibit 10.18
          above).
 10.21    Registration  Rights  Agreement to be entered into between the Company
          and Manhattan Capital Partners, LLC upon the signing of the Consulting
          Agreement (Exhibit 10.20 above).
 10.22    License  Agreement  entered  into between the Company and Global Alpha
          Corporation.


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 10.23    Restated Multiple Advance Convertible  Promissory Note entered into by
          the Company and Global Alpha Corporation, Dated July 9, 2002.
 10.24    Security  Agreement  entered into between the Company and Global Alpha
          Corporation, dated July 9, 2002.


(b) The  Registrant  filed a reports on  Form-8K on May 5,2003 and May 22,  2003
during the quarter ended June 30, 2003.

(1)  Incorporated by reference to the Company's  Registration  Statement on Form
     S-8 filed on March 9, 2000.

(2)  Incorporated  by reference to the Company's  Form 10-KSB for the year ended
     March 31, 1996.

(3)  Incorporated  by reference to the Company's  Form 10-KSB for the year ended
     March 31, 1997.

(4)  Incorporated  by reference to the  Company's  Form 10-QSB for the quarterly
     period ended September 30, 1997.

(5)  Incorporated  by reference to the  Company's  Form 10-QSB for the quarterly
     period ended September 30, 1999.

(6)  Incorporated  by reference to the  Company's  Form 10-QSB for the quarterly
     period ended December 31, 1999.

(7)  Incorporated by reference to the Company's  Registration  Statement on Form
     S-8 filed on October 15, 1999.

(8)  Incorporated  by reference to the Company's  Form 10-KSB for the year ended
     March 31, 1993.

(9)  Incorporated  by reference to the Company's  Form 10-KSB for the year ended
     March 31, 1992.

(10) Incorporated  by reference to the Company's  Form 10-KSB for the year ended
     March 31, 2000.


















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                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Dated: November 24, 2003 ALPHA VIRTUAL, INC.





By:     /s/  Charles A. Lesser
        ---------------------------------
        Charles A. Lesser
        Acting President and Chief
        Financial Officer



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.
































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