10-K 1 try1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-KSB [X] Annual report under section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended May 31, 2001. [ ] Transition report under section 13 or 15(d) of the Securities Exchange Act of 1934. COMMISSION FILE NUMBER: 33-55254-43 Virtual Gaming Enterprises, Inc. (Exact name of registrant as specified in its charter) Nevada 87-0485308 (State of Organization) (I.R.S. Employer I.D. No.) 2580 SEASCAPE GLEN, ESCONDIDO, CA 92026 (Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (760) 510-0188 Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] There were no revenues during the initial year of operations as the Company focused on web site and casino development. The aggregate market value of the voting stock of the registrant held by non-affiliates of the Registrant, based upon the closing price of the Common Stock on the OTC Bulletin Board on May 31, 2001, was approximately $1,116,669. The number of shares outstanding of the registrant's common Stock as of May 31, 2001 was 20,303,067. Note: If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this form. 2,576,322 Common Shares, $0.001 Par Value, Issued and Outstanding Transitional Small Business Disclosure Format: Yes[ ] No [X] DOCUMENTS INCORPORATED BY REFERENCE Document of the Registrant Form 10-KSB Reference Location None N/A Virtual Gaming Enterprises, Inc. Table of Contents for Form 10-KSB Year Ended May 31, 2001 PART I ------ Item 1. Business Item 2. Description of Property Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II ------- Item 5. Market for Common Equity and Related Stockholders Matters Item 6. Management's Discussion and Analysis of Plan of Operation Item 7. Audited Financial Statements Item 8. Changes In and Disagreement With Accountants on Accounting and Financial Disc PART III -------- Item 9. Directors, Executive Officers, Promoters and Control Persons Item 10. Executive Compensation Item 11. Security Ownership of Certain Beneficial Owners and Management Item 12. Certain Relationships and Related Transactions PART I ------ This Report contains forms of forward-looking statements that are based on the Company's beliefs as well as assumptions made by and information currently available to the Company. When used in this report, the words "believe," "expect," "anticipate," "estimate," and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks, uncertainties and assumptions, including without limitations, material risks factors such as inadequate working capital, auditors qualification as to going concern, recent commencement of operations, lack of market acceptance to date for the Company's products and services, nominal revenues to date, continuing losses from operations, future growth of revenue and threat of regulation of Company's business. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results will vary materially from these anticipated, estimated, or projected and the variations may be material. The Company cautions potential investors not to place undue reliance on any such forward- looking statements all of which speak only as of the date such statement was made. Item 1. Business Virtual Gaming Enterprises, Inc. was incorporated June 1, 1998, under the laws of the State of Nevada. Mr. Joseph M. Williams acted as President for approximately two weeks before Mr. Virgil G. Williams assumed the daily responsibility of President and continues in that capacity to present. On June 11, 1998, Virtual Gaming Enterprises, Inc. ratified a plan of Merger with Interbet, Inc. Upon successful completion of the merger, Virtual Gaming Enterprises, Inc. was named the succeeding entity and the name was changed to Virtual Gaming Enterprises, Inc. The Company was formed to purchase, manage, develop, market, and resell casino style Internet games that will allow players to wager. Initial business development efforts involved exploring potential contracts with various Indian tribes. These agreements with Indian Tribes proved to be too difficult to bring to market. The Company then chose to purchase developed technologies with existing casino licenses. The Company purchased Hung-Sai Ltd., an International Business Corporation, now a fully owned subsidiary of Virtual Gaming Enterprises, Inc. Hung-Sai is the business of on-line gaming. The Company, through it's subsidiary, purchased one casino in December of 1998 called Classic Bet. Classic Bet is a traditional on-line casino that requires the loading of software on the player's computer. Classic Bet has a suite of Multimedia games including Black Jack. Promotion of Classic Bet is done primarily through mass mailing of CD with the games on them. Once the software suite has been loaded, the player can log in to their secure account with a user name and password. In November of 1999 the Company purchased a Theme Park of 18 games that are simple, secure and player friendly. Players can choose from Black Jack, Video Poker, Lil' Baccarat, and/or slot machines. Players have the ability to register once and play in many different themed casinos. Using at least a 56k modem players can begin playing in less than two minutes. The Company has eliminated the days of downloading software or waiting for a CD in the mail. Our players do not install any software. Anyone with Netscape or Internet Explorer 4.x browsers can easily access and play the Java-based games. Players can always find a table or slot machine because an unlimited number of openings are dynamically created for each member who enters the casino. Players enjoy the same advantages of traditional casinos conventional gaming software that reshuffles the deck after each hand. The Company's software plays up to six decks before shuffling. The Company holds a 20% (twenty percent) interest in a Sports Book business, Vegasbook.com, also licensed and operated exclusively on the Island of Dominica. Vegas Book maintains an 800 number that allows players to submit sports wagers by phone using secure passwords and user names. All deposits are escrowed with a large Dominican off shore bank insuring that the player's account remains solely available for their wagers. Membership is protected from all outside inquiries by the Offshore Privacy Act of 1995 and sets severe penalties for any release of information. It has never been easier or safer to bring the excitement of legitimate casino gaming into the player's home or office. Network Services are provided through InSatCom, Ltd. InSatCom offers a high-speed digital data center coupled with a fully redundant private satellite communication network. Licensed by Cable and Wireless and the Government of the Commonwealth of Dominica, InSatCom is the first private network offering encrypted data, Internet web hosting, and reliable video transmissions from the Caribbean. InSatCom's nine-meter satellite dish is able to simultaneously broadcast to multiple transponders ensuring a reliability factor of 99.9%. The threat of unauthorized entry is virtually eliminated because InSatCom operates its own proprietary software and hardware. Player's wagers and transactions are encrypted to retain complete confidentiality. On March 23rd, 2000, The Company purchased a 10% interest in www.global-shopping.net, a division of EBB, USA Inc. for $50,000 in cash. EBB USA is a member of the world's largest barter service with offices worldwide. The Company believes there is potential in using "cybercash" for gaming purposes in its current casinos and sports book. Item 2. Properties The Company neither owns nor leases any real property. Virgil G. Williams, President and a Director of the Company provide office facilities and related services, without charge. The Company's principal place of business is located at 2580 Seascape Glen, Escondido, CA 92026. Item 3. Legal Proceedings On or about June 11, 1999, the United States Securities and Exchange Commission initiated a proceeding in the United States District Court, Southern District of California, against the Company seeking to hold the Company in Civil Contempt for failure to respond to a Subpoena issued by the Commission. The Court granted the Commission's request and issued an Order that sanctioned the Company Ten Thousand ($10,000.00) Dollars per day until such time as it complied with the Commission's Subpoena. Subsequent to the Company's compliance with the Commission's Subpoena, the Company and the Commission entered into a Stipulation and Order whereby the Company, having purged itself of the civil contempt citation, agreed to pay and did pay Ten Thousand ($10,000.00) Dollars as a sanction. The Stipulation and Order was signed by the Court and filed on or about November 18, 1999. Virtual Gaming Enterprises, Inc., and its President, Virgil Williams, in or about May, 2000, submitted Offers of Settlement to the United States Securities and Exchange Commission that stemmed from certain matters reviewed by the Commission. The Company, without admitting or denying any wrongdoing, consented to entry of an Order by the Commission that: A) Orders it to cease and desist from committing or causing any violation, and any future violation, of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder; and B) Orders the effectiveness of Virtual Gaming's Form S-8 be suspended. On July 24, 2000, the Company and the Commission agreed to modify a portion of this Offer of Settlement to reflect that, "As a result of Virtual Gaming's failure to meet its reporting obligations, the Form S-8 never became effective." Virgil Williams, without admitting or denying any wrongdoing, consented to entry of an Order by the Commission that: A) Orders him to cease and desist from committing or causing any violation, and any future violation, of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Both of these Offers of Settlement have yet to be acted upon by the Commission. In a civil proceeding filed in the United States District Court for the Eastern District of New York in January 2000, identified by Case Number 00 CIV 0276, Platinum I.T. Consulting, Inc., and Edward Marian, alleged that Virtual Gaming Enterprises, Inc., Virgil Williams, Brenda Williams and others violated Section 12(1) of the Securities Act, Violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Breached their Contract(s) with Plaintiff(s), Fraudulently Induced Plaintiff(s) to purchase the Company's securities, Converted Plaintiff(s) funds, and were Unjustly Enriched at Plaintiff's expense. Plaintiffs sought damages in excess of Five Million ($5,000,000.00) Dollars. The Company deemed it in its best interest to resolve this matter, as the costs and fees for defense would largely outweigh the costs of resolution. Accordingly, without admitting or denying the allegations in the Complaint, the Company and Virgil and Brenda Williams entered into a Settlement and Consent Judgment whereby they agreed to compensate the Plaintiffs in the amount of $170,00.00 within 75 days of the effective date of the Settlement and Consent Judgment. Due to the hospitalization of the Company's President Virgil Williams, the Company did not make payment as required under the Settlement and Consent Judgment. As a result, and by the terms and provisions of the Settlement and Consent Judgment, the Settlement Obligation has increased to $250,000.00. The Company expects to remit this amount to the Plaintiffs, in care of Plaintiffs' Attorney, in short order. On February 14, 2000, the State of Indiana, Office of the Secretary of State, Securities Division, filed an Administrative Complaint against Virtual Gaming Enterprises, Inc., Virgil Williams and others, alleging that all Respondents sold and/or offered for sale certain securities in violation of Indiana State Law. On this same date, the Indiana Securities Division requested and received a Cease and Desist Order. On March 2, 2000, Virtual Gaming Enterprises, Inc., and Virgil Williams filed their Answer and Affirmative Defenses to the Administrative Complaint and demanded an immediate administrative hearing pursuant to the terms and provision of the Indiana Securities Act that requires a hearing to be set within 45 days of the Indiana Securities Division. Virtual Gaming Enterprises, Inc., and Virgil Williams have and do expressly deny any and all allegations made against them in the Administrative Complaint. Counsel for the Company and Mr. Williams, having not had a response to the hearing demand, provided the Indiana Securities Division a second copy of the Answer and Affirmative Defenses and Demand for Hearing via facsimile on March 17, 2000. Subsequent to March 17, 2000, Counsel for the Company made several attempts to contact the Indiana Securities Division via telephone, leaving messages for the Deputy Commissioner, Enforcement, who apparently is responsible for this proceeding. The Indiana Securities Division has never responded to the Demand for Hearing or the telephonic inquiries of counsel. In January or February 2000, Virtual Gaming Enterprises, Inc., was named as a Defendant in a Complaint for Interpleader filed in the Third Judicial District Court in and for Salt Lake County, State of Utah, and identified as Civil No. 000901201. Therein, National Stock Transfer, Inc., the transfer agent for the Company's Stock, due to competing demands for certain certificates. This action remains pending. Finally, the Company is currently dealing with questions that the U.S. Securities and Exchange Commission (SEC) has about the Company and timely filing of the financial reports of the Company. The Company and its attorney has disclosed that the SEC may have further questions and may bring an enforcement action. The Company intends to defend itself if an action is taken. The Company is involved in a lawsuit with Silicon Valley IPO Net work, et all. The Company and its attorney has disclosed that a settlement will be discussed. Item 4. Submission of Matters to a Vote of Security Holders The only matter submitted to the shareholders of the corporation was the matter of the Plan of Merger with Interbet, Inc., such plan being effective as of June 11, 1998. The Merger was approved by a majority vote of 13,136,539 votes in favor of the Merger out of the 25,000,000 total outstanding at the time of the vote. The Articles of Merger were filed with the Sate of Nevada pursuant to the provisions of NRS 78-458, the Domestic and Foreign Corporation Laws. PART II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock is listed on the Over the Counter Bulletin Board under the symbol "VGAM". The following table sets forth the high and low closing prices of the Company's Common Stock for each calendar quarter since March 31, 1998. These quotations reflect inter-dealer prices, without retail mark-up or commissions and may not represent actual transactions. Date Low High March 31, 1998 .01 - .10 June 30, 1998 .01 - .10 September 30, 1998 .10 - .87 December 31, 1998 .10 - .87 March 31, 1999 .75 - 2.50 June 30, 1999 3.00 - 5.00 September 30, 1999 5.00 - 9.87 December 31, 1999 8.50 - 10.37 March 31, 2000 15.00 - 18.50 June 30, 2000 1.12 - 16.87 August 31, 2002 11.50 - 5.00 November 31, 2000 1.375 - 0.75 February 28, 2001 1.03 - 0.375 May 31, 2001 0.35 - 0.055 August 31, 2001 0.05 - 0.011

During the period reported in this 10-KSB, certain securities were sold by the company and/or the Company's President, Virgil Williams. Some of the securities were sold in Reliance on Regulation S, others were sold in private transactions by Virgil Williams wherein certain of Mr. Williams' shares were sold in private transactions and others were sold in reliance on an exemption from registration afforded by Regulation D. The Company and Mr. Williams are currently in the process of compiling these sales and will report them in an amendment to this Form 10- KSB. Item 6. Management's Discussion and Analysis or Plan of Operation NOTE: REGARDING PROJECTIONS AND FORWARD LOOKING STATEMENTS This statement includes projections of future results and forward looking statements as that terms is defined in Section 27A of the Securities Act of 1933 as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements that are included in this 10-KSB, including statements of historical fact, are forward looking statements. Although Management believes that the expectations reflected in these forward looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors could cause actual results to differ materially from the expectations disclosed in this statement, including without limitation, in conjunction with those forward looking statements contained in this statement. Virtual Gaming has taken an "off-line" approach to marketing to the end users or players. The Company has focused efforts in print, radio, developed an affiliate program and, instituted countless direct marketing programs. The Company has chosen not to focus on banner advertisement as our sole marketing efforts. The Company plans to separate itself from other on-line casinos with this unique marketing approach. Through strategic partnerships, Virtual Gaming will be in the business of selling turnkey solutions to prospective casino owners. The Company has refined the licensing and connectivity issues that a new casino entrepreneur might find insurmountable. Moreover, the Company has tested, enhanced, and developed reporting features that a casino operator must have. The Company has partnered with a creative staff to offer custom themes to what the prospective casino owner might want. The Company intends to develop casinos in non-English languages. The Internet will allow the Company to reach new markets. The Company will then aggressively market Internationally. The Company should benefit initially from listings in new search engine technologies outside of the U.S. The Company should benefit from adding new functionality to the games hosted in Dominica. The Java-based games will make new features easy and fast to implement. All changes are made at the server level and can be enjoyed by the players immediately. The existing software development team is currently testing new features such as chat rooms, message boards, and the addition of sound. The Company continues to test and enhance games based on player feedback Item 7. Financial Statements See Independent Auditors Report, Balance Sheet, Statement of Operations, Statement of Stockholders' Equity, Statement of Cash Flows and Notes to Financial Statements, included herein and made a part of this report. Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure There have been no disagreements with the accountants or the accounting and financial disclosure. PART III -------- Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act Virgil G. Williams ------------------- Mr. Williams was born in Cameron, Texas on February 10, 1948. His formative years were spent in North Central and East Texas. Attending private school in East Texas for primary and secondary schooling, Mr. Williams was heavily involved in scholastic and athletic programs. Graduating at the top of his class in 1966, Mr. Williams applied for and was accepted to Ambassador College in Pasadena, California. Graduating near the top of his class in 1970, Mr. Williams was offered a position with the faculty teaching Advanced Speech & Communications courses to selected classes. Two days following his graduation, Mr. Williams married his current wife of 30 years. Mr. Williams taught classes while completing his post Graduate work in Education/Speech & Communication in 1974. The Williams' son, Joseph Matthew was born in September 1971 and their daughter Jacquelyn Renae was born in May 1976. Mr. Williams resigned from his position in August 1980 and moved to Richmond, VA where he formed Consolidated Resources, Ltd. and worked in the asset management business. Working with assets of clients in excess of 100 Million Dollars, Mr. Williams enjoyed expanding his base of knowledge in various arenas of finance, which included working with public stock. Realizing the potential of the public arena, Mr. Williams took a position with a public Company in San Diego, CA in 1991- 1994. Returning to the private sector, Mr. Williams continued to work with public companies on a consulting restructuring basis for the next three years. Mr. Williams filed for personal bankruptcy on October 20, 1997 and was discharged on December 30, 1997. In October, 1995, a federal district court found Mr. Williams liable for securities fraud and ordered him to pay a joint and several judgment of $26,987,721 in re: Alco International Group, Inc. This judgment was included in and discharged pursuant to the federal bankruptcy laws. Virtual Gaming Enterprises was incorporated in Nevada in June 1998 and Mr. Williams was named Chairman of the Board and President within the first month of operation and has continued in that capacity to the present. Brenda J. Williams ------------------ Brenda Williams was born in Wichita, Kansas on February 23, 1949 and resided in the Wichita area until her graduation from high school in 1967. Majoring in education at Ambassador College in Pasadena, California, Ms. Williams held offices in Women's Clubs and was the captain of the track team for two years. Graduating in 1970, Ms. Williams was married and has remained so for almost 30 years. Working as an office manager for an engineering Company while her husband was in graduate school, Ms. Williams gave birth to her first child, Joseph Matthew in September 1971. Her second child, Jacquelyn Renae was born in May 1976. Ms. Williams has given considerable time to volunteer services in children's schools and churches. She has also served on library boards and has continued over the years to work in adult literacy programs on both the East and West Coasts. Presently serving as a Director and Secretary/Treasurer of Virtual Gaming Enterprises, Inc., Ms. Williams has continued her postgraduate work in psychology at local colleges. Declaring personal bankruptcy in October 1997, which was discharged in December 1997, was the result of her efforts involving business transactions that required the assets shared with her husband. Ms. Williams continues her efforts in volunteer work and working daily in the corporate office. Item 10. Executive Compensation Annual Compensation ------------------- Name and position Year Salary Bonus Other Annual Compensation ------------------------------------------------------------------------------------ Virgil G. Williams 1999 $165,000.* -0- President & CEO 2000 $198,333.* -0- 2001 $198,333. -0- Brenda J. Williams 1999 $ 64,167.* -0- Secretary & Treasurer 2000 $ 79,167. -0- 2001 $ 79,167. -0-

Long Term Compensation ---------------------- Restricted Options**/ LTI All Other Stock SARs ($) Payouts Compensation Name and position Award(s)($) ($) ($) ------------------------------------------------------------------------------------- Virgil G. Williams 1999 -0-. -0- -0- President & CEO 2000 -0- -0- -0- 2001 -0- -0- -0- Brenda J. Williams 1999 -0-. -0- -0- Secretary & Treasurer 2000 -0- -0- -0- 2001 -0- -0- -0-

*The above figures represent Accrued Salaries for fiscal year ended 5/31/99. Of the amounts listed, $12,200 was paid to Virgil Williams and $3,050 was paid to Brenda Williams. The balance remains accrued and due to the officers. **The above referenced stock options have been duly approved, but have neither been exercised nor distributed. Item 11. Security Ownership of Certain Beneficial Owners and Management The following table sets forth information relating to the beneficial ownership of the Company's common stock by those persons holding beneficially more than 5% of the Company's common stock. The only holders of more than 5% of the Company's Common Stock are the directors and executive officers. Title of Name & Amount and Nature Share Percentage Class Address of Beneficial Shares of Ownership --------------------------------------------------------------------------------- Common Brenda J. Williams 20,000(1) .2% 2580 Sea Scape Glen Escondido, CA 92026 Common Brenda J. Williams 1,853,333(2) 18.8% 2580 Sea Scape Glen options(4) Escondido, CA 92026 Common Virgil G. Williams 5,333,333(3) 54.7% 2580 Sea Scape Glen options(4) Escondido, CA 92026

(1) These shares were issued pursuant to the Plan of Merger. (2) Have not been issued, although she has the vested rights to these shares pursuant to her employment agreement. (3) Have not been issued, although he has the vested rights to these shares pursuant to his employment agreement. (4) Assuming the issuance of these shares, the total outstanding shares would be 2,576,332, plus 7,180,666 for a total of 9,756,998, the number upon which the percentage of ownership is figured. Item 12. Relationships and Related Transactions As aforesaid, the Company neither owns nor leases any real property. Office facilities and related services are provided without charge by Virgil G. Williams, the Company's President. The Company's principal place of business is located at 2580 Seascape Glen, Escondido, CA 92026. These accommodations are currently being provided to the Company, without charge, by Mr. Williams. No compensation of directors or executive officers has been paid by the Company to date. The officers and directors of the Company are reimbursed for out-of-pocket expenses incurred on the Company's behalf. While the Company anticipated compensating Messrs. Williams and Williams beginning January 2000, the same has not yet begun to occur. At this time, there are no additional relationships or related transactions to be reported. Item 13. Exhibits and Reports of Form 10-KSB Exhibit 2: Plan of acquisition, reorganization, arrangement, liquidation, or succession Exhibit 3: Articles of Incorporation (Incorporated by Reference) Exhibit 4: Instruments defining the rights of security holders including indentures (N/A) Exhibit 9: Voting Trust Agreement (N/A) Exhibit 10: Material Contracts Exhibit 11: Statements re: computation of per share earnings Exhibit 13: Annual or quarterly reports, Form 10-QSB Exhibit 16: Letter on change in certifying accountant (N/A) Exhibit 18: Letter on change in Accounting Principals (N/A) Exhibit 21: Subsidiaries of the registrant Exhibit 22: Published report regarding matters submitted to vote (N/A) Exhibit 23: Counsel of experts and counsel (N/A) Exhibit 24: Power of Attorney (N/A) Exhibit 27: Financial Data Schedule Exhibit 99: Additional Exhibits (N/A) Item 14. Independent Auditor's Report Item 7. Financial Information Financial Information VIRTUAL GAMING ENTERPRISES, INC. (A Development Stage Enterprise) AUDITED FINANCIAL STATEMENTS For the Years Ended May 31, 2001 and 2000 INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report . . . . . . . . . . . . . . . . . . . F-2 Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . F-3 Statements of Operations . . . . . . . . . . . . . . . . . . . . . F-4 Statements of Stockholders' Equity (Deficiency). . . . . . . . . . F-5 Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . F-6 Notes to Financial Statements. . . . . . . . . . . . . . . . . . . F-7 F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Virtual Gaming Enterprises, Inc. Escondido, California We have audited the accompanying balance sheets of Virtual Gaming Enterprises, Inc., a development stage enterprise, as of May 31, 2001 and 2000 and the related statements of operations, stockholders' equity (deficiency) 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Virtual Gaming Enterprises, Inc. as of May 31, 2001 and 2000 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 5 to the financial statements, the Company has experienced a loss since inception. The Company's financial position and operating results raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 5. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /S/Gately & Associates, LLC Orlando, Florida January 18, 2002 F-2 Virtual Gaming Enterprises, Inc. (A Development Stage Enterprise) Balance Sheets May 31, 2001 2000 ---------- ---------- ASSETS CURRENT ASSETS Cash $ 2,045 $ 109,142 Advance receivable - related party 82,198 62,333 ---------- ---------- Total current assets 84,243 171,475 PROPERTY AND EQUIPMENT Equipment 5,000 5,000 Less: accumulated depreciation (4,167) (2,500) ---------- ---------- Total property and equipment 833 2,500 OTHER ASSETS Intangible assets 3,375,000 3,375,000 Less: accumulated amortization 0 0 ---------- ---------- Net intangibles 3,375,000 3,375,000 Investment - EBB Venture Capital 50,000 50,000 Investment - Vegas Book, Ltd 320,000 320,000 ---------- ---------- Total other assets 3,745,000 3,745,000 Total Assets $3,830,076 $3,918,975 ========== ========== LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY) CURRENT LIABILITIES Accrued salaries payable $ 441,882 $ 204,007 Accrued litigation payable 272,500 250,000 Short-term notes payable 1,711,575 1,550,309 ---------- ---------- Total current liabilities 2,425,957 2,004,316 Total Liabilities 2,425,957 2,004,316 STOCKHOLDERS EQUITY (DEFICIENCY) Common stock, $0.001 par value, authorized 25,000,000 shares; 40,303,067 and 8,287,701 issued and outstanding shares 40,303 8,288 Additional paid-in capital 3,930,948 3,423,963 Stock held in treasury, 20,000,000 (20,000) 0 Deficit accumulated during the development stage (2,547,132) (1,517,592) ---------- ---------- Total Stockholders Equity (Deficiency) 1,404,119 1,914,659 ---------- ---------- Total Liabilities and Stockholders Equity (Deficiency) $3,830,076 $3,918,975 ========== ==========

The accompanying notes are an integral part of the financial statements. F-3 Virtual Gaming Enterprises, Inc. (A Development Stage Enterprise) Statements of Operations For the Years and Period Since Inception Ended May 31, Period from November 1997 (Inception) through 2001 2000 May 31, 2001 ------------ ------------ ------------------ - Revenues $ 0 $ 0 $ 0 Expenses Compensation: Officers 335,750 290,690 859,610 Other 19,200 16,553 46,873 Consultants 254,614 42,060 325,174 General and administrative expenses 216,043 361,593 613,733 Depreciation 1,667 1,667 4,167 Research and development 18,500 90,000 130,500 Loss due to litigation 0 250,000 250,000 ------------ ------------ ------------------ - Total expenses (845,774) (1,052,563) (2,230,057) ------------ ------------ ------------------ - Interest expense (183,766) (133,309) (317,075) Loss from operations (845,774) (1,052,563) (2,230,057) ------------ ------------ ------------------ - Net loss $ (1,029,540) $ (1,185,872) $ (2,547,132) ============ ============ =================== Basic net loss per weighted average share $ (0.05) $ (0.20) ============ ============ Weighted average number of shares 18,986,564 5,834,400 ============ ============

The accompanying notes are an integral part of the financial statements. F-4 Virtual Gaming Enterprises, Inc. (A Development Stage Enterprise) Statement of Changes in Stockholders' Equity For the Years and Period Since Inception through May 31, 2001 Deficit Accumulated Additional During the Total Number Common Paid-in Development Stockholders' Of Shares Stock Capital Stage Equity ------------ ------ ---------- ----------- ----------- -- BEGINNING BALANCE, November 1997 (Inception) 0 $ 0 $ 0 $ 0 $ 0 Shares issued for cash 13,000,000 46,400 0 0 46,400 Net loss 0 0 0 (20,506) (20,506) ------------ ------ ---------- ----------- ----------- -- BALANCE, May 31, 1998 13,000,000 46,400 0 (20,506) 25,894 June 1998 - reverse merger 10,209,647 (44,079) 44,109 0 30 February 1999 - reverse split (22,707,774) (1,819) 1,819 0 0 Shares issued for cash 1,679,949 1,680 184,382 0 186,062 Net loss 0 0 0 (311,214) (311,214) ------------ ------ ---------- ----------- ----------- -- BALANCE, May 31, 1999 2,181,822 2,182 230,280 (331,720) (99,228) Shares issued for cash 6,105,879 6,106 3,193,653 0 3,199,759 Net loss (1,185,872)(1,185,872) ------------ ------ ---------- ----------- ----------- -- BALANCE, May 31, 2000 8,287,701 $ 8,288 $ 3,423,963 $ (1,517,592) $1,914,659 Shares issued for cash 2,848,700 2,849 448,984 451,833 Shares issued to officers for compensation under stock option and compensation plan 9,166,666 9,166 58,001 67,167 Shares issued for treasury stock 20,000,000 20,000 20,000 Shares held as treasury stock (20,000,000)(20,000) (20,000) Net loss (1,029,540)(1,029,540) -------------- ------- ----------- ------------ ----------- BALANCE May 31, 2001 20,303,067 $20,303 $ 3,930,948 $ (2,547,132)$1,404,119 ============== ======= =========== ============ ===========

The accompanying notes are an integral part of the financial statements. F-5 Virtual Gaming Enterprises, Inc. (A Development Stage Enterprise) Statement of Cash Flows For the Years and Period Since Inception Ended May 31, Period from November 1997 (Inception) through 2001 2000 May 31, 2001 ------------ ------------ ------------------ - CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (1,029,540) $ (1,185,872) $ (2,547,132) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation 1,667 1,667 4,167 Loss due to litigation 0 250,000 250,000 Compensation by stock 67,167 0 67,167 Changes in operating assets and liabilities: (Increase) decrease advance receivable - related party (19,865) (47,509) (82,198) Increase (decrease) accrued salaries payable 237,875 31,040 441,882 Increase (decrease) accrued Interest payable 183,766 133,309 317,075 ------------ ------------ ------------------ - Net cash used by operating activities (558,930) (817,365) (1,549,039) ------------ ------------ ------------------ - CASH FLOW FROM INVESTING ACTIVITIES: Purchase of property and equipment 0 (5,000) (5,000) Purchase of investments 0 (340,000) (340,000) Acquisition of intangible assets 0 (1,898,001) (1,958,001) ------------ ------------ ------------------ - Net cash (used) provided by investing activities 0 (2,238,001) (2,303,001) ------------ ------------ ------------------ - CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 451,833 3,169,759 3,845,085 ------------ ------------ ------------------ - Net cash provided by financing activities 451,833 3,169,759 3,854,085 ------------ ------------ ------------------ - Net increase (decrease) in cash (107,097) 114,393 2,045 CASH, beginning of period 109,142 (5,251) 0 ------------ ------------ ------------------ - CASH, end of period $ 2,045 $ 109,142 $ 2,045 ============ ============ ===================

The accompanying notes are an integral part of the financial statements. F-6 VIRTUAL GAMING ENTERPRISES, INC. (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES THE COMPANY Virtual Gaming Enterprises, Inc. is a Nevada chartered development stage corporation which conducts business from its headquarters in Escondido, California. The Company was incorporated on August 9, 1990. The operating company, now dissolved, was established in November 1997. The Company has not yet engaged in its expected operations. The Company's future operations will be to provide casino gambling via the Internet. Current activities include raising additional equity and negotiating with potential key personnel and facilities. There is no assurance that any benefit will result from such activities. The Company will not receive any operating revenues until the commencement of operations, but will nevertheless continue to incur expenses until then. The following summarize the more significant accounting and reporting policies and practices of the Company: A) START-UP COSTS Costs of start-up activities, including organization costs, are expensed as incurred, in accordance with Statement of Position (SOP) 98-5. B) NET LOSS PER SHARE Basic is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. C) USE OF ESTIMATES The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and revenues and expenses for the period then ended. Actual results may differ significantly from those estimates. D) PROPERTY AND EQUIPMENT All property and equipment are recorded at cost and depreciated over their estimated useful lives, using the straight-line method. Upon sale or retirement, the costs and related accumulated depreciation are eliminated from their respective accounts, and the resulting gain or loss is included in the results of operations. Repairs and maintenance charges which do not increase the useful lives of the assets are charged to operations as incurred. E) SIGNIFICANT ACQUISITION In June 1998, Interbet, Inc. issued 13,136,539 shares of common stock to acquire all of the issued and outstanding shares of the common stock of Virtual Gaming Enterprises, Inc. (VGEI) in a reverse merger, accounted for as a reorganization of VGEI. (2) ADVANCES RECEIVABLE - RELATED PARTIES The Company has advanced $82,198 to officers of the Company. These advances are due on demand and carry no stated interest rate. (3) STOCKHOLDERS' EQUITY The Company has authorized 50,000,000 shares of $0.001 par value common stock. The Company had 40,303,067 shares of common stock issued and outstanding at May 31, 2001 and 8,287,701 shares of common stock issued and outstanding at May 31, 2000. The Company, in August 1990, issued 1,000,000 shares for $1,000 in cash. In August 1996, the Company issued 100,000 shares for $50,000 in cash. In December 1997, the Company issued 4,973,108 shares in conjunction with the acquisition of Interbet, Inc. In June 1998, the Company issued 2,000,000 shares in exchange for services valued at $313,200. In June 1998, the Company issued 600,000 shares in settlement of a loan amounting to $93,957. In June 1998, the Company issued 1,400,000 shares for $46,400 in cash. In June 1998, the Company F-7 VIRTUAL GAMING ENTERPRISES, INC. (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS (3) STOCKHOLDERS' EQUITY (CONTINUED) issued 13,136,539 shares for the acquisition of Virtual Gaming Enterprises, Inc. In February 1999, the Company completed a reverse split of its common stock, leaving 501,873 shares issued and outstanding. During the fourth quarter of fiscal 1999, the Company issued 1,679,949 shares for $186,062 in cash. During the Year ended May 31, 2000, the Company issued 6,105,879 shares for $3,169,759. During the year ended May 31, 2001, the Company issued 2,848,700 shares for $451,833, 9,166,666 shares as compensation for $67,167 and 20,000,000 shares as treasury stock for $20,000. (4) INCOME TAXES Deferred income taxes (benefits) are provided for certain income and expenses which are recognized in different periods for tax and financial reporting purposes. The Company has net operating loss carry-forwards for income tax purposes of approximately $2,547,132, expiring $20,500 at May 31, 2018, $311,200 at May 31, 2019, $771,523 at May 31, 2020 and $154,500 at May 31, 2021. The amount recorded as deferred tax assets is approximately $382,100 and $227,700 as of May 31, 2001 and May 31, 2000, respectively, which represents the amount of tax benefit of the loss carryforward. The Company has established a 100% valuation allowance against this deferred tax asset, as the Company has no history of profitable operations. (5) GOING CONCERN As shown in the accompanying financial statements, the Company incurred a net loss of $2,547,132 for the period from November 1997 (Inception) through May 31, 2001. The ability of the Company to continue as a going concern is dependent upon commencing operations and obtaining additional capital and financing. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The Company is currently seeking financing to allow it to begin its planned operations. (6) RELATED PARTIES As discussed in Note 2, the Company extended an advance to officers. Related party balances and amounts for the period since inception, (November 1997), ended May 31, 2001 are as follows: Advance receivable - related party $ 82,198 ======== (7) INTANGIBLE ASSETS During the year ended May 31, 2001, the Company has engaged consultants to upgrade operating systems for the internet gambling casinos. During the year ended May 31, 2000, the Company Entered into agreements for the development of software that Will provide gaming capabilities on the internet. The Company has Invested $1,898,001 during the year 2000 for 17 of these programs. The Company plans to lease and/or manage these sites for a fee. In May 1999, the Company formed Hung Sai, Ltd., a Nevis Corporation. In May 1999, Hung Sai entered into a license agreement with a third party to provide an Internet gateway for future Internet casinos to be located in St. Kitts, West Indies. This agreement required a $60,000 initial license fee and future revenue sharing from the Company's future on-line casinos. The Company expects to amortize the license fee over a five-year period, once commercialization has begun. (8) COMMITMENTS AND CONTINGENCIES EMPLOYMENT AGREEMENTS In July 1998, the Company entered into employment agreements with two of its officers. These agreements have three-year terms expiring June 30, 2001. The agreements contain base pay amounts of $250,000, $280,000 and $325,000, combined. These contracts also call for the issuance of options for 3,000,000 shares of the Company's common stock, 1,500,000 of which vested on December 1, 1998, and 150,000 per month beginning June 1, 1999 for a period of ten months. (9) LEGAL PROCEDINGS The Company is currently dealing with questions that the U.S. Securities and Exchange Commission (SEC) has about the Company and timely filing of the financial reports of the Company. The Company and its attorney has disclosed that the SEC may have further questions and may bring an enforcement action. The Company intends to defend itself if an action is taken. The Company is involved in a lawsuit with Silicon Valley IPO Net work, et all. The Company and its attorney has disclosed that a settlement will be discussed. On or about June 11, 1999, the United States Securities and Exchange Commission initiated a proceeding in the United States District Court, Southern District of California, against the Company seeking to hold the Company in Civil Contempt for failure to respond to a Subpoena issued by the Commission. The Court granted the Commission's request and issued an Order that sanctioned the Company Ten Thousand ($10,000.00) Dollars per day until such time as it complied with the Commission's Subpoena. Subsequent to the Company's compliance with the Commission's Subpoena, the Company and the Commission entered into a Stipulation and Order whereby the Company, having purged itself of the civil contempt citation, agreed to pay and did pay Ten Thousand ($10,000.00) Dollars as a sanction. The Stipulation and Order was signed by the Court and filed on or about November 18, 1999. Virtual Gaming Enterprises, Inc., and its President, Virgil Williams, in or about May, 2000, submitted Offers of Settlement to the United States Securities and Exchange Commission that stemmed from certain matters reviewed by the Commission. The Company, without admitting or denying any wrongdoing, consented to entry of an Order by the Commission that: A) Orders the Company to cease and desist from committing or causing any violation, and any future violation, of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder; and B) Orders the effectiveness of Virtual Gaming's Form S-8 be suspended. On July 24, 2000, the Company and the Commission agreed to modify a portion of this Offer of Settlement to reflect that, "as a result of Virtual Gaming's failure to meet its reporting obligations, the Form S-8 never became effective." Virgil Williams, without admitting or denying any wrongdoing, consented to entry of an Order by the Commission that: A) Orders him to cease and desist from committing or causing any violation, and any future violation, of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Both of these Offers of Settlement have yet to be acted upon by the Commission. In a civil proceeding filed in the United States District Court for the Eastern District of New York in January 2000, identified by Case Number 00 CIV 0276, Platinum I.T. Consulting, Inc., and Edward Marian, alleged that Virtual Gaming Enterprises, Inc., Virgil Williams, Brenda Williams and others violated Section 12(1) of the Securities Act, Violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Breached their Contract(s) with Plaintiff(s), Fraudulently Induced Plaintiff(s) to purchase the Company's securities, Converted Plaintiff(s) funds, and were Unjustly Enriched at Plaintiff's expense. Plaintiffs sought damages in excess of Five Million ($5,000,000.00) Dollars. The Company deemed it in its best interest to resolve this matter, as the costs and fees for defense would largely outweigh the costs of resolution. Accordingly, without admitting or denying the allegations in the Complaint, the Company and Virgil and Brenda Williams entered into a Settlement and Consent Judgment whereby they agreed to compensate the Plaintiffs in the amount of $170,00.00 within 75 days of the effective date of the Settlement and Consent Judgment. Due to the hospitalization of the Company's President Virgil Williams, the Company did not make payment as required under the Settlement and Consent Judgment. As a result, and by the terms and provisions of the Settlement and Consent Judgment, the Settlement Obligation has increased to $250,000.00. The Company expects to remit this amount to the Plaintiffs, in care of Plaintiffs' Attorney, in short order. On February 14, 2000, the State of Indiana, Office of the Secretary of State, Securities Division, filed an Administrative Complaint against Virtual Gaming Enterprises, Inc., Virgil Williams and others, alleging that all Respondents sold and/or offered for sale certain securities in violation of Indiana State Law. On this same date, the Indiana Securities Division requested and received a Cease and Desist Order. On March 2, 2000, Virtual Gaming Enterprises, Inc., and Virgil Williams filed their Answer and Affirmative Defenses to the Administrative Complaint and demanded an immediate administrative hearing pursuant to the terms and provision of the Indiana Securities Act that requires a hearing to be set within 45 days of the Indiana Securities Division. Virtual Gaming Enterprises, Inc., and Virgil Williams have and do expressly deny any and all allegations made against them in the Administrative Complaint. Counsel for the Company and Mr. Williams, having not had a response to the hearing demand, provided the Indiana Securities Division a second copy of the Answer and Affirmative Defenses and Demand for Hearing via facsimile on March 17, 2000. Subsequent to March 17, 2000, Counsel for the Company made several attempts to contact the Indiana Securities Division via telephone, leaving messages for the Deputy Commissioner, Enforcement, who apparently is responsible for this proceeding. The Indiana Securities Division has never responded to the Demand for Hearing or the telephonic inquiries of counsel. Finally, in January or February 2000, Virtual Gaming Enterprises, Inc., was named as a Defendant in a Complaint for Interpleader filed in the Third Judicial District Court in and for Salt Lake County, State of Utah, and identified as Civil No. 000901201. Therein, National Stock Transfer, Inc., the transfer agent for the Company's Stock, due to competing demands for certain certificates. This action remains pending. F-8 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this 10-KSB report to be signed on its behalf by the undersigned thereunto duly authorized. VIRTUAL GAMING ENTERPRISES, INC. (Registrant) Date: September 14, 2000 /s/ Virgil G. Williams ------------------------- Virgil G. Williams President

VIRTUAL GAMING ENTERPRISES INC 10-K