U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 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 DECEMBER 31, 2001.

                                       OR

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

                  For the transition period from _____ to _____

                         Commission file number 0-28685

                         VERTICAL COMPUTER SYSTEMS, INC.
        (Exact Name of Small Business Issuer as Specified in its Charter)

            DELAWARE                                            65-0393635
(State or Other Jurisdiction of                              (I.R.S. Employer
 Incorporation or Organization)                             Identification No.)

                             6336 WILSHIRE BOULEVARD
                          LOS ANGELES, CALIFORNIA 90048
                    (Address of Principal Executive Offices)

                                 (323) 658-4211
                           (Issuer's Telephone Number)

                        SCIENTIFIC FUEL TECHNOLOGY, INC.
                        --------------------------------
                     (Former name of small business issuer)

                    1203 HEALING WATERS, LAS VEGAS, NV 89031
                    ----------------------------------------
                    (Former address of small business issuer)

         Indicate by check whether the issuer: (1) filed all reports required to
be filed by Section 13 or 15(d) of the  Exchange  Act  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        No  X
             -----     ---

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment of this Form 10-K. [ ]

         Registrant's revenues for the fiscal year ended December 31, 2001 were:
$4,156,088.

         The  aggregate  market value for the  Registrant's  voting common stock
held by non-affiliates  based upon the closing bid price for the common stock on
May 15, 2002, as reported on the NASD Bulletin Board system,  was  approximately
$3,028,296.

         Shares of common  stock  held by each  officer  and  director  and each
person who owns 5% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. The determination of affiliate
status is not necessarily a conclusive determination for other purposes.

         The number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date: Common Stock, par value $.00001
per share, 627,691,422 shares issued and outstanding as of May 15, 2002.

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




<PAGE>



                            VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
                                              FORM 10-KSB
                              FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                           TABLE OF CONTENTS


   ITEM 1.   DESCRIPTION OF BUSINESS..........................................1
   ITEM 2.   DESCRIPTION OF PROPERTY.........................................14
   ITEM 3.   LEGAL PROCEEDINGS...............................................14
   ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............15
   ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........15
   ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS......21
   ITEM 7.   FINANCIAL STATEMENTS............................................34
   ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
             PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT .....35
   ITEM 10.  EXECUTIVE COMPENSATION..........................................38
   ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..42
   ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................42
   ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K................................44









                                       i

<PAGE>

ITEM 1.  DESCRIPTION OF BUSINESS

         Management  has used best  efforts in writing  Vertical's  Form  10-KSB
report in plain, easy to understand English.  Vertical Computer and the Industry
Overview  Sections  attempt  to  outline  both  the  meaning  and  scope  of the
strategies  currently  employed at Vertical.  Although  both these  sections are
compelling,  the other  information  contained in this report is  important  and
necessary in order to gain a thorough  understanding  of our business,  markets,
customers  and  competition.  Accordingly,  please  read our entire  Form 10-KSB
report  prior to making an  investment  in  Vertical,  as these are  complicated
technologies and solutions that involve risks and  uncertainties.  References to
"we", "us",  "our",  "Vertical" or "Vertical  Computer" means Vertical  Computer
Systems,  Inc.  and  its  subsidiaries  and  divisions,  and  their  predecessor
companies and subsidiaries.

         When  used  in  this  report,   the  words   "anticipate",   "believe",
"estimate",  "will", "may", "intend", "in our opinion", and "expect" and similar
expressions identify forward-looking  statements.  Forward-looking statements in
this  report  include,  but are not limited  to,  those  relating to the general
expansion  of  our  business,   particularly  with  respect  to  our  e-business
initiatives  and including  our ability to develop  multiple  applications,  our
planned introduction of new products and services,  the possibility of acquiring
complementary   businesses,   products,   services  and   technologies  and  our
development of relationships  with other providers of leading edge technologies.
Although we believe that our plans,  intentions  and  expectations  reflected in
these forward-looking  statements are reasonable,  we can give no assurance that
these plans, intentions or expectations will be achieved.

         Actual  results,  performance or achievements  could differ  materially
from those contemplated,  expressed or implied by the forward-looking statements
contained in this report.  Important  factors that could cause actual results to
differ  materially  from our  forward-looking  statements  are set forth in this
report and contained in Item 6, "Management's Discussion and Analysis or Plan of
Operations."  These factors are not intended to represent a complete list of the
general or specific factors that may affect us.


DESCRIPTION OF BUSINESS

         OVERVIEW

         Vertical  Computer was  incorporated  in the State of Delaware in March
1992. Vertical Computer operated as a non-reporting public shell company, with a
wholly owned subsidiary, which was sold at the time of acquiring Externet World,
Inc. In October 1999, we acquired all the outstanding  capital stock of Externet
World, an Internet service provider, and became an operating entity. In December
1999, we acquired Emily Solutions' Web technology.  The Emily framework consists
of executable  programs,  files,  configuration data and documentation needed to
create Websites that intercommunicate via XML and HTTP.

         In March 2000, we entered into a joint venture with Zap S.A.,  Brazil's
second  largest  provider  of  real  time  financial  information  for  Brazil's
financial    markets,    and    subsequently    established    a   Web   portal,
theBrazilbridge.com,  Vertical  Computer's  first Home Country Gateway ("HCG" or
"Bridge").  Vertical  Computer acquired all of the stock of  Globalfare.com,  an
on-line travel service,  in May 2000. Later, in May 2000, Vertical Computer paid
$400,000 to acquire a 2.5% equity interest in iNetPurchasing,  Inc., and another
$100,000 to receive a royalty on all  iNetPurchasing  transactions for 20 years.
During  June  2000,  Vertical  acquired  Pointmail.com,  Inc.,  a company in the
process of  developing an Internet  e-mail  system.  In October  2000,  Vertical
Computer  launched another Bridge,  theUSbridge.com.  In October 2000,  Vertical
Computer sold its wholly owned  subsidiary  Externet  World,  Inc. to two former
shareholders  of  Vertical   Computer.   Also,  in  October  2000,  First  Serve
Entertainment  Pvt.  Ltd.  became a global  partner,  and  entered  into a joint
venture with Vertical Computer to develop another Bridge in India.

         During March 2001,  Vertical Computer entered into a joint venture with
Navicom Co. Ltd., an e-commerce and telecommunications company that is a leading
provider of Global Positioning System technologies and GPS-related  applications
in  Korea.  As part  of the  joint  venture,  Navicom  intends  to  establish  a
distribution  platform within the Korean  technology and e-commerce  communities
for Vertical  Computer's  products and services.  Navicom and Vertical  Computer
launched  theKoreaBridge.com  in October 2001. In March 2001,  Vertical Computer
invested  $1,000,000 to obtain a 60 percent majority  interest in Now Solutions,
LLC  ("Now").  Also in March 2001,  Now  acquired  the  Renaissance  CS(R) Human
Resources and Payroll  assets from Ross Systems,  Inc. The  Renaissance  Payroll
System,  which reaches into small and growing  businesses,  is a human resources
software  system and used by over 175 companies in North  America.  In May 2001,
Vertical Computer issued 3-year warrants to purchase  1,000,000 shares of common
stock at a strike price of $0.05 per share for exclusive  licensing  rights to a
patent-pending fiber optics


                                       1
<PAGE>

technology application created and owned by Aluizio Cruz. As part of its overall
strategy to provide a full suite of products and  services to global  customers,
Vertical  acquired  EnFacet,  Inc. in August 2001 and certain assets of Adhesive
Software in November 2001, including the SiteFlash technology.  EnFacet sold two
products,  NewsFlash  (catering to the  publishing  industry and  newspapers  in
particular)  and SiteFlash (the  affiliation/syndication  Web product) which are
based on award winning  (CrossRoads  A-List for 2000 and 2001),  patent  pending
technologies.  In addition  Vertical is also in the  process of  developing  and
marketing  other "Flash" based  products -  AffiliateFlash,  ResponseFlash,  and
UniversityFlash.

         In November 2001 Vertical  entered into a license  agreement  with iNet
Purchasing  ("iNet")  whereby it licensed the Emily  software and technology for
use in connection with iNet's e-procurement system in Texas, Maine, and Idaho in
exchange for a 20% commission of subscription fees and the ability to market all
subscription  fees  (except  for Texas QISV  vendors).  Pursuant  to the license
agreement,  Vertical  also obtained a joint  marketing  effort to sell its Emily
Agent to these  vendors.  Vertical  is  entitled to retain all of the $495 sales
price for sales any vendors. In December 2001, Vertical Computer entered into an
option  agreement with iNet to purchase an additional  interest in iNet in April
2002. If exercised,  Vertical would own 56% of iNet upon exercise of the option.
The  option has an  exercise  price of  $860,000  and is due by the end of April
2002.  Under the terms of the  option,  iNet was  required  to  deliver  certain
financial and non-financial  information.  This information was never delivered.
Vertical is seeking an extension  of the exercise  date to allow iNet to deliver
the required  information  and to allow  Vertical an  opportunity  to review the
information and to make an informed  investment  decision.  Discussions thus far
with iNet have not resulted in a resolution of this matter.

         Vertical  agreed to pay $250,000,  of which $150,000 was actually paid,
in exchange for 51% equity  interest in  WorldBridge  Webcasting  Services,  LLC
("WorldBridge"), a webcast services company. In October 2001, Vertical agreed to
reduce its interest in  WorldBridge  from 51% to 49%. In January 2002,  Vertical
Computer  and  Strategic   Marketing   Alliance  agreed  to  terminate  Vertical
Computer's  interest  in  WorldBridge  in  consideration  for credit on Vertical
Computer's  account with Strategic  Marketing whereby  Strategic  Marketing will
continue to provide  consulting  services  through 2002. In addition,  Strategic
Marketing  will receive  3-year  warrants to purchase  stock equal to $5,000 per
month,  based on a strike price formula of $0.01 plus the previous  average five
day market price on the date of issuance.  These warrants will be issued in lieu
of the  warrants  specified in the original  consulting  agreement,  dated as of
November 2000, with Strategic Marketing beginning in February 2002.

         Vertical  Computer  maintains  its  primary  focus  on  developing  its
proprietary Emily technology, Web services,  Underpinning Web Technologies,  and
other products,  such as ResponseFlash and  UniversityFlash.  Its subsidiary Now
Solutions  is striving to develop its services and products in order to grow its
customer base.  Additionally,  Vertical  Computer  continues to build its global
network of Local Country  Partners with the goal of developing an  international
network of Bridges  that will serve as  distribution  platforms  throughout  the
world for its proprietary and licensed technologies, goods and services.


         BUSINESS DIVISIONS

         Vertical  Computer's  business operations are broken into the following
divisions:  Emily Solutions,  EnFacet,  Adhesive Software Assets, Now Solutions,
Globalfare.com,  Home  Country  Gateways,  Pointmail.com,  and  joint  ventures,
strategic  partnerships  and  minority  interests.  Each of these  divisions  is
discussed below.


         EMILY SOLUTIONS

         Vertical Computer acquired the rights to Emily Solutions Web technology
in  December  1999.  Emily  Solutions'  work  platform,  "the Emily  Framework",
consists of executable  programs,  files,  configuration  data and documentation
needed  to  create  Web-based   applications  that   intercommunicate   via  XML
(Extensible  Markup Language) and HTTP. HTTP or Hypertext  Transfer  Protocol is
the set of rules for exchanging files (text,  graphic images,  sound, video, and
other  multimedia  files) on the Web. The Emily Framework was developed to be an
engineering  package  comparable to other Web development tools, such as Allaire
Cold Fusion or Microsoft Frontpage. The primary component of the Emily Framework
is MLE (Markup Language Executive),  a programming language that runs on Windows
NT, Windows 2000, Linux and several UNIX platforms.  MLE is developed to be both
a complement and an alternative to Java on the server side.

         In addition,  Vertical  Computer  developed the Emily XML Enabler Agent
and the Emily Broker  applications,  which is now used as the interface  between
iNet  e-procurement  system for the states of Texas, Maine and Idaho. As part of
the  agreement  between iNet  Purchasing  and Vertical  Computer,  the Emily XML
Enabler  Agent is offered as an optional  product to expedite the interface at a
price of $495 to each vendor.



                                       2
<PAGE>

         The Emily  scripting  language has been enabled to work on Java and the
option is being  explored  to launch the Emily  scripting  language as part of a
Java tool kit.

         For the twelve months ended December 31, 2001,  Emily  Solutions had no
assets and no material revenue or expenses.


         ENFACET, INC.

         In August 2001,  Vertical  Computer  acquired all of EnFacet,  Inc. for
30,000 shares of Series C 4% Cumulative  Convertible preferred stock. EnFacet is
a  software-products  company that has  Web-based  e-Business  software  used by
newspapers, government agencies, universities and large franchises. EnFacet sold
two products  Newsflash  (catering to the publishing  industry and newspapers in
particular) and SiteFlash (the affiliation/ syndication Web product), which were
originally  licensed  from  a  third-party,  Adhesive  Software,  Inc.  Vertical
Computer  later   acquired   certain   assets  of  Adhesive,   including   these
technologies,  from a third party.  Both  NewsFlash  and  SiteFlash are based on
award  winning   (Crossroads   A-List  for  2000  and  2001),   patent   pending
technologies. Vertical Computer recognized approximately $757,000 of goodwill in
connection with the purchase, which is being amortized over a 3-year period.

         For the five months ended December 31, 2001,  EnFacet had approximately
$638,000 of net goodwill.


         ADHESIVE SOFTWARE ASSETS

         In November 2001, Vertical Computer acquired software technology assets
of Adhesive Software,  including the SiteFlash technology platform, from a third
party for $100,000 in cash, 50,000 shares of Series C 4% Cumulative  Convertible
preferred stock, and a 4% promissory note in the amount of $280,000.  All unpaid
amounts  are due  September  2004.  The note is  secured  by  certain  assets of
Vertical Computer reserved as collateral.


         NOW SOLUTIONS, LLC

         In February  2001,  Vertical  Computer  acquired a 60%  interest in Now
Solutions,  LLC, a company that develops and maintains human resource  software,
in exchange for  $1,000,000.  Also in March 2001,  Now  Solutions  purchased the
Human Resource  Information Service Application Software assets ("HRIS") of Ross
Systems,  Inc.  ("Ross") in exchange for $5,100,000 and a promissory note due to
Ross for  $1,000,000.  The Ross  note  does not bear  interest  and has  payment
requirements of $250,000 and $750,000 due February 2002 and 2003,  respectively.
In addition the agreement  calls for various  earn-out  provisions to be paid to
Ross if certain sales levels are achieved by Now Solutions  during the two years
subsequent to the purchase.  Now Solutions acquired a $5,500,000 note payable to
finance the Ross acquisition and used the excess amount for working capital. The
note bears  interest  at prime plus one and a half  (prime was 4.75% at December
31,  2001) and has an interest  rate floor of 8.5%.  The Note payable is due the
earlier of February 2006 or if terminated,  by either party,  in accordance with
the terms of the  agreement.  The note calls for monthly  principal  payments of
$91,500, plus interest. Now Solutions has been notified by the lender that it is
in default of certain  covenants in the loan  agreement.  Vertical  Computer had
pledged a $1.5  million  deposit  as  collateral  pursuant  to a deposit  pledge
agreement to guarantee the first 24 payments of the loan to finance the purchase
of HRIS.  Although Vertical Computer believes it is entitled to a portion of its
$1.5 million deposit which increases as Now makes its payments,  it is currently
in  discussions  with the  lender to resolve  NOW  Solution's  default.  Until a
settlement is reached,  the default by Now Solutions is cured,  or Now Solutions
continues to makes its payments  through  February  2003,  or Vertical  Computer
pursues  legal action,  Vertical  Computer is unlikely to obtain a return of its
deposit, or any portion thereof.

         Arglen  Acquisitions,  LLC facilitated the Now Solutions'  transactions
and acquired a 30% interest in Now Solutions for services  provided and received
warrants of Vertical  Computer to purchase 5% of the total  outstanding stock of
Vertical Computer or the initial grant of 30,763,943 shares. If, during the last
90  trading  day  period of the first  year  from the date the  issuance  of the
initial set of  options,  the per share  value of  Vertical  Computer's  shares,
adjusted for any forward or reverse  splits and any other  dilutive  effect,  is
less than  $0.50,  then Arglen  will be  entitled  to an  additional  25,000,000
warrants to purchase common shares. If, during the last 90 trading day period of
the second year from the date the  issuance  of the initial set of options,  the
per share value of Vertical Computer, adjusted for any forward or reverse splits
and any other dilutive effect, is less than $1.00, then Arglen,  provided it has
not exercised and sold more than 25% of the  55,763,943  shares  underlying  the
previous stock warrants,  shall be entitled to an additional 25,000,000 warrants
to purchase common shares. The exercise price of the warrants will be $0.08, and
the  warrants  shall be  exercisable  for a period of 5 years  from the date the
warrants are registered  with the Securities and Exchange  Commission for resale
or an exemption from registration becomes available.

         Pursuant to the terms of the operating  agreement,  Vertical Computer's
interest  will be reduced to 51% over three years as employees of Now  Solutions
will be entitled to receive ownership interests in Now Solutions.



                                       3
<PAGE>

         The Now Solutions' purchase was accounted for under the purchase method
of  accounting,  with the cash paid to Ross in  connection  with the purchase of
HRIS. The purchase price also included $667,000 for Arglen's 30% interest in Now
Solutions  and $798,000 for the value of the Warrants  issued to Arglen  (valued
using the Black-Scholes  valuation  model).  Vertical Computer and Now Solutions
recognized  approximately  $7,294,000 of goodwill and other intangible assets in
connection  with the  purchase,  which is being  amortized  over a 3- to  8-year
period.

         On April 10, 2002,  Vertical Computer appointed a fifth  representative
to the Now Solutions Executive  Committee.  On April 12, 2002, Vertical Computer
received a letter from Arglen  Acquisitions  LLC, a member of Now Solutions LLC,
accusing Vertical Computer of defaulting on its obligations under Now Solutions'
Operating Agreement by failing to obtain a waiver of default from Now Solutions'
lender,  Coast Business  Credit.  The letter further stated that the default has
triggered the dissolution of Now Solutions,  and authorizes Arglen  Acquisitions
to  acquire  Vertical  Computer's  ownership  interest  in  Now  Solutions  at a
discounted price. On May 8, 2002,  Vertical  Computer demanded  arbitration from
Arglen Acquisitions seeking to enforce its rights under the Operating Agreement,
including  the  appointment  of the fifth  representative  to the Now  Solutions
Executive  Committee.  On May 9, 2002,  Arglen  Acquisitions  filed a Demand for
Arbitration  and Statement of Claim against  Vertical  Computer.  In its demand,
Arglen  Acquisitions  alleged  that  Vertical  Computer  is in  default  of  its
obligations under the Operating Agreement.  Arglen is seeking to enjoin Vertical
Computer  from  appointing  a fifth  member of the  Executive  Committee  of Now
Solutions and other  actions,  as well as seeking  specific  performance  of the
default provisions of the Operating  Agreement,  including the right to purchase
Vertical Computer's interest in Now Solutions.  Vertical Computer believes these
allegations are without merit.  Vertical  Computer  intends to defend its rights
and to assert its own claims against Arglen Acquisitions.

         For  the  ten  months  ended  December  31,  2001,  Now  Solutions  had
approximately $4,987,000 of net goodwill and other intangible assets.


         GLOBALFARE.COM

         In May 2000, Vertical Computer acquired  Globalfare.com.  Globalfare is
headquartered  in Los Angeles,  California.  In light of the  relocation and the
future of the travel industry caused by the terrorist attacks at the World Trade
Center,  Vertical  Computer has  suspended  operations  of  Globalfare  while it
formulates    its    future    strategy.    Globalfare    was   an    e-commerce
business-to-consumer and business-to-business  outlet whose aim has been to seek
out and promote  travel  products  from across the USA and around the world that
are the best values in terms of price, quality and selection.

         Prior to the suspension of operations,  Globalfare also offered a point
of presence on the Web for  travelers  looking for the best buys  available  for
travel  within a  relatively  short time frame and for those who are  looking to
plan vacations  trips  throughout the world.  Globalfare's  goal was to become a
complete  on-line travel service,  and offer a  comprehensive  range of best-buy
travel  products;  excellent hotels to suit all budgets;  and first-rate  travel
insurance at reasonable costs, all with instant confirmation and the convenience
of credit card payment.

         For the twelve  months  ended  December 31,  2001,  Globalfare.com  had
assets of $51,650, net revenues of $92,139 and a net loss of $570,581.


         HOME COUNTRY GATEWAYS

         Vertical  Computer  is  developing  a Web-based  distribution  platform
called  Home  Country  Gateway  as part of its  Global  Partners  System.  These
gateways represent an international distribution platform for the demonstration,
deployment  and  sale  of  Web  services  and  Underpinning  Web   Technologies.
Currently,  Vertical  Computer has five gateways in operation,  the U.S.  Bridge
(http://www.theUSbridge.com),            the            Brazil            Bridge
(http://www.thebrazilbridge.com),           the           China           Bridge
(http://www.thechinabridge.com),            the           India           Bridge
(http://www.theindiabridge.com),            the           Korea           Bridge
(http://www.thekoreabridge.com)        and        the        World        Bridge
(http://www.theworldbridge.com).

         The goal of the gateways is to use them as a distribution  platform for
Web  Services.   In  the  meantime,   Vertical  Computer  continues  toward  the
implementation  of structured  subscription  fees as Web Services and technology
are added to the  gateways.  Later,  these  gateways are also  expected to offer
exclusive  sponsorship  opportunities  in a broad  range of ways to  effectively
deliver  companies'   messages  and  desired  product  information  to  newfound
consumers worldwide.

         The  gateways  display  Web  Services  like  the  Personal  Information
Management  system through a licensing  agreement with  WebAddressBook,  whereby
Vertical  Computer  acquired a permanent  license to utilize the source code for
"WebAddressBook"  in October 2000.  This system allows users to manage  personal
information  such as address book,  calendar,  contacts,  bookmarks,  note pads,
files  and   tasks.   WebAddressBook   is   customizable,   multi-language   and
user-friendly.  It is a full-featured  customizable product that fits seamlessly
into Vertical Computer's existing infrastructure.



                                       4
<PAGE>

         The  gateways  continue  to  offer a free  Internet  messaging  service
through  Webbe,  which is licensed and co-branded  from a third party.  Vertical
Computer  has  renewed  this  license for a term of 1 year at a rate of $19,400,
which was due by the end of January  2002.  As of December  31,  2001,  Vertical
Computer has paid $5,000 toward the amount owed. The balance is now due.  Webbe,
essentially a highly  personalized Web browser,  is a one-stop shop for Internet
activity, and adds additional communications tools to Vertical Computer's global
network of gateways.

         For the twelve months ended December 31, 2001, Vertical Computer has no
assets, revenues or expenses in relation to the gateways.


         POINTMAIL.COM, INC.

         In June 2000,  Vertical  Computer acquired  Pointmail.com,  Inc., which
owns proprietary,  Web-based e-mail software that enhances  Vertical  Computer's
existing "ThePostmaster.Net"  Internet service.  ThePostmaster.Net is accessible
world wide, offers a cross-platform  e-mail solution,  and is cheaper and easier
than using traditional e-mail programs.

         For the twelve months ended December 31,  2001Pointmail.com  had assets
of $82, no revenues and a net loss of $89,234.


         JOINT VENTURES, STRATEGIC PARTNERSHIPS, AND MINORITY INTERESTS

         INET  PURCHASING,  INC.  iNet  Purchasing,  Inc.,  based  in  Bethesda,
Maryland, is a developer of Internet-based  procurement services targeted at the
specific  needs of public sector  purchasing  in the state and local  government
arena through  PublicBuy.net.  State governments in Texas,  Maine and Idaho have
selected  iNet's unique  technology to meet their statewide  procurement  needs.
Through its strategic  partnerships,  iNet  solutions  handles  everything  from
requisition to final payment,  providing an end-to-end audit trail essential for
governmental  processes,  which can lead to  increased  efficiency  and  lowered
expenses of current  public sector  purchasing  processes both for the buyer and
the  supplier.  iNet has  directed  its  talents,  resources,  technologies  and
Internet-based  services to reduce the  overhead  in the  government-to-business
market.

         By using iNetPurchasing's  services, public and private sector entities
can manage the cost of the purchasing process.  iNetPurchasing's  Internet-based
services  provide  quick and easy  access to vendor  contracts  and open  market
catalogs  maintained  for the  public  sector  agency  through  iNetPurchasing's
proprietary  e-catalog  technology.  The iNetPurchasing  service offers the full
procurement  cycle workflow  process from end-user  requisition  through payment
reconciliation.  The  service is  offered  either as a  stand-alone,  front end,
Web-based  system or can be  interfaced  to agency  financial  systems,  such as
PeopleSoft, SAP or Oracle.

         iNetPurchasing   is  in  effect  a  communications   link  between  the
governmental  buyer and the private supplier for which it charges the supplier a
value-added fee for the electronic processing of purchases.

         In April 2000,  Vertical  Computer entered into two joint ventures with
iNetPurchasing.com,  Inc., iNet Government Services,  LLC and Vertical iNet LLC.
Neither entity has begun operations.  Both joint venture ownerships are held 50%
by Vertical  Computer and 50% by iNet. In May 2000,  Vertical  Computer invested
$400,000  in iNet for 2.5% of  iNet's  outstanding  shares  and  $100,000  for a
royalty license,  which provides for royalty payments to Vertical Computer based
upon iNet's transactional fees.

         In November 2001,  Vertical  Computer entered into a license  agreement
with iNet,  where the Emily  software  and  technology  was  licensed for use in
connection  with  iNet's  e-procurement  system  in Texas,  Maine,  and Idaho in
exchange for a 20% commission on subscription fees and the ability to market all
subscription  fees  (except  for Texas QISV  vendors).  Pursuant  to the license
agreement,  Vertical Computer also obtained a joint marketing effort to sell its
Emily  Agent to these  vendors.  Vertical  is entitled to retain all of the $495
sales price for sales to any vendors.

         In December 2001,  Vertical  Computer  entered into an option agreement
with  iNet to  purchase  additional  interest  in iNet by  April  2002,  whereby
Vertical  Computer could obtain an aggregate 56% ownership  interest in iNet. In
accordance  with the option  agreement,  Vertical  Computer  was required to pay
$140,000 in four equal monthly installments beginning in December 2001 and grant
stock options to three iNet  employees,  Basil Nikas,  Robin Mattern,  and Wayne
Savage, in the amount of 1,500,000, 1,500,000, and 500,000 shares, respectively.
Vertical  Computer  has paid a total of  $112,500  and  intends  to  offset  the
remaining balance against amounts owed by iNet pending a final  accounting.  The
options are vested,  have a strike price of $0.010, and must be exercised within
3 years from the date of issuance.  Pursuant to the terms of the Stock  Purchase
Agreement and the Stockholders  Agreements,  if Vertical Computer  exercises its
option to obtain a majority  interest in iNet, by April 2002,  Vertical Computer
is required to pay to iNet  $860,000 in cash or  marketable  securities,  70,000


                                       5
<PAGE>

shares of Series "C" Preferred Stock,  and issue additional  3-year warrants and
options,  as the case may be, to purchase an additional  6,000,000  common stock
shares each to Nikas and Mattern and  2,000,000  common  stock shares to Savage.
The strike price is the closing price of the Vertical common stock on January 6,
2002,  and, in the event that Vertical  does not acquire a majority  interest in
iNet  Purchasing,  Inc.,  these  options  and  warrants  will  be  automatically
cancelled.  Under the terms of the option,  iNet was required to deliver certain
financial and non-financial  information.  This information was never delivered.
Vertical is seeking an extension  of the exercise  date to allow iNet to deliver
the required  information  and to allow  Vertical an  opportunity  to review the
information and to make an informed investment decision as well as to allow both
parties to resolve the issues of monies owed by iNet and  Vertical  Computer and
vice versa.  Discussions thus far with iNet have not resulted in a resolution of
this matter.

         As of December 31, 2001, all of the iNet  investments and advances paid
for royalties are reserved.  There have been no revenues or expenses in relation
to the investments for the twelve months ended December 31, 2001.

         APOLLO INDUSTRIES,  INC. Apollo Industries,  Inc. ("Apollo"),  based in
Los Angeles,  California,  is a systems  integrator and consulting  firm that is
establishing an E-business platform focused on  multiple-application  Smart Card
based  solutions  for  credit,   debit  and  other  high  volume   informational
transactions with their customer base. Vertical Industries intends to create and
manage  innovative  end-to-end  (turnkey)  Smart Card systems that  optimize the
convenience,  mobility  and  flexibility  vital  to  accessing  information  and
exchanging commercial value.

         In  October  2000,  Vertical  Computer  agreed to provide  $250,000  in
funding  to  Apollo  for  the  enhancement  of its  ApolloSmart  technology  and
development of its service business in exchange for a 30% equity interest.  Also
on October 14, 2000, in consideration for $25,000 from Vertical Computer, Apollo
agreed to pay a royalty of 2% of all  transaction  fees up to $275,000 and 1% up
to $3,000,000. On April 19, 2001, Vertical Computer loaned Apollo $24,000, which
was due on June 30, 2001.  On May 8, 2001,  Vertical  Computer  loaned Apollo an
additional  $24,000  which  was due on July 16,  2001.  The  loans  are  secured
pursuant  to a stock  pledge in the  amount of 500,000  shares of Apollo  common
stock for each of the two loans. Apollo is in default of the two loans. Vertical
Computer  has not  foreclosed  on either  loan and  Apollo is in the  process of
securing  funding  to  repay  both  loans.  Vertical  Computer  intends  to  use
ApolloSmart  technology  to offer  consumers  many  features  from  small-change
transactions,  banking and credit/debit spending,  computer security,  Web-based
shopping,  and Internet voting up to assisting  enterprises  around the world in
implementing and expanding smart card usage.

         As of December 31, 2001, the investment in notes  receivable and all of
the advances paid to Apollo for royalties have been reserved. There have been no
revenues  and a net loss of $202,334  was deferred in relation to Apollo for the
twelve months ended December 31, 2001.

         ZAP QUOTE, S.A. In March 2000, Vertical Computer entered into two joint
ventures with ZAP Quote,  S.A.,  Brazil's  second largest  provider of real time
financial   information  for  Brazil's  financial  markets.   ZAP  Quote,  S.A.,
established in 1985, has used its proprietary  wireless technology to become the
fastest growing company for financial news and information based in Brazil.  ZAP
Quote,  S.A. also has a major position in providing back office software to many
of Brazil's financial institutions.

         Both joint venture ownerships are held 50% by Vertical Computer and 50%
by ZAP Quote,  S.A.  The first  joint  venture  was  converted  into a Brazilian
corporation  named  Vertical Zap S.A. in August 2000.  The terms of Vertical Zap
S.A.  require  Vertical  Computer to provide the latest in U.S.  technology  and
products while ZAP Quote,  S.A. will add its expertise and familiarity  with the
Brazilian financial and business  communities,  along with the initial financing
for the  project.  As part  of  Vertical  Computer's  Global  Partners'  System,
Vertical Zap S.A.  developed  and launched an Internet  distribution  Website or
"Bridge"  to  market  and  distribute   Vertical  Computer's  Web  services  and
Underpinning Web Technologies throughout Brazil. The second joint venture, known
as ZAP Vertical, has not been converted into a corporation,  but is developing a
strategy  to market  and  distribute  ZAP  Quote,  S.A.'s  proprietary  wireless
financial  applications in countries and territories around the world, excluding
South America.

         WIRELESS LEARNING  SYSTEMS,  LLC. In June 2001,  Epsylon  Technologies,
Taurus Global,  LLC and Vertical Computer formed Wireless Learning Systems,  LLC
("Wireless Learning"), which was formulating plans to develop wireless solutions
for  schools  to support  teacher  and  student  wireless  educational  systems.
Vertical issued 3-year warrants to purchase  846,000 shares of common stock at a
strike  price of  $0.050  per  share in  connection  with the  formation  of the
Wireless Learning LLC. The holders of these warrants are Robert Langworthy, Igor
Shoifot,  and Alexander Sergeev in equal amounts.  In addition,  Vertical issued
3-year  warrants to purchase  54,000 shares of common stock at a strike price of
$0.050 per share to Taurus Global in  connection  with the formation of Wireless
Learning.  Vertical  Computer has put Wireless  Learning on hold until  relevant
technology is acquired.



                                       6
<PAGE>

         WORLDBRIDGE  WEBCASTING SERVICES,  LLC. In June 2001, Vertical Computer
agreed to pay $250,000,  of which  $150,000 was actually paid, in exchange for a
51% equity interest in WorldBridge Webcasting Services,  LLC ("WorldBridge"),  a
webcast services  company.  In October 2001,  Vertical Computer agreed to reduce
its interest in WorldBridge from 51% to 49%. In January 2002,  Vertical Computer
and  Strategic  Marketing  Alliance  agreed  to  terminate  Vertical  Computer's
interest  in the  WorldBridge  Webcasting  LLC in  consideration  for  credit on
Vertical Computer's account with Strategic Marketing whereby Strategic Marketing
will  continue  to  provide  consulting  services  through  2002.  In  addition,
Strategic  Marketing  will receive  3-year  warrants to purchase  stock equal to
$5,000 per month,  based on a strike  price  formula of $0.01 plus the  previous
average five day market price on the date of issuance.  These  warrants  will be
issued in lieu of the warrants  specified in the original  consulting  agreement
with Strategic Marketing beginning in February 2002.

         THE BRAZILBRIDGE.COM.  In April 2000, Vertical Computer and its partner
ZAP Quote, S.A. launched the Brazil Bridge. Each party has a 50% interest in the
joint venture.

         THE  KOREABRIDGE.COM.  In February 2001, Vertical Computer entered into
an  agreement  with  Navicom  Co.  Ltd.,  to form a joint  venture to launch and
operate  "theKoreaBridge.com"  and  related  businesses.  Each  party  has a 50%
interest in the joint venture. The Korea Bridge was launched in October 2001.

         THE INDIABRIDGE.COM. In October 2000, Vertical Computer entered into an
agreement  with First  Serve  Entertainment,  Inc.,  to form a joint  venture to
launch and operate "theIndiaBridge.com" and related businesses. Each party has a
50%  interest in the joint  venture.  The India  Bridge was launched in December
2000.

         For the twelve months ended December 31, 2001, all of the joint venture
investments  are fully  reserved.  There have been no  revenues  or  expenses in
relation to the investments for the twelve months ended December 31, 2001.


         BUSINESS OPERATIONS

         Vertical  Computer's business operations consist of three main business
technologies:  (i)  Underpinning Web  Technologies,  (ii) Web Services and (iii)
Global Partners System. Each of these technologies is discussed below:


         UNDERPINNING WEB TECHNOLOGIES

         EMILY XML SCRIPTING LANGUAGES (EMILY). Emily is a Very High Level (VHL)
programming  language,  designed for the specific purpose of working with Markup
Language documents,  especially XML. Emily is a core Underpinning Web Technology
of Vertical  Computer since it has the  capability to create other  Underpinning
Web Technologies, such as the Emily Agent. The emergence of a standard (XML) for
inter-business exchange of data, coupled with inexpensive development tools (PC,
Emily, etc.) and communications media (Internet),  make the business-to-business
market,  in  our  opinion,  ready  to go  beyond  conventional  Electronic  Data
Interchange  to full-scale  data exchange in order to fully utilize the benefits
of tight supply chain management.  The Emily scripting language has been enabled
to work on Java and the option is being  explored to launch the Emily  scripting
language as part of a Java tool kit.

         EMILY  XML  ENABLER  AGENT.  The  XML  Enabler  Agent  was  created  to
XML-enable  any  database.  The  first  Beta  test  resulted  in a  full-fledged
application  with iNet where a solution was needed to connect the State of Texas
supplier's  catalogs  to  iNet  catalog  database  for the new  state  of  Texas
e-procurement.  The solution was developed utilizing Emily broker software.  All
Texas  suppliers  can purchase  the Emily  Enabler  Agent to make their  catalog
instantaneously  available  on the  State of Texas  e-procurement  catalog  with
automatic  updates when the supplier  changes  their  catalog  information.  The
market is any database  that is not  XML-enabled.  The XML Enabler Agent is sold
for a price  of $495 for the  standard  version  and  $995 for the  professional
version. Vertical Computer is currently looking for opportunities to use the XML
Enabler  Agent  with  another  large  potential  application  that can result in
multiple sales opportunities for the XML Enabler Agent. The XML Enabler Agent is
a product developed by Vertical Computer utilizing the Emily Scripting Language.

         SITEFLASH.  SiteFlash  is an  e-Business  Suite that  provides  content
management,   e-commerce,   workflow,   as   well   as   affiliation/syndication
capabilities.  It  has  multi-lingual  and  multi-modal  (any  output  device  -
including  cell  phones,  PDAs)  capabilities.  The core  product  is  rooted in
patent-pending technology that splits the Web pages or the Web site into smaller
components in three distinct categories - form, function and content.  SiteFlash
then allows one to combine these objects from all these categories arbitrarily -
which means that  re-usability  of code,  GUI elements and content is increased,
without  significant  additional  programming.  SiteFlash  is XML enabled and is
compatible  with  diverse   software  systems  that  may  exist  in  the  target
environment.  There is a varied  market  for  SiteFlash  because,  with  minimal
customization,  the core  SiteFlash  technology  can be  immediately  applied to
several vertical markets, including newspapers, franchise operations, government
umbrella agencies, and institutions of higher education.  SiteFlash revenue flow
is expected to be derived from three revenue streams:  SiteFlash will be sold as


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<PAGE>

(i) a software  product,  where revenues are expected to be derived from license
fees and annual  maintenance and/or support fees; (ii) a core Web platform where
revenues  are  expected  to  come  from a  one-time  product  sale,  as  well as
additional  royalties  for any  run-time  applications  that the third party may
distribute in connection  with the SiteFlash core platform;  and (iii) a service
where revenues are expected to consist of a one-time setup fee plus monthly fees
for continued use of the service.


         WEB SERVICES

         NEWSFLASH - PUBLISHING.  Vertical Computer acquired  NewsFlash with its
purchases of EnFacet and the assets of Adhesive software that had been developed
from the SiteFlash  technology.  NewsFlash is a fully developed  product and had
been  successfully  marketed  to a number of  newspapers.  The  newspapers  that
purchased  NewsFlash  still use the product and offer third party  endorsements.
The new  upgraded  product  that is being  finalized  is expected to enhance the
features and functionality of NewsFlash.  Vertical  Computer's initial focus has
been on the newspaper  industry,  particularly  on those  newspapers that do not
have the  capabilities of purchasing and  maintaining a high quality,  real-time
Web site. Vertical Computer owns all of NewsFlash.

         UNIVERSITYFLASH  - HIGHER EDUCATION.  UniversityFlash  is a new product
that developed from the SiteFlash  technology.  UniversityFlash  is being rolled
out at California State University in Fullerton. The UniversityFlash product has
been fully developed by working in conjunction  with California State University
in Fullerton for custom  applications and integration with the other systems. On
the higher education front,  UniversityFlash's  open architecture and ability to
create and maintain multiple  affiliate sites from a single  installation of the
product provides  control,  as well as the flexibility  that permits  individual
departments to freely choose,  develop and maintain their own Web presence using
the same software code rather than different  departments  developing  different
software  code. By bringing  disparate  data  together in one place,  we believe
UniversityFlash  ensures data integrity and consistency,  and thereby simplifies
the decision-making  processes. We believe that universities,  big and small, in
the United  States  comprise  part of the market for  UniversityFlash.  Vertical
Computer owns all of UniversityFlash.

         AFFILIATEFLASH   -   FRANCHISES/INDEPENDENT    AGENTS.   AffiliateFlash
leverages  the  affiliation/syndication   capabilities  that  lie  at  the  core
SiteFlash  product.  AffiliateFlash  provides  organizations with the ability to
create and maintain all related Web sites from a central location, regardless of
the structure by which they were organized, whether as loosely connected agents,
a multi-level hierarchy, a networked hierarchy, or matrix based.  AffiliateFlash
has the  capabilities  that provide the franchiser  with a degree of control and
tracking while also enabling the franchisee to focus on the end-customer without
having to take time to perform routine administrative tasks. We believe that the
AffiliateFlash  market  is made up of  franchises  headquartered  in the  United
States,  as well as companies using  multi-level  marketing  arrangements with a
large set of  independent  agents that need to have some central  tracking while
maintaining   their   independent   status.   Vertical   Computer  owns  all  of
AffiliateFlash.

         RESPONSEFLASH - EMERGENCY MANAGEMENT.  ResponseFlash is another product
based on the SiteFlash  core  technology.  ResponseFlash  addresses the need for
real-time  two-way  communications  between  an  organization  and  its  various
departments and among the various  departments.  Applying this to a governmental
scenario in an emergency  management  framework,  this  translates  into several
possibilities  where  various  agencies  may have  the  need to (a)  communicate
directly to the citizens; (b) communicate with several other agencies and enable
communication  among agencies;  (c) have two-way  communication  between itself,
other agencies and the citizens.  The domestic market for ResponseFlash includes
governmental  and  non-governmental   bodies.  We  believe  that  the  potential
customers of  ResponseFlash  include all of the independent  governing bodies in
the United States that are required by Federal and State guidelines to set up an
emergency  communications  infrastructure.   ResponseFlash  is  currently  being
implemented   with  the   Metropolitan   Emergency   Communications   Agency  in
Indianapolis  and  Marion  County,  Indiana.   Vertical  Computer  owns  all  of
ResponseFlash.

         INETPURCHASING - E-PROCUREMENT SERVICES FOR THE PUBLIC SECTOR. By using
iNet's services,  public and private sector entities can efficiently  manage the
costs of the purchasing process.  iNet's  Internet-based  services provide quick
and easy access to vendor contracts and open market catalogs  maintained for the
public sector agency through iNet's proprietary e-catalog  technology.  The iNet
service  offers  the full  procurement  cycle  workflow  process  from  end-user
requisition through payment  reconciliation.  The service is offered either as a
stand-alone,  front  end,  Web-based  system  or can  be  interfaced  to  agency
financial systems, such as PeopleSoft, SAP or Oracle.

         iNet has over 1,700 term contracts with over 1,300 vendors constituting
nearly a  half-million  lines of  commodity  items in its  production  e-catalog
system. Idaho, Texas, Maine, Nevada, and Jackson County (Kansas City), Missouri,
have selected the iNet offering, "PublicBuy.Net" Government-to-Business service,
over its  competitors.  iNet's  revenue  model  combines both  subscription  and


                                       8
<PAGE>

transaction-based  fees, as well as fees for  Web-based  services and tools that
assist merchants in becoming  Web-enabled  suppliers.  Vertical  Computer has an
option to purchase a majority interest in iNet.

         NOW  SOLUTIONS - HUMAN  RESOURCES/PAYROLL.  Now  Solutions is a company
specializing  in  end-to-end,   fully  integrated  human  resource  and  payroll
solutions to large and mid-size  companies.  Now Solutions  derives revenue from
software licenses,  professional services consulting,  and renewable maintenance
from  approximately  175  customers.  The product  suite has a successful  track
record  in  providing  solutions  to  many  well-known  organizations.  Vertical
Computer  acquired  the human  resources  and  payroll  product  suite from Ross
Systems  through a newly  incorporated  entity  called  Now  Solutions  of which
Vertical  Computer  currently owns 60%, although this percentage will decline to
51% over three years as employees of Now Solutions earn ownership interests.

         The product  suite is targeted  to address the needs of  management  in
today's dynamic business  environment and gives organizations  functionally rich
in a "user friendly" and flexible software solutions,  without the multi-million
dollar  implementation  budgets of the  competitors.  Now Solutions has recently
released a new version of their product offering called Empath 6.0. The existing
revenue model is based upon three components:  new licensing fees,  professional
services,  and annual  maintenance  fees.  Now Solutions has  approximately  175
customers paying annual maintenance fees totaling approximately $4 million.

         GLOBALFARE.COM INC. - TRAVEL.  Globalfare.com was originally  conceived
to be both an  e-commerce  and brick  and  mortar  business  that  sells  travel
products on-line on its  Globalfare.com Web site and through a customer care and
reservation  center.  In light of the  relocation  and the  future of the travel
industry  based upon the attacks of September  11, 2001,  Vertical  Computer has
suspended  operations  while it  reformulates  its strategy.  On-line sales were
intended to include sales through  co-branded  sites with solutions  targeted to
assist the travel  agent  industry  and  through  Vertical  Computer  in-country
partners,  corporate  travel  and  management  programs,  government  relocation
programs, and local and state government sales.

         Globalfare.com's  net fare database  contains  negotiated and net fares
that, in many cases, are priced lower than the airlines' published airfares, and
thereby provide Globalfare with higher percentage commissions, particularly with
regard to consolidator  fares.  Globalfare.com is evaluating new joint marketing
options of high quality  products  and  services.  Globalfare.com's  website and
on-line  booking  engine's  are designed  from the ground up to quickly  provide
affiliates and partners with a complete co-branded on-line travel presence.

         APOLLO   INDUSTRIES  -  SMART   CARDS.   Apollo's   target   market  is
organizations  (like affinity groups) that generate and can use information from
high  volume  financial,  or  data-rich  non-financial,   transactions.  Typical
examples  include  the  often-complex  needs of hotel,  transportation,  travel,
medical,  campus and fast food establishments.  Until the advent of smart cards,
such detailed data could not be collected,  aggregated and instantaneously  used
in a cost  effective,  secure  manner.  Apollo expects to earn revenue from fees
charged to customers for Smart Card-based  systems Apollo designs.  Revenues are
expected to be based on multiple factors that can include card issuance,  system
integration,  transaction  benefits  and  volume,  cost  savings and volume that
benefit the  affinity  group.  Revenue  should also  include fees from banks and
other institutions that serve the organizations,  as do current credit and debit
card programs. We believe that Smart Card readers,  systems integration software
and hardware,  on-card logo  advertising,  extended (value added) card functions
and other systems components may provide new types of revenue.  Apollo's revenue
for credit  applications  and other  services  are  expected  to be shared  with
various affinity groups.  Vertical  Computer  acquired 30% of Apollo in 2000 and
has a  royalty  arrangement  whereby  it will  receive  a  royalty  of 2% of all
transaction fees up to $275,000 and 1% up to $3,000,000.

         WIRELESS  APPLICATIONS.  Since  Vertical  Computer is  currently in the
planning stages with regard to wireless  applications,  Vertical Computer has no
projects developed in this market. However,  Vertical Computer is in discussions
with two of its  partners,  Zap Quote,  S.A.  and  Navicom  concerning  wireless
applications  to market  their  existing  products,  as well as to  develop  new
products.


         GLOBAL PARTNERS SYSTEM

         The Global  Partners  System  provides  the  resources  and services to
commercially  exploit and distribute  worldwide the Web services and products of
Vertical Computer and its affiliates through its local country partners. Through
the Global  Partners  System,  the local  country  partners  have the ability to
launch  products  or services  globally  through the  Vertical  Computer  Bridge
network.  Our current local country  partners  include Zap Quote S.A.  (Brazil),
Navicom Co. Ltd (Korea), and First Serve Entertainment (India).

         APPLICATION PLATFORMS (BRIDGES, HOME COUNTRY GATEWAYS OR HGCS). As part
of its Global Partners  System,  the Bridges function as a service that provides
commercial  distribution for Vertical Computer Web Services and Underpinning Web


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<PAGE>

Technologies,  as well  as for  those  of  third  parties.  Six  Bridges  are in
operation. The Bridges are designed to meet the need for a place where Web users
can  "bridge"  national  and  cultural  barriers to connect  with each other for
commerce or  personal  interests  and  purchase  Web  services.  Utilizing  this
expanding   global   network  of  Web   services,   Vertical   Computer   offers
business-to-business,   business-to-government,   and  business-to-consumer  Web
services through its range of accessible  resources that  specifically  cater to
the desires of targeted communities around the world.

         At the core of each Bridge is an alliance with a local country partner,
which provides  country-specific  expertise,  capital and/or content. Each local
partner  supports its respective  Bridge and gains access for Vertical  Computer
Web Services and  technology to market and  distribute in its markets.  Vertical
Computer  is  planning  to add new  partners  to develop a network of Bridges in
different  countries,  and thereby market  Vertical  Computer's  proprietary and
licensed technologies,  goods and services worldwide while continuing to develop
its own applications. Local country partners have the option to market their own
products and services internationally through the Bridge network.

         ZAP QUOTE S.A.  ZapQuote S.A.,  established in 1985,  uses  proprietary
wireless  communications  technology  to enhance its  position in the  Brazilian
marketplace.  Using  available  carrier  channel space on the FM Band, Zap Quote
Wireless Data Broadcasting is able to deliver real time data over broad areas at
a low cost,  including  real-time  financial  data to banks,  brokers and travel
agencies at competitive  prices.  Zap Quote and Vertical  Computer  launched the
Brazil  Bridge  (WWW.THEBRAZILBRIDGE.COM)  in April  2000 and  markets  Vertical
Computer's proprietary and licensed technologies throughout Brazil.

         NAVICOM CO.  LTD.  Navicom Co.  Ltd.,  is a leading  provider of global
positioning  system  technologies  and GPS-related  applications  in Korea.  The
global  positioning  system is the only  system  currently  available  to show a
person's  (or an  object's)  exact  position on Earth  anytime,  in any weather,
anywhere.   Since   commencing   operations  in  1996,  it  has  devoted  itself
continuously to developing numerous applications and opportunities involving GPS
receiver technology.  Vertical Computer and Navicom launched the Korea Bridge in
October 2001.

         FIRST SERVE ENTERTAINMENT,  INC. First Serve  Entertainment,  Inc., Los
Angeles, and India-based First Serve Entertainment India Pvt. Ltd.  (FSE-India),
are both headed by international  sports celebrity and business  executive Vijay
Amritraj,  who was  recently  named a  United  Nations  Messenger  of  Peace  by
Secretary-General  Kofi Annan. In the United States, FSE is a television company
producing,  broadcasting,  syndicating and distributing  television  programs in
India,  Asia and North  America.  In India,  FSE-India is a  multimedia  company
producing,  broadcasting,  syndicating and distributing  television programs and
feature films in India and Asia.  FSE-India has successfully  launched the entry
of Columbia TriStar International  Television,  Turner  International,  ESPN and
others  in  India.  With  Vertical  Computer,   Amritraj  launched  and  co-owns
www.theIndiaBridge.com,  which along with its  established  functions,  has also
channeled funds to survivors of the Gujarat  Earthquake.  Vertical  Computer and
FSE launched the India Bridge in December 2000.


         COMPETITION

         In general, Vertical Computer has substantial competition from software
and hardware vendors, system integrators, and multinational corporations focused
upon information technology.  Furthermore,  each product offered by Vertical has
competition  within  its  market  niche.  Below  is a  description  of  Vertical
Computer's principal  competitors.  Many of Vertical Computer's competitors have
substantially  greater  financial  resources and name  recognition than Vertical
Computer.

         SOFTWARE/HARDWARE VENDORS

         Various  software and hardware  vendors have  initiatives  that compete
with  Vertical  Computer's  Software  technologies.  Besides a number of smaller
companies, Vertical Computer faces competition from Microsoft, Sun, Oracle, IBM,
and Compaq.

         MICROSOFT'S  ".Net"  initiative  provides  software on a per-use rental
basis. This is the primary  distribution model with which Vertical Computer must
compete.  As part of its  .Net  strategy,  Microsoft,  in March  2001,  launched
HailStorm,  a collection  of consumer Web  services,  among them a calendar,  an
address  book,  user profiles  (including  secure  credit card  information  and
personal  preferences),  and in-boxes for receiving alerts and messages,  all of
which are  housed on  Microsoft's  servers.  For  business  services,  Microsoft
launched   another   initiative,   bCentral,   which  hosts   several  types  of
applications,  including a Website  builder,  content  management,  order entry,
accounting,  and customer tracking software services, all of which are available
for  approximately  $110 per month.  The bCentral Web site had about 1.7 million
visitors in February 2002, making it the second-ranking small-business Web site,
according to Media Metrix.



                                       10
<PAGE>

         IBM has several  products  and  services  that  compete  with  Vertical
Computer's offerings in providing applications platforms. For example, IBM Start
NOW  Infrastructure  Solutions provide open,  standard  interfaces and protocols
that  allow  systems  to  interoperate  and  enables  users to manage  demanding
databases and storage challenges,  to develop Internet and intranet presence, to
set up log on and  registration  procedures  for  customers and suppliers and to
share information and data on-line.

         ORACLE AND SUN are also  developing  XML  technologies  through a joint
venture  to  convert  Microsoft-based  software  into  Java  software.  Java  is
supported by Oracle,  Sun,  BEA  Systems,  IBM and others,  as  competition  for
Microsoft's own proprietary  method of writing software.  The new software tools
will  translate  Microsoft  Active  Server Pages into Java Server Pages  without
forcing developers to rewrite their software code. These rival technologies both
allow "dynamic" Web  content--meaning  content that repeatedly changes,  such as
stock quotes or weather  forecasts--to  appear on Web pages. These new tools are
aimed at moving  customers  to Oracle's  application-server  software  that runs
e-commerce and other Web site transactions.

         COMPAQ  COMPUTER  CORP. is preparing a  restructuring  that will see it
emphasize  sales  of  industry-specific  packages  of  computers,  software  and
services  over  computer  hardware.  Among the  plans,  other key  elements  are
acquisitions  to  bolster   computer-service   revenue,  and  expanded  software
development  and sales to lessen its  reliance on  hardware.  Compaq  expects to
cater to industries such as financial services, telecommunications,  health care
and manufacturing, rather than the Internet customers that it has championed for
the  last  two  years.  A new  marketing  unit is  being  organized  to  develop
industry-specific  packages from its own and others' products.  Like IBM, Compaq
aims to expand  higher-margin  services to offset its increasingly lower margins
on revenues derived from its traditional hardware business.


         SYSTEM INTEGRATORS

         System integrators generally provide information  technology management
and consulting services for larger organizations.  Their built-in infrastructure
costs generally make it impractical to service  organizations with less than 100
workstations. The major system integrators with which Vertical Computer competes
include Computer Associates,  Hewlett Packard, IBM, and the consulting divisions
of the big 5 accounting firms.


         MULTINATIONAL CORPORATIONS

         Vertical  Computer has substantial  competition in global  distribution
systems from  multinational  corporations in the technology  field, such as IBM,
General  Electric,  as  well as  foreign  multinationals  such  as the  European
electronics   multinationals   (Siemens,   Nokia,   SAP),   Japanese   Kereitsus
(Mitsubishi, Mitsui), Korean Chaerbols (Samsung), and others.


         DIRECT COMPETITION TO VERTICAL COMPUTER - DISTRIBUTION AND PRODUCTS

         EMILY   SOLUTIONS  XML   SCRIPTING   LANGUAGE   (SCRIPTING   LANGUAGE).
Competition for the Emily base product  consists of traditional  languages,  and
toolkits designed for those languages.  The competition is mainly from currently
existing generic programming  languages.  Most generic programming  languages do
not have specific  extensible markup language or XML support.  The most recently
announced  Microsoft  VisualBasic.Net  supports XML. Our Emily product will work
under the .NET framework and is expected to interface  with the latest  versions
of Microsoft products that support XML. The Java programming language is another
dominant language program and Emily is uniquely  positioned to interoperate with
Java  and  additionally  can  extend  Java's   abilities.   Emily  enables  Java
programmers to quickly write XML applications that interoperate with Java.

         EMILY XML ENABLER AGENT (XML-BASED DATABASE TOOLS).  There are a number
of products  that can either be modified  to perform the same  functions  as our
Emily XML Enabler Agent, but they are available as either standalone products or
are part of very  complex  high-priced  packages,  such as Web  Method's  "B2Bi"
product,  which is priced at $500,000  and up.  Another  competitor,  IBM, has a
product  called  Extensible  Lightweight  Extractor,   that  does  some  similar
functions, but is not yet available as a product for sale to the public.

         SITEFLASH - CONTENT  MANAGEMENT,  E-COMMERCE AND WORKFLOW.  SiteFlash's
competition is derived from its competencies in content management,  e-commerce,
and workflow.  In the content  management  arena,  Vignette and  BroadVision are
competitors. In the e-commerce arena, ClearCommerce is a competitor,  whereas in
the workflow arena, there are competing  products from IBM and Oracle.  However,
Vertical  Computer believes that no single product exists that integrates all of
these components to provide the scope of functionality  that SiteFlash  provides
nor the  affiliation/syndication  capabilities found in SiteFlash.  In addition,
SiteFlash's  multi-lingual  and  multi-modal  capabilities  give these  projects
capabilities  much more than any single  competitor's  product in one integrated
solution. Taking the cue from the market, SiteFlash is now available as a single


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<PAGE>

integrated  product or as a set of  individual  modules  that the  customer  can
purchase separately.

         NEWSFLASH-CONTENT  MANAGEMENT AND  PUBLISHING.  In the realm of content
management,   the  larger   newspapers  have  a  choice  between  NewsFlash  and
conventional content management systems like Vignette and BroadVision.  However,
for medium to small  newspapers  this is a less viable option  because the price
points of the competing  products are high, ranging from about $250,000 up to $1
million, plus additional consulting fees for customization.  However,  NewsFlash
is the only  product  that  has been  specifically  designed  for the  newspaper
industry.  In addition,  NewsFlash is the only product that offers more features
than just a content management system.

         UNIVERSITYFLASH - HIGHER  EDUCATION.  Vertical Computer is not aware of
any direct competitors to UniversityFlash. Vertical's competition in this market
consists of homegrown  custom  software  firms,  Vignette,  Yahoo  Geocities and
consulting   firms,  each  of  whom  might  duplicate   different   features  of
UniversityFlash.

         AFFILIATEFLASH - FRANCHISES/INDEPENDENT  AGENTS. Current competition in
this market consists of homegrown custom software, Vignette, Yahoo GeoCities and
Yahoo!  Store  and  consulting  firms  each of whom  might  duplicate  different
features of AffiliateFlash.

         RESPONSEFLASH  -  EMERGENCY  COMMUNICATION  MANAGEMENT.   ResponseFlash
functionality leverages the most powerful capability of the SiteFlash technology
- the real-time immediate two-way  communication  between thousands of Web sites
among  themselves,  as well as with the  central  site.  ResponseFlash  has been
tailored for the emergency  communications  management  segment and has features
that are not offered by competitive products.  At present,  Vertical Computer is
not  aware  of  a   commercially   available   package  that   replicates   this
functionality.

         INETPURCHASING   -  E-PROCUREMENT   SERVICES  FOR  THE  PUBLIC  SECTOR.
iNetPurchasing  began  offering  products and services that combine deep content
and   management   capabilities   accessible   through  the  Internet   designed
specifically for the public sector.  Although  Vertical Computer is not aware of
any  direct  competition  for  iNet's  specific  services  or  products,  Ariba,
CommerceOne, and FedCenter.Com have offerings that may compete.

         NOW SOLUTIONS - HUMAN  RESOURCES AND PAYROLL  SOFTWARE.  Now Solutions'
competitors include PeopleSoft,  Oracle,  Lawson,  Cyborg and SAP. Now Solutions
believes  its  product  can  accommodate  the  complexities  of  the  large  and
multi-dimensional companies without considerable modifications.

         GLOBALFARE.COM   INC-TRAVEL  SERVICES.   Globalfare.com's   competitors
include Travelocity and Expedia. These two companies, who are among the industry
leaders of the on-line travel industry,  primarily focus on delivering  standard
published  fares to the mass  public.  Other  companies  such as Cheap Seats and
Cheap Tickets provide  discount or negotiated  fares via phone sales but provide
mostly published fares on-line.

         BRIDGES (COMMERCIAL  DISTRIBUTION  PLATFORM).  Competition for Vertical
Computer's  Bridges is two-fold.  First,  there are  competitors  with  Internet
portals  on an  international  basis  like  Yahoo,  AOL,  Lycos  and MSN.  These
companies  operate on a  worldwide  basis with  different  arrangements  in each
country  and compete on a general and  specific  basis with all of our  Bridges.
Second,  there are portals that are geared  toward their  respective  country of
origin like IG.com.br in Brazil, which compete only with the specific Bridge for
that territory (e.g.,  theBrazilbridge.com).  Both global and territory-specific
portals such as these  typically  target an  advertising  revenue stream that is
generated by sheer mass of hits to their sites, and consequently,  tend to spend
significant  advertising  dollars to bring masses to their  sites.  In contrast,
Vertical  Computer's  approach is to utilize  affiliate  programs and in-country
name recognition of Vertical  Computer's global partners combined with selective
and limited advertising to attract specific visitors by technology and products.

         APOLLO  INDUSTRIES.  Many  companies  seek  to  provide  financial  and
informational   solutions  to  affinity  group  clients.   MasterCard  and  Visa
International have focused on authorization  systems.  Card issuing banks assume
credit risks. Other companies have focused on hardware and software. In Apollo's
belief, few companies appear to be focusing on designing  transactional  systems
designed to integrate  all  financial  and  informational  exchange  needs in an
integrated system. Apollo's direct competition will be consulting  organizations
like Booz Allen Hamilton,  which hope to provide complete systems  solutions for
Smart Card transactions in addition to their general consulting services. Apollo
has  focused on  offering a fully  integrated  systems  management  and  banking
interface.

         VERTICAL ZAP S.A. Because Vertical Computer is in the development stage
of its wireless  applications  business,  it has not  identified  its  potential
competition.  Vertical  Zap  intends to utilize  the FM  frequency.  As with its
existing Web service strategy, Vertical Computer's focus is on the international


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<PAGE>

development  and  deployment  of wireless  Web  services  and  Underpinning  Web
technology with our current joint ventures with Zapquote, S.A.


         STRATEGIC OVERVIEW

         We believe that each of Vertical Computer's business units has distinct
marketing  advantages for their niche markets.  Vertical  Computer plans to find
national marketers who can commercially  exploit Vertical Computer's products in
the respective niche market. By utilizing the strategic elements each individual
business unit offers, Vertical Computer plans to leverage each other's strengths
in their segments, as well as to exploit the network of customers,  vendors, and
support agencies that Vertical Computer has built.

         Although  Vertical  Computer's  current  marketing  effort focuses upon
several sectors,  it has recently  concentrated on the United States  government
for the  following  reasons:  (i)  companies  which  it  either  controls  or is
affiliated  with have  government  clients  which has created the  potential  to
cross-promote  our Web services;  (ii) the  Underpinning  Web  Technologies  are
suited to the emerging governmental  environment that demands the capability for
cross-agency  and federal,  state and local  interface;  and (iii) the increased
security  environment  caused by the  terrorist  attacks of  September  11, 2001
necessitates improvements in secure communications and agency-to-agency contacts
that can be facilitated by its technology.

         Vertical  Computer's  current strategy is to obtain federal  government
contracts  through its existing  relationships  or to be a  subcontractor  for a
particular service to one of the major federal government prime contractors,  as
warranted  under the  circumstances.  For local and state  government  entities,
Vertical  Computer  believes it can  cross-market to its existing client base of
its partners,  affiliates,  and subsidiaries.  Overall,  the marketing  strategy
entails  building a strong  international  distribution  base by which  Vertical
Computer hopes to attract the best-of-breed  smaller Web services from companies
without  international  distribution.  In that way, Vertical Computer can market
and commercially  exploit their Web services on Vertical Computer's own platform
and as well as for distribution to governmental entities.

         In the past two years,  Vertical  Computer  has built an  international
distribution system offering Web Services and Underpinning Web Technologies from
its own platforms. Vertical Computer intends to incorporate third party products
and services  into its  worldwide  distribution  platform  while selling its own
services to these third  parties.  Vertical  Computer has obtained a base of Web
Services and Underpinning Web Technologies that it believes are ready to proceed
to market.


         DEVELOPMENT

         Vertical  Computer  continues  to seek local  country  partners who are
established suppliers of Internet infrastructure and content, top management and
local authorities and who manifest diverse  strengths in their regions,  such as
extensive  marketing  abilities,  a stable local presence and local and national
government  contacts,  expertise and familiarity with the financial and business
communities.  Such partners are expected to help bring existing and new Vertical
Computer  technologies  to their markets,  and it believes will also enhance the
prospects for local equity  offerings and investment,  thereby creating a better
overall  value.  In general,  the  companies  in each area will attempt to raise
their own funding and operate as separate firms.


         PROPRIETARY RIGHTS

         Vertical Computer relies upon a combination of contract  provisions and
patent,  copyright,  trademark and trade secret laws to protect its  proprietary
rights in its products and services.  Vertical Computer distributes its products
and services under agreements that grant users or customers a license to use its
products and services and relies on the  protections  afforded by the  copyright
laws to protect  against  the  unauthorized  reproduction  of its  products.  In
addition,  Vertical  Computer  moves to  protect  its  trade  secrets  and other
proprietary  information  through  agreements  with  employees and  consultants.
Vertical   Computer  has  also  filed  for  a  number  of  patents  for  various
technologies:  (a) one  patent  application  related  to the  Emily  programming
language; (b) one patent application related to the Emily XML Enabler Agent; (c)
one  patent  application  related  to the  Emily  XML  Broker  used in the  site
HTTP://XML.PUBLICBUY.NET; and (d) one patent application for transmitting images
on fiber optics that might  improve in orders of magnitude  today's  capacity of
fiber  optics to transmit  images and data.  There are also patent  applications
related  with the EnFacet  acquisition  and the  purchase  of certain  assets of
Adhesive  Software Inc. All of these patents are pending  approval at this time.
Although Vertical Computer intends to protect its rights  vigorously,  there can
be no assurance that these measures will be  successful.  Policing  unauthorized
use of its  products  and  services  is  difficult  and the steps  taken may not
prevent the misappropriation of our technology and intellectual property rights.
In addition,  effective patent, trademark, trade secret and copyright protection
may be unavailable or limited in certain foreign  countries.  Vertical  Computer
seeks to protect  the source code of its  products  as a trade  secret and as an
unpublished copyright work. Source code for certain products has been or will be
published in order to obtain patent protection or to register  copyright in such


                                       13
<PAGE>

source code. Vertical Computer believes that its products,  trademarks and other
proprietary  rights do not infringe on the proprietary  rights of third parties.
There can be no assurance that third parties will not assert infringement claims
against us in the future with respect to current or future  features or contents
of services or products or that any such  assertion may not result in litigation
or require us to enter into royalty arrangements.


         REGULATORY ENVIRONMENT; PUBLIC POLICY

         In the United  States and most  countries  in which  Vertical  Computer
conducts its operations, Vertical Computer is generally not regulated other than
pursuant to laws applicable to businesses in general or to value-added  services
specifically.  In some countries,  Vertical Computer is subject to specific laws
regulating the  availability of certain material related to, or to the obtaining
of,  personal  information.  Adverse  developments  in the  legal or  regulatory
environment  relating to the interactive  on-line services and Internet industry
in the United  States,  Europe,  Asia,  Latin America or elsewhere  could have a
material adverse effect on Vertical Computer business,  financial  condition and
operating results. A number of legislative and regulatory proposals from various
international  bodies  and  foreign  and  domestic  governments  in the areas of
telecommunications  regulation,  particularly  related to the infrastructures on
which the Internet  rests,  access  charges,  encryption  standards  and related
export  controls,   content  regulation,   consumer   protection,   advertising,
intellectual property,  privacy,  electronic commerce, and taxation,  tariff and
other  trade  barriers,  among  others,  have  been  adopted  or are  now  under
consideration.  Vertical  Computer is unable at this time to predict  which,  if
any, of the proposals  under  consideration  may be adopted and, with respect to
proposals that have been or will be adopted, whether they will have a beneficial
or an adverse effect on our business, financial condition and operating results.


         EMPLOYEES

         As of April 12, 2002,  Vertical Computer had 49 full-time employees and
1 part-time  employee.  This total  includes 37 full-time at Now  Solutions,  of
which 29 are  employed in the United  States and 8 are  employed  in Canada.  In
addition,  Vertical Computer utilizes various consultants.  Vertical Computer is
not a party to any collective bargaining agreements.


ITEM 2.  DESCRIPTION OF PROPERTY

         Our headquarters are currently located at 6336 Wilshire Boulevard,  Los
Angeles,  California,  and comprise  approximately 4,200 square feet. Additional
premises housing  administrative and accounting  personnel are currently located
at 6300 Wilshire Boulevard,  Suite 1430, Los Angeles,  California,  and comprise
approximately 1,910 square feet. Our subsidiary, Globalfare.com, is also located
at  6336  Wilshire  Boulevard,  Los  Angeles,   California.   Now  Solutions  is
headquartered at 201 Main Street,  Suite 1455, Fort Worth,  Texas, and comprises
approximately 3,223 sq ft. feet. In addition,  Now Solutions has offices at 1001
Marina Village Parkway,  Alameda,  California and 6205 Airport Road, Building B,
Suite 100, Mississauga,  Ontario,  Canada, which comprise 2,895 and 2,600 square
feet,  respectively.  All of the locations are leased from third parties and the
premises are in good condition.  We believe that our facilities are adequate for
our present needs and our near term growth, and that additional  facilities will
be available at acceptable rates as we need them.


ITEM 3.  LEGAL PROCEEDINGS

         We are,  from time to time,  involved  in  various  lawsuits  generally
incidental  to our  business  operations,  consisting  primarily  of  collection
actions  and  vendor  disputes.  In the  opinion  of  management,  the  ultimate
resolution of these matters,  if any, will not have a significant  effect on the
financial position, operations or cash flows of Vertical Computer.

         In addition,  we are  involved in the  following  additional  litigated
matters.  The case  entitled,  MARGARET  GRECO,  ET AL.,  V.  VERTICAL  COMPUTER
SYSTEMS, INC., filed in United States District Court for the Eastern District of
New York (Case No. 00 Civ. 6551 (DRH)), involves allegations that the plaintiffs
sustained damage as a result of an alleged improper rescission of a subscription
agreement based on a November 1999 private placement memorandum. Plaintiffs seek
in excess of $18 million in damages  based on the  alleged  increase in value of
the stock since the private  placement.  We believe this matter is without merit
and we intend to vigorously defend this action.

         A second matter,  entitled LE SOCIETE  FRANCAISE DE CASINOS V. VERTICAL
COMPUTER SYSTEMS,  INC., was filed in Los Angeles County,  California,  Superior
Court,  on January 19,  2001.  This action was filed by a former  customer  ("Le
Societe") of Externet World, Inc., a wholly owned subsidiary, which claimed that
Vertical  Computer was liable to it for in excess of $500,000 in costs allegedly
paid for an Internet casino  software  package to be developed and maintained by
Externet  World,  Inc. The  plaintiff  also alleged that  Vertical  Computer has
breached an agreement  to pay the disputed  sums flowing out of its October 2000
settlement  of  litigated  matters  with two  former  shareholders  of  Vertical
Computer.  A settlement agreement has been executed and a dismissal was filed in
January 2002. As part of the  settlement  agreement,  the parties agreed that Le


                                       14
<PAGE>

Societe  received  $400,000 and the remaining  $100,000  held in escrow,  net of
approximately  $35,000 in other costs, was distributed 60% to Vertical  Computer
and 40% to Externet World, Inc.

         On April 10, 2002,  Vertical Computer appointed a fifth  representative
to the Now Solutions' Executive Committee.  On April 12, 2002, Vertical Computer
received a letter from Arglen  Acquisitions  LLC, a member of Now Solutions LLC,
accusing Vertical Computer of defaulting on its obligations under Now Solutions'
Operating Agreement by failing to obtain a waiver of default from Now Solutions'
lender,  Coast Business  Credit.  The letter further stated that the default has
triggered the dissolution of Now Solutions,  and authorizes Arglen  Acquisitions
to  acquire  Vertical  Computer's  ownership  interest  in  Now  Solutions  at a
discounted price. On May 8, 2002,  Vertical  Computer demanded  arbitration from
Arglen Acquisitions seeking to enforce its rights under the Operating Agreement,
including the  appointment  of the fifth  representative  to the Now  Solutions'
Executive  Committee.  On May 9, 2002,  Arglen  Acquisitions  filed a Demand for
Arbitration  and Statement of Claim against  Vertical  Computer.  In its demand,
Arglen  Acquisitions  alleged  that  Vertical  Computer  is in  default  of  its
obligations under the Operating Agreement.  Arglen is seeking to enjoin Vertical
Computer  from  appointing  a fifth  member of the  Executive  Committee  of Now
Solutions and other  actions,  as well as seeking  specific  performance  of the
default provisions of the Operating  Agreement,  including the right to purchase
Vertical Computer's interest in Now Solutions.  Vertical Computer believes these
allegations are without merit.  Vertical  Computer  intends to defend its rights
and to assert its own claims against Arglen Acquisitions.


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

         No matter was submitted to a vote of security  holders during the three
months ended December 31, 2001.


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Our  common  equity is traded on the  Over-The-Counter  Bulletin  Board
("OTCBB")  under the symbol "VCSY."  Initial  trading on the OTCBB  commenced in
October 1999. Vertical Computer's common stock traded on the `pink sheets' prior
to that date.

         The following is the range of high and low closing prices of our stock,
for the periods indicated below. As of April 16, 2002, there were  approximately
973 holders of record of our common stock.  This  information  was obtained from
the Pink Sheets, LLC.

                                                       HIGH              LOW
                                                       ----              ---

       Quarter Ended March 31, 2002                    $0.027           $0.0101

       Quarter Ended December 31, 2001                $0.0175           $0.0100
       Quarter Ended September 30, 2001               $0.0380           $0.0120
       Quarter Ended June 30, 2001                    $0.0910           $0.0350
       Quarter Ended March 31, 2001                   $0.1200           $0.0550

       Quarter Ended December 31, 2000                $0.2250           $0.0440
       Quarter Ended September 30, 2000               $0.6200           $0.1750
       Quarter Ended June 30, 2000                    $1.0700           $0.3800
       Quarter Ended March 31, 2000                   $0.6500           $0.0375

         The quotations  reflect  inter-dealer  prices,  without retail mark-up,
mark-down or commission and may not represent actual transactions.

         Vertical  Computer  paid  dividends on  outstanding  Series A Preferred
Shares in the amounts of $111,111 and  $100,000 in 2000 and 2001,  respectively.
Vertical  Computer  presently  intends to retain  future  earnings,  if any,  to
provide  funds  for  use in  the  operation  and  expansion  of its  businesses.
Accordingly,  Vertical Computer does not anticipate paying cash dividends on its
common stock in the near future.


UNREGISTERED SALES OF SECURITIES

         During January and February of 2000,  Vertical Computer raised $700,000
upon the exercise of 20,000,000 outstanding warrants to purchase an equal number
of shares of common stock (based on Vertical Computer's  post-split in February,
2000). The warrants were issued in connection with Vertical  Computer's  Private
Placement that took place during November 1999.



                                       15
<PAGE>

         In February 2000,  Vertical Computer completed a 20-for-1 forward stock
split. All shares have been adjusted to reflect the stock split.

         In February  2000,  Vertical  Computer  reached an agreement  with Marc
Elalouf,  a shareholder of Externet World, in which 246,470,580 shares of common
stock were cancelled.  Vertical Computer also recorded an additional $11,000 for
a receivable due from the former owner.

         In February 2000, Vertical Computer raised $10,000,000, less $1,000,000
in offering  costs received by Avenel  Financial  Group  ("Avenel")  through the
issuance of 50,000 shares of Series A 4% Convertible Preferred Stock of Vertical
Computer to International  Internet and Lakewood Development  Corporation.  Each
share of Series A 4% Convertible  Preferred Stock is convertible into 500 shares
of Vertical  Computer  common stock after February 28, 2001. In connection  with
the issuance of the Series A 4% Convertible  Preferred Stock,  Vertical Computer
also  granted  Avenel  warrants  to acquire  1,000,000  common  stock  shares of
Vertical Computer at a strike price of $1.00.

         In March 2000,  Vertical  Computer  raised  $1,000,000 from the sale of
1,000,000  shares of common stock upon the  exercise of  1,000,000  common stock
purchase  warrants at an exercise  price of $1.00 per share by Avenel  Financial
Group.

         In April 2000,  Vertical Computer acquired  Globalfare.com  ("GFI"), an
on-line travel agency  formerly based in Las Vegas,  Nevada.  Vertical  Computer
issued  5,945,299  shares of its common stock to the former GFI  shareholders to
acquire all of the outstanding common stock of GFI.

         In May 2000,  Vertical Computer acquired,  by merger,  Scientific Fuel,
Inc., ("SFI"), a public shell company. Vertical Computer issued 2,000,000 shares
of its  common  stock to the  former  SFI  shareholders  to  acquire  all of the
outstanding common stock of SFI.

         In June 2000, Vertical Computer acquired Pointmail.com, Inc. ("PMI"), a
company  that was in the  process  of  developing  an  Internet  e-mail  system.
Vertical  Computer issued 1,000,000 shares of its common stock to the former PMI
shareholders to acquire all of the outstanding common stock of PMI.

         In September  2000,  Vertical  Computer  entered into a agreement  with
Avenel Alliance in which "Avenel"  provided  business  development and marketing
services to Vertical  Computer in exchange for $5,000 per month, a commission of
6% of all profits created by Avenel marketing  efforts,  the issuance of 500,000
shares of  Vertical  Computer's  common  stock and 4 year  warrants  to purchase
7,000,000  shares of common stock. The warrants have a strike price of $0.35 per
share and vested at the rate of 583,333 per month,  beginning in September 2000.
All warrants have vested. This agreement has expired.

         In October 2000,  Vertical  Computer sold its wholly owned  subsidiary,
Externet World, Inc., for $1,200,000 to Eurovest, Inc., a company of which Terry
Washburn,  a former  member of Vertical  Computer's  Board of  Directors,  is an
executive  officer.  Eurovest  subsequently  sold  Externet  World to two former
shareholders of Vertical  Computer and received  147,350,980  shares of Vertical
Computer's common stock. As part of a settlement  agreement,  144,850,000 common
stock shares were  cancelled  and  2,000,980  shares were  retained in trust for
Vertical Computer. As part of the transaction, Eurovest received fees of $72,000
and 500,000 shares of Vertical Computer's common stock.

         In October 2000,  Vertical Computer entered into a marketing  agreement
with Xatnu, Inc. in which "Xatnu" was to provide a national television and radio
campaign  in  exchange  for  commencement  fees of $92,750  and the  issuance of
379,688  shares of Vertical  Computer's  common stock at $0.16 a share.  Per the
agreement,  all of the shares  issued  were to be sold into the market  within 6
months of grant  and if the total  proceeds  were  less than  $60,750,  Vertical
Computer was required to pay the remaining  amount to Xatnu.  Vertical  Computer
also  issued  1-year  warrants  to acquire  250,000  shares of common  stock and
250,000  shares with 5-year  warrants to Michael Blum and Phil  Alexander,  at a
strike price of $0.16 a share. Two thirds of the options were issued to Blum and
one third of the  options  were issued to  Alexander.  The 1-year  warrants  for
250,000 shares of common stock expired in October 2001.

         In December  2000,  Vertical  Computer  entered  into a  month-to-month
agreement with Strategic Media Alliance,  Inc.,  whereby Vertical Computer would
pay a monthly  retainer fee of $10,000 in cash and would issue  3-year  warrants
for  45,455  shares  of  common  stock at a strike  price of $0.11 per share for
marketing  services.  As of December 2001, 590,915 warrants have been issued and
the  agreement  is still in  effect.  In January  2002,  Vertical  Computer  and
Strategic Marketing Alliance agreed to terminate Vertical Computer's interest in
the  WorldBridge   Webcasting  LLC  in  consideration  for  credit  on  Vertical
Computer's  account with Strategic  Media  Alliance  whereby it will continue to
provide consulting services through 2002. In addition,  Strategic Media Alliance
will receive 3-year warrants to purchase stock equal to $5,000 per month,  based


                                       16
<PAGE>

on a strike  price  formula of $0.01 plus the  previous  average five day market
price on the date of  issuance.  These  warrants  will be  issued in lieu of the
warrants  specified in the original  consulting  agreement with Strategic  Media
Alliance beginning in February 2002.

         In January 2001,  Vertical  Computer issued warrants to purchase 45,704
shares of common  stock at a strike  price of $0.1094 per share to Mark  Kellner
for business services.

         In February 2001,  Vertical Computer issued 5-year warrants to purchase
500,000  shares  of  common  stock  at  a  strike  price  of  $0.086  to  Coffin
Communications Group for investment relations' services.

         In February 2001,  Vertical Computer issued 3-year warrants to purchase
250,000  shares of common  stock at a strike  price of $0.086  per share to Gary
Blum for legal services.

         In February 2001,  Vertical  Computer agreed to pay Donald  Hateley,  a
financial  advisor,  for services  rendered in  connection  with the purchase of
Vertical's  purchase of 60% of Now Solutions,  LLC, a fee in the amount of 5% of
the  aggregate  consideration  in  connection  with the  transaction  and 5-year
warrants to purchase 1,000,000 shares at a strike price of $0.076 per share. The
warrants were issued in March 2001.

         In March 2001,  Arglen  Acquisitions,  LLC, which  facilitated  the Now
Solutions' transaction and acquired a 30% interest in Now Solutions for services
provided,  received  warrants of  Vertical  Computer to purchase 5% of the total
outstanding  stock of  Vertical  Computer  or the  initial  grant of  30,763,943
shares.  If,  during the last 90  trading  day period of the first year from the
date the issuance of the initial set of options, the per share value of Vertical
Computer's  shares,  adjusted  for any  forward or reverse  splits and any other
dilutive  effect,  is less  than  $0.50,  then  Arglen  will be  entitled  to an
additional 25,000,000 warrants to purchase common shares. If, during the last 90
trading day period of the second year from the date the  issuance of the initial
set of  options,  the per share  value of Vertical  Computer,  adjusted  for any
forward or reverse  splits and any other  dilutive  effect,  is less than $1.00,
then  Arglen,  provided  it has not  exercised  and  sold  more  than 25% of the
55,763,943 shares  underlying the previous stock warrants,  shall be entitled to
an additional  25,000,000 warrants to purchase common shares. The exercise price
of the warrants  will be $0.08,  and the  warrants  shall be  exercisable  for a
period  of 5 years  from  the  date  the  shares  underlying  the  warrants  are
registered  with the  Securities  and Exchange  Commission or an exemption  from
registration becomes available. Pursuant to the terms of the operating agreement
of NOW Solutions,  Vertical Computer's interest in NOW Solutions will be reduced
to 51% over three  years as  employees  of NOW  Solutions  will be  entitled  to
receive shares of NOW Solutions'  common stock. The NOW Solutions'  purchase was
accounted for under the purchase  method of accounting,  with cash of $5,100,000
paid to Ross and a note payable of  $1,000,000  due to Ross.  Vertical  Computer
Systems incurred  $667,000 for Arglen's 30% interest in NOW Solutions,  $798,000
for the value of the Vertical  Computer  warrants issued to Arglen (valued using
the  Black-Scholes  valuation  model),  $3,800,000  for intangible  assets,  and
$229,000 in a finders fee and professional charges,  $1,800,000 in goodwill, all
included as part of the purchase  price.  Vertical  Computer  and NOW  Solutions
recognized  approximately  $7,294,000 of goodwill and other intangible assets in
connection  with the purchase,  which were being amortized over a three to eight
year period.

         In May  2001,  Vertical  Computer  agreed  to pay  $1,000  in cash  and
warrants to purchase 16,667 shares of common stock per month to Robert Wagman to
provide managing editor services for on-line content on a month-to-month  basis.
As of December 2001, 133,336 warrants have been issued. The Agreement terminated
in December 2001.

         In May 2001,  Vertical  Computer  issued  3-year  warrants  to purchase
1,000,000  shares  of common  stock at a strike  price of $0.05 per share for an
exclusive  license of a  patent-pending  fiber optic image  encoding  technology
created and owned by Aluizio Cruz.

         In April 2001, Vertical Computer issued Stephen Gunn 3-year warrants to
purchase  250,000 shares of common stock at a strike price of $0.06 per share in
consideration  for services  provided as the Chief Financial Officer of Vertical
Computer.

         In June 2001,  Vertical  Computer  issued  3-year  warrants to purchase
846,000  shares of  common  stock at a strike  price of $0.050  per share to the
three individuals in connection with the formation of the Wireless Learning LLC.
The holders of these warrants are Robert Langworthy,  Igo Shoifot, and Alexander
Sergeev in equal amounts. In addition,  Vertical Computer issued 3-year warrants
to purchase  54,000  shares of common stock at a strike price of $0.05 per share
to Taurus Global in connection with the formation of the Wireless Learning LLC.

         In June 2001,  Vertical  Computer  issued  3-year  warrants to purchase
5,000,000 shares of common stock at a strike price of $0.037 per share for legal
services performed by Gary Blum.



                                       17
<PAGE>

         In June 2001,  Vertical  Computer  issued  3-year  warrants to purchase
5,000,000  shares of common  stock at a strike price of $0.05 per share to Chuck
Ashman for business and marketing consulting services.

         In July  2001,  Vertical  Computer  agreed to pay  $4,500  per month to
Stephen  Rossetti  to provide  government  business  consultation  services on a
month-to-month basis. In addition,  the consultant is entitled to receive 3-year
warrants  to purchase  common  stock equal to $5,500 per month based on a strike
price of the previous average five day market price on the date of issuance.  As
of December  2001,  1,732,288  warrants  have been issued and the  agreement was
still in effect.

         In July 2001, Vertical Computer entered into two consulting  agreements
with Taurus Global, LLC and M.S. Farrell & Co., Inc., in which Vertical Computer
agreed to issue  approximately  $200,000 in common stock to each  consultant for
business  advisory  services.  Twenty percent of the common stock was due on the
agreement  date,  with an additional 20% due on the 30th and 60th day subsequent
to the agreement  date and the  remaining 40% due on the 90th day  subsequent to
the agreement date. The number of shares to be issued to each consultant will be
determined on the date each  consulting fee is due. These shares were registered
pursuant  to the Form S-8 filed on July 13,  2001 and  November  2001.  Vertical
Computer is also  obligated  to issue  warrants to  purchase  500,000  shares of
common stock to each consultant.  As of December 31, 2001, Vertical Computer had
issued  10,081,152  shares of its common  stock in exchange  for the  consulting
services  provided and  1,000,000  warrants.  The  warrants  have vested and are
exercisable  for five years from  issuance  at a strike  price equal to the fair
market  value of Vertical  Computer's  common  stock on the day of grant.  As of
December  31,  2001,  Vertical  Computer  recognized  approximately  $248,000 in
consulting  expenses in relation to the common  stock issued and $10,000 for the
value  of the  warrants  (the  warrants  were  valued  using  the  Black-Scholes
valuation model).

         In August 2001, Vertical Computer entered into an Equity Line of Credit
agreement,  whereby up to  $10,000,000  of common  stock may be  purchased.  The
shares must be registered  before sale and the shares can be purchased at 95% of
the  closing  bid price,  on the date of  purchase.  The  equity  line of credit
contains a fee of $392,000 payable in common stock. In September 2001,  Vertical
Computer issued  7,142,857 shares of common stock or $200,001 (fair market value
of shares issued) of the fee. In March 2002, Vertical Computer issued 12,500,000
shares of common stock for the remaining fee in connection  with the Equity Line
of Credit.  To date,  no shares  have been  purchased  under the Equity  Line of
Credit.

         In August 2001,  Vertical Computer issued 30,000 shares of its Series C
4%  Cumulative  Convertible  Preferred  Stock to acquire all of the  outstanding
common stock of EnFacet, Inc. ("EnFacet"), a company involved in the development
of Website management software.  The Series C 4% convertible stock eliminates on
consolidation,  since the shares were issued to EnFacet.  As per the  agreement,
EnFacet  is  required  to  distribute  15,000  shares to those  employees  still
employed by EnFacet,  one year from the  anniversary  date of the agreement.  At
that time the  remaining  shares may be used by  EnFacet  to acquire  additional
funding.  The  fair  value  of the  liabilities  assumed  by  Vertical  Computer
approximated  $428,000,  which was off set by assets  with an  approximate  fair
value of the same amount.  The Series C 4% Preferred  Stock is convertible  into
shares of common stock at a ratio of one to four hundred. Dividends on the stock
are cumulative and accrue on a quarterly  basis.  In the event of a voluntary or
involuntary  liquidation,  the  Series  C  4%  shareholders  are  entitled  to a
liquidation preference of $100 per share.

         In September 2001, Vertical Computer issued 3-year warrants to purchase
2,500,000  shares of  common  stock at a strike  price of $0.025 to  individuals
affiliated with EnFacet, Inc. in order to retain their services.  The holders of
these warrants are Chuck Kinsicki,  Leroy Molock,  Aubrey  McAuley,  Vasu Vijay,
Justin Davis, Jacob Stearns, Annette Keith and Allison Enderle.

         In September and October 2001,  Vertical  Computer  issued $125,000 and
$140,000 of convertible debentures,  respectively.  The debt accrues interest at
6% per annum and is due October 2006. The debentures are convertible into shares
of common stock at either 120% of the closing bid price on the date of agreement
or 80% of the 3 lowest closing bid prices 20 days prior to the  conversion.  The
debenture is convertible at the option of the holder,  any time after  purchase.
Vertical Computer has recognized  $66,250 as interest expense in relation to the
beneficial  feature  conversion of the  debentures.  As of December 31, 2001, no
conversions have taken place.

         In October 2001,  Vertical Computer executed a $100,000 promissory note
with an unrelated party. The note bears interest at 12% per annum and all unpaid
principal and interest was due February 2002. The note is secured by third party
securities  owned by  Vertical  Computer,  which it  intends to sell in order to
repay the loan and by a pledge against the loan by the Mountain Reservoir Corp.,
to sell up to 5,225,000 shares of common stock owned by Mountain Reservoir Corp.
to cover any shortfall.  Mountain Reservoir Corp. is a corporation controlled by
the W5 Family  Trust.  Mr.  Wade,  the  President  and CEO of Vertical  Computer
Systems, is the trustee of the W5 Family Trust. In April 2002, Vertical Computer
entered into an amendment  agreement whereby Vertical and the third party waived
any  default and agreed to  continue  to sell the  400,000  shares of  eResource
Capital  Group  stock,  which  Vertical  pledged  pursuant  to the Stock  Pledge
Agreement as collateral. Vertical Computer further agreed to use the proceeds of


                                       18
<PAGE>

the eResource  Capital Group sales of stock to reduce the obligations  under the
note accordingly.  Pursuant to this amendment, Vertical agreed to make a minimum
payment of no less than  $31,500 by April 5, 2002,  a payment of $8,500 by April
6, 2002, ten (10) weekly  installment  payments of $6,000 beginning on April 15,
continuing  until  all  principal  then  outstanding  with all  interest,  fees,
charges,  and other  amounts owing  hereunder and then unpaid by June 2002.  The
first  $6,000  payment  has not been  paid and the  Company  is  negotiating  an
extension.

         In November 2001, Vertical Computer executed a $100,000 promissory note
with an unrelated party. The note bears interest at 12% per annum and all unpaid
principal and interest was due February 2002. The note is secured by third party
securities  owned by  Vertical  Computer,  which it intends to sell to repay the
loan, and by a pledge against the loan by Mountain  Reservoir  Corp., to sell up
to  5,225,000  shares of common  stock owned by Mountain  Reservoir to cover any
shortfall.   In  January  2001,   Vertical  Computer   executed   indemnity  and
reimbursement  agreements  with  Mountain  Reservoir  Corporation  to cover  the
10,450,000  shares of stock  pledged by  Mountain  Reservoir  with regard to the
October and November  2001 notes,  whereby  Vertical  Computer  would  reimburse
Mountain  Reservoir  with an  number  of  shares  equal  to any  shares  sold as
collateral  to cover the  default of any loan.  Mountain  Reservoir  Corp.  is a
corporation  controlled by the W5 Family Trust.  Mr. Wade, the President and CEO
of Vertical  Computer  Systems,  is the trustee of the W5 Family Trust. In April
2002, Vertical Computer entered into an amendment agreement concerning the note,
whereby  Vertical  and the third party  agreed  waive any  default and  Vertical
agreed to make monthly installment  payments in the amount of $7,500 each on the
fifteenth day of each month,  beginning in May 2002. Pursuant to this amendment,
all principal  then  outstanding,  and all interest,  fees,  charges,  and other
amounts  owing  hereunder  and then unpaid shall be paid by the end of September
2002.  The first $7,500 payment has not been paid and the Company is negotiating
an extension.

         Also in November 2001,  Vertical  Computer  purchased various assets of
Adhesive Software,  Inc. for $100,000,  50,000 shares of Series C 4% Convertible
Preferred Stock and a promissory note for $280,000,  which was issued in October
2001. The note bears interest at 4% per annum and has average monthly  principal
and  interest  payments of $9,375  through out the term of the note.  All unpaid
amounts  are due  September  2004.  The note is  secured  by  certain  assets of
Vertical  Computer.  In April 2002,  Vertical Computer entered into an amendment
agreement  concerning the note,  whereby  Vertical and the third party agreed to
extend the date for which the remaining  three (3) $5,000  installment  payments
would be due to the first day of each month,  beginning in May 2002 and the time
to pay all  remaining  $10,000  installments  was  extended so that each $10,000
installment would be due and payable on the first day of each month beginning on
August 1, 2002, and will continue until the principal has been paid in full.

         In November 2001,  Vertical Computer issued 3-year warrants to purchase
300,000  shares of common  stock at a strike  price  $0.014 to  Parker,  Mills &
Patel,  LLP,  in  consideration  for making  loans to  advance  funds to certain
vendors on behalf of Vertical Computer.

         In December 2001,  Vertical Computer  executed an employment  agreement
with Richard Wade to become CEO and President of Vertical Computer.  Pursuant to
the terms of the  agreement,  Mr.  Wade will  receive an annual  base  salary of
$300,000,  and the issuance of 5-year warrants to purchase  20,000,000 shares of
common  stock at a strike  price of $0.10  per  share  and  5-year  warrants  to
purchase 600,000 shares of stock at a strike price of $0.10 per share.

         In December 2001,  Vertical  Computer  executed a $425,000 note payable
with a third party.  Vertical  Computer received proceeds of $300,000 and paid a
commitment fee of $125,000.  The note accrues  interest at 12% per annum and was
due January 31, 2002.  The note is secured by 36,303,932  shares of common stock
of  Vertical  Computer  that is owned by  Mountain  Reservoir  Corporation,  and
15,000,000  shares of common  stock of  Vertical  Computer  that is owned by Mr.
Valdetaro,  Vertical Computer's Chief Technology Officer, to cover any shortfall
in the event of default. Mountain Reservoir Corp. is a corporation controlled by
the W5 Family  Trust.  Mr.  Wade,  the  President  and CEO of Vertical  Computer
Systems,  is the  trustee  of the W5 Family  Trust.  In January  2001,  Vertical
Computer executed separate indemnity and reimbursement  agreements with Mountain
Reservoir Corporation and Mr. Valdetaro to cover their pledges of 36,303,932 and
15,000,000 shares of common stock,  respectively.  Pursuant to these agreements,
Vertical Computer agreed to reimburse  Mountain  Reservoir and Mr. Valdetaro for
any shares  sold as  collateral  to cover the  default of any loan.  The Note is
currently  in default and the  collateral  is  currently  being  transferred  to
Vertical Computer's account to cover the amounts currently due.

         In December 2001,  Vertical  Computer  entered into an option agreement
with iNet  Purchasing  ("iNet") to purchase  an  additional  interest in iNet in
April 2002  (Vertical  Computer is currently  negotiating  to extend this date),
whereby  Vertical  Computer would obtain an aggregate 56% ownership  interest in
iNet pursuant to the Stock Purchase Agreement and the Stockholder's  Agreements.
In accordance with the option agreement, Vertical Computer shall pay $140,000 in
four equal  monthly  installments  beginning  in  December  2001 and grant stock
options to three iNet employees,  Basil Nikas, Robin Mattern,  and Wayne Savage,
in the  amount  of  1,500,000,  1,500,000,  and  500,000  shares,  respectively.
Vertical  Computer  has paid a total of  $112,500  and  intends  to  offset  the


                                       19
<PAGE>

remaining balance against amounts owed by iNet pending a final  accounting.  The
options are vested,  have a strike  price of $0.01,  and are  exercisable  for a
three year period. Pursuant to the terms of the Stock Purchase Agreement and the
Stockholders  Agreements,  if Vertical Computer exercises its option to obtain a
majority  interest  in  iNet in  April  2002  (Vertical  Computer  is  currently
negotiating to extend this date),  Vertical  Computer shall pay to iNet $860,000
in cash or marketable  securities,  70,000 shares of Series "C" Preferred Stock,
and  issue  additional  3 year  warrants  and  options,  as the case may be,  to
purchase  an  additional  6,000,000  shares  of common  stock  each to Nikas and
Mattern and  2,000,000  common stock  shares to Savage.  The strike price is the
closing price of Vertical  Computer common stock on the date of January 6, 2002,
and, in the event that Vertical Computer does not acquire a majority interest in
iNet, these options and warrants will be automatically cancelled.

         In January  2002,  Vertical  Computer  and Taurus  Global LLC agreed to
extend  the  July  2001  consulting   services   agreement  for  6  months.   In
consideration  of Taurus Global services,  Vertical  Computer will pay a monthly
fee of $12,500 and issued an  additional  100,000  warrants on the same terms as
the July 2001 consulting  services  agreement.  The warrants have vested and are
exercisable  for five years from  issuance  at a strike  price equal to the fair
market value of Vertical Computer's common stock on the date of grant.  Vertical
Computer  has the option to pay the monthly fee in common stock valued at 95% of
the average  closing  price 3 trading days prior to  issuance.  In the event the
proceeds  of the  stock  result  in  greater  than a 20%  profit or loss for the
monthly fee,  Taurus or Vertical  Computer shall pay the difference in profit or
loss, as applicable, at the end of the term.

         In January 2002, Vertical Computer executed indemnity and reimbursement
agreements with Mountain Reservoir Corporation to cover the 10,450,000 shares of
stock pledged by Mountain  Reservoir  Corporation with regard to the October and
November  2001  notes,   whereby  Vertical  Computer  would  reimburse  Mountain
Reservoir  Corporation  with an  number of shares  equal to any  shares  sold as
collateral  to cover the default of the loans.  Mountain  Reservoir  Corp.  is a
corporation  controlled by the W5 Family Trust,  of which Mr. Wade is a trustee.
Mr. Wade is President and a Director of Vertical Computer.

         In January 2002,  Vertical  Computer  executed  separate  indemnity and
reimbursement  agreements with Mountain Reservoir  Corporation and Mr. Valdetaro
to cover their  respective  36,303,932  and  15,000,000  shares of common  stock
pledged by Mountain  Reservoir  Corporation and Valdetaro in connection with the
$425,000 note issued in December 2001, whereby Vertical Computer would reimburse
Mountain  Reservoir  Corporation  and Valdetaro  with the  respective  number of
shares equal to any shares sold as  collateral to cover the default of any loan.
The Note is currently in default and the  collateral is currently  being sold by
the lender account to cover the amounts currently due. Mountain  Reservoir Corp.
is a  corporation  controlled  by the W5 Family  Trust,  of which Mr.  Wade is a
trustee. Mr. Wade is President and a Director of Vertical Computer.

         In  March  2002,  Vertical  Computer  issued  a  $100,000   convertible
debenture.  The debt accrues interest at 5% per annum and is due April 2004. The
debenture  is  convertible  into  shares of common  stock at either  120% of the
closing  bid price on the date of  agreement  or 80% of the lowest  closing  bid
prices 5 days prior to the  conversion.  The  debenture  is  convertible  at the
option of the holder, any time after purchase. The holder of the debentures is a
third-party individual. As of April 15, 2002, no conversions have taken place.

         In April 2002,  a $180,000  note that bears  interest at 12% per annum,
which  Vertical  issued in August  2001 and which  was due  February  2002,  was
amended  such that the  amount on the note was  increased  to  $211,136  and the
maturity  date was extended so that the note will be payable in August 2002.  In
addition,  interest on $146,420  will  accrue  beginning  on August 17, 2001 and
interest on the remaining  $64,716 will accrue  beginning on September 27, 2001.
In  connection  with the note,  Vertical  Computer  issued  warrants to purchase
500,000  shares of its common  stock.  Vertical  Computer  pledged  third  party
securities of eResource Capital Group that is holds.  These shares are available
for sale as collateral for the note.  The warrants  vested  immediately,  have a
strike  price of $0.028  per  share and are  exercisable  for three  years  from
issuance.  The value of the warrants,  $5,000  (valued  using the  Black-Scholes
valuation  model) has been  deferred and will be amortized  over the term of the
loan.

         Unless   otherwise  noted,  the  sales  set  forth  above  involved  no
underwriter's  discounts  or  commissions  and are  claimed  to be  exempt  from
registration with the Securities and Exchange  Commission  pursuant to Section 4
(2) of the Securities Act of 1933, as amended,  as transactions by an issuer not
involving a public  offering,  the  issuance  and sale by  Vertical  Computer of
shares of its common  stock to  financially  sophisticated  individuals  who are
fully aware of  Vertical  Computer's  activities,  as well as its  business  and
financial  condition,  and who acquired said securities for investment  purposes
and understood the ramifications of same.




                                       20
<PAGE>

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


MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         THE  FOLLOWING  INFORMATION  SHOULD  BE READ IN  CONJUNCTION  WITH  THE
CONSOLIDATED  FINANCIAL  STATEMENTS  OF VERTICAL  COMPUTER AND THE NOTES THERETO
APPEARING ELSEWHERE IN THIS FILING.  STATEMENTS IN THIS MANAGEMENT'S  DISCUSSION
AND ANALYSIS OR PLAN OF OPERATION AND ELSEWHERE IN THIS  PROSPECTUS THAT ARE NOT
STATEMENTS   OF   HISTORICAL   OR  CURRENT  FACT   CONSTITUTE   "FORWARD-LOOKING
STATEMENTS."


         OVERVIEW

         Vertical  Computer  is  a  multinational   provider  of  Web  services,
underpinning Web technologies,  and  administrative  software services through a
global partner distribution network. Web services involve the outsourcing of the
daily information technology requirements of consumer, business and governmental
entities via the Internet.  Underpinning  Web  technologies  are the  foundation
technologies  used to build Web services,  permitting the rapid  development and
deployment  of  all  systems.  Administrative  software  services  are  software
products,   such  as  human  resources  or   procurement,   that  provide  basic
functionality to any operational entity.

         Vertical  Computer  attempts  to acquire and  operate  companies  whose
products,  in Vertical  Computer's belief: are proven and best of the breed; are
profitable or on the path to  profitability;  complement each other; and provide
cross-product distribution channels. Vertical Computer's business model combines
complementary,  integrated Web services, a multinational  distribution system of
local  partners,  and  underpinning  Web  technologies  to create a distribution
matrix that it believes  are capable of  penetrating  multiple  sectors  through
cross promotion.


         WEB SERVICES

         Web  services  encompass  a full  range of  services  from  the  simple
Web-unique application of instant messaging to complex administrative  services,
such as converting  accounting software into an application service provider. An
application service provider is a company that offers individuals or enterprises
access  over the  Internet  to  applications  and  related  services  that would
otherwise have to be located in their own person or enterprise computers.

         Vertical   Computer's  Web  services   derive  from  a  full  range  of
administrative  software  services  controlled by Vertical Computer that will be
converted  into  specialized  Web services that Vertical  Computer has developed
independently or acquired. Vertical Computer's ownership interest is typically a
controlling interest.  In most cases, the administrative  software services will
retain their historic  client-server  based  customers even though a Web service
has been developed for those  customers and new customers.  Vertical  Computer's
current Web services address the following market segments:

<TABLE>
<CAPTION>
                                                         WEB                                   VERTICAL
MARKET                                PRODUCT            SERVICES   OWNERSHIP                  COMPUTER %
------                                -------            --------   ---------                  ----------
<S>                                   <C>                <C>            <C>                       <C>
Application Platform                  Bridges            Yes            Vertical Computer         100%
Database connect XML                  Emily Agent        Yes            Vertical Computer         100%
Emily XML Scripting Language          EMILY              Yes            Vertical Computer         100%
Publishing Content                    NewsFlash          No             Vertical Computer         100%
Higher Education                      UniversityFlash    No             Vertical Computer         100%
Franchises/Independent Agent          AffiliateFlash     Yes            Vertical Computer         100%
Emergency Management                  ResponseFlash      Yes            Vertical Computer         100%
Public Sector e-Procurement Service   INet               Yes            iNetPurchasing            2.5%
Human Resources                       HRIS               No             Now Solutions              60%
Travel                                Globalfare         Yes            Vertical Computer         100%
Smart Cards                           ApolloSmart        Yes            Vertical Computer          30%
</TABLE>

         UNDERPINNING WEB TECHNOLOGIES

         Underpinning  Web  technologies  provide  the  software  foundation  to
support:  Internet-based platforms for the delivery of Web services;  individual
software  products  that can be sold  independently  or  combined  with  another
software product; and rapid deployment of all Web services and software products
throughout Vertical Computer's distribution system.



                                       21
<PAGE>

         Vertical  Computer's  first  underpinning  Web technology is the patent
pending Emily XML scripting  language.  XML  (Extensible  Markup  Language) is a
flexible way to create common information  formats and share both the format and
the date on the World Wide Web, intranets, and elsewhere. For example,  computer
makers might agree on a standard or common way to describe the information about
a  computer  product  (processor  speed,  memory  size,  and so forth)  and then
describe  the  product  information  format  with XML.  Such a  standard  way of
describing data would enable a user to send an intelligent  agent (a program) to
each computer maker's Web site,  gather data, and then make a valid  comparison.
XML can be used by any individual or group of individuals or companies that want
to share information in a consistent way. Emily Scripting  Language has recently
been upgraded to be Java compatible.  Java is a programming  language  expressly
designed for use in the  distributed  environment  of the Internet.  Java can be
used to create  complete  applications  that may run on a single  computer or be
distributed  among  servers and clients in a network.  The Emily XML  Automation
Toolkit for Java is currently in its final testing  phase,  in  preparation  for
release  in the  first  quarter  of 2002.  Utilizing  Emily,  Vertical  Computer
developed  two  products,  the Emily  Agent and  Broker,  which are now  jointly
marketed  with  iNetPurchasing,  Inc.  as  part  of  the  State  of  Texas'  new
e-procurement  system.  Dr.  Charles  Goldfarb,  recognized  authority of Markup
Languages, has included a chapter on Emily and its application,  relative to the
State of Texas procurement system, in the 4th Edition of the XML Handbook.

         Vertical  Computer's  second  underpinning Web technology is SiteFlash.
The SiteFlash  technology  utilizes XML and  publishes on the Web,  enabling the
user to build and  efficiently  operate Web services with the unique  ability to
separate form,  function,  and content on the Web. This unique ability is patent
pending and has many applications in the Web arena. SiteFlash technology focuses
on content management,  e-commerce,  and workflow and has led to the development
of four additional products:  NewsFlash,  UniversityFlash,  AffiliateFlash,  and
ResponseFlash.   ResponseFlash   is  currently   being   implemented   with  the
Metropolitan Emergency  Communications Agency in Indianapolis and Marion County,
Indiana.  UniversityFlash  is being used in higher education  (e.g.,  California
State University),  NewsFlash can be used for newspapers (e.g., LA OPINION), and
SiteFlash is for use by  consulting  organizations  (e.g.,  Infotec).  SiteFlash
architectural concepts enable integration with existing technological components
within many organizations.  Additional key features that differentiate SiteFlash
from   other   products   are  its   affiliation/syndication   capability,   its
multi-lingual  capability and its multi-modal (any output device including PDAs,
wireless  phones,  etc)  framework.  Vertical  Computer  offers  SiteFlash  as a
stand-alone  product and also as a technology platform for products designed for
specific vertical markets.


         ADMINISTRATIVE SOFTWARE SERVICES

         Administrative  software services as adapted to an application  service
provider  on the Web are a  sub-set  of Web  services.  These  services  include
procurement,  scheduling, travel management, payroll, financial and other common
functions.  A majority of Vertical Computer's  administrative  software services
are Web-enabled,  meaning that they can be accessed on the Internet. Exploratory
analysis is being done to develop an application  service  provider  application
for human resource information service software. Vertical Computer believes that
its   administrative   software   services  provide  upfront  cost  savings  and
productivity  increases for everyday  operations with competitive set-up charges
and implementation times.


         GLOBAL PARTNERS SYSTEM

         Vertical Computer's Global Partners System is intended to create export
markets for Web services,  administrative software services and Web technologies
through the use of Websites with local  country  partners.  The Global  Partners
System is  currently  composed  of three  countries,  India,  Brazil  and Korea.
Vertical  Computer's  initial  strategy is to develop Web services in one of the
original  Global  Partner's   countries  to  demonstrate  the  strength  of  the
distribution system. The foreign partner has the option either to market the Web
services  directly or to  subcontract  the Web  services to a local  entity with
particular  expertise in that  specific  field.  The  ultimate  objective of the
Global  Partners System is to demonstrate the strength of the local partner when
marketing the  best-of-breed  Web service in that respective  country by selling
its products against those offered by competing companies.


RESULTS OF OPERATIONS


         YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

         TOTAL REVENUES.  Vertical  Computer had total revenues of $4,156,088 in
the year ended December 31, 2001. Total revenues  primarily  consist of software
license,  consulting and maintenance  fees.  Substantially all of these revenues
relate to the  business  operations  of NOW  Solutions,  a  subsidiary  in which
Vertical  Computer  owns a 60%  interest.  Vertical  Computer  acquired  the 60%
interest in NOW  Solutions in February  2001. As a result,  Vertical  Computer's
operating  results for the  corresponding  period in the prior year excluded the
results of operations of NOW Solutions.  Vertical Computer had other revenues of
$137,451 for the year ended December 31, 2000.



                                       22
<PAGE>

         SELLING,  GENERAL AND  ADMINISTRATIVE  EXPENSES.  Vertical Computer had
selling,  general and  administrative  expenses of $13,296,508 and $5,865,898 in
the years ended  December  31,  2001 and 2000,  respectively.  This  increase of
$7,430,610 was primarily  attributable  to $4,608,000 from the operations of NOW
Solutions,  the  amortization  of $1,252,000 for goodwill and software costs, an
increase in the write off of certain  investments  of  $610,000,  an increase in
attorney  fees of  approximately  $560,000  primarily  related  to fund  raising
activities,  patents and  trademarks and  settlements of lawsuits,  and $400,000
related to  administrative  fees  associated  with the Cornell  Capital  Line of
Credit Agreement.

         OPERATING LOSS.  Vertical  Computer had an operating loss of $9,140,420
and $5,728,447 in the years ended December 31, 2001 and 2000, respectively. This
increase of $3,411,973 was primarily  attributable to the $7,430,610 increase in
selling,  general and administrative expenses partially offset by the $4,018,637
increase in revenues in the current period.

         INTEREST EXPENSE. Vertical Computer had an interest expense of $724,489
in the year ended  December  31,  2001.  This  increase  expense  related to the
increase in long and short term financing of approximately  $7,500,000 which was
used to acquire NOW Enfacet and the Adhesive software assets and to fund ongoing
operations during the current period.

         MINORITY INTEREST IN LOSS OF SUBSIDIARY.  The minority interest in loss
of  subsidiary  was $667,667 for the year  December 31, 2001.  This increase was
primarily  attributable to Vertical Computer's  acquisition of a 60% interest in
NOW. The $667,667  represents  the minority  shareholder's  40% share of the net
loss from NOW limited to the total amount of their investment.

         NET LOSS. Vertical Computer had a net loss of $9,032,895 and $4,865,195
in the years ended  December 31, 2001 and 2000,  respectively.  This increase of
$4,167,700 was primarily  attributable to the increase of $7,430,610 in selling,
general and  administrative  expenses,  as well as interest expense of $724,489.
These expenses were partially  offset by increased  revenue of $4,018,637 in the
current year.

         DIVIDENDS   APPLICABLE  TO  PREFERRED  STOCK.   Vertical  Computer  has
outstanding  Series A 4%  Convertible  Cumulative  Preferred  Stock that accrues
dividends at a rate of 4% on a semi-annual  basis.  The dividends  applicable to
this preferred stock was $513,712 in the year ended December 31, 2001.  Vertical
Computer has  outstanding  preferred  stock that accrues  dividends at a rate of
four percent on a quarterly basis. These dividends are cumulative. These accrued
dividends are reflected in the dividends applicable to preferred stock.

         NET LOSS AVAILABLE TO COMMON STOCKHOLDERS.  Vertical Computer had a net
loss available to common stockholders of $9,546,607 and $15,053,907 in the years
ended December 31, 2001 and 2000,  respectively.  This decrease of $5,507,300 is
primarily  attributable  to a deemed  dividend of $10,000,000 on the issuance of
Series A Preferred Stock in the comparable  period in the prior year.  Excluding
the  deemed  dividend,  net loss  available  to  common  stockholders  increased
$4,492,700 in the year ended December 31, 2001 over the comparable period in the
prior  year.  This  increase  was  primarily  attributable  to the  increase  of
$7,430,610 in selling,  general and administrative expenses, as well as interest
expense of $724,489.  These expenses were partially offset by increased  revenue
of $4,018,637 in the current year.


                                       23
<PAGE>

         Vertical  Computer  primarily  used the cash  received  from  financing
arrangements to fund investing activities for the fiscal year 2001. During 2001,
Vertical  Computer  acquired a 60%  interest in NOW,  100% of  Enfacet,  certain
assets of Adhesive Software, Inc, and suspended operations of Globalfare.com. As
a result,  Vertical Computer believes that  period-to-period  comparisons of our
results of operations  are not  necessarily  meaningful and should not be relied
upon as any  indication  of  future  performance.  Operating  results  may  also
fluctuate due to the following factors:

         o     Demand for products and services;

         o     Mix of products sold;

         o     Introduction,  localization or enhancement of Vertical Computer's
               products and competitors' products;

         o     General economic conditions;

         o     Market acceptance of existing and new products; or

         o     Changes or anticipated  changes in Vertical Computer's pricing or
               that of our competitors.

         o     Reviews  in  industry  press   concerning  our  products  or  our
               competitors; and

         o     Mix of distribution channels through which products are sold.


FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES AND RECENT DEVELOPMENTS

         Presently,  Vertical Computer is entirely dependent on external cash to
fund its operations.  In the past, Vertical Computer has financed its operations
through  the sale of  securities,  including,  without  limitation,  common  and
preferred stock and convertible securities,  and loans. Vertical Computer's cash
position  remains  uncertain.  At  December  31,  2001,  Vertical  Computer  had
cash-on-hand  of  $845,459.  Since  December  31,  2001,  Vertical  Computer has
received gross proceeds of $280,000 from the sale of convertible debentures.  As
of the date of this filing,  Vertical  Computer  believes that it has sufficient
funds  available to fund its  operations  for two months.  Thereafter,  Vertical
Computer  will need to raise  additional  funds from the sale of  securities  or
loans.  Vertical  Computer's  inability to raise such funds will  jeopardize its
ability to continue operations.  Vertical Computer's primary need for cash is to
fund its ongoing  operations  until such time that the sale of its  products and
services generate enough revenue to fund operations. Vertical Computer's monthly
cost of operations is  approximately  $250,000  (excluding the operations of Now
Solutions,  LLC). In addition to the monthly  operating cost,  Vertical Computer


                                       24
<PAGE>

has principal and interest payments due on notes payable.  Below are the minimum
principal payments on notes payable of Vertical Computer,  including the year of
payment:


                                               AMOUNT                  AMOUNT
                                          (INCLUDING NOW       (EXCLUDING NOW
       YEAR ENDING DECEMBER 31,               SOLUTIONS)           SOLUTIONS)
       ------------------------       ------------------ --------------------

       2002                                 $ 5,908,662          $ 1,231,843
       2003                                   1,220,000              299,042
       2004                                      85,000               85,000
                                            -----------          -----------
       Total                                $ 7,213,662          $ 1,615,885
                                            ===========          ===========

         At  December  31,  2001,   Vertical   Computer  also  had   outstanding
convertible debentures with an original principal balance of $265,000.  Interest
accrues at a rate of 6% per year.  Outstanding principal and interest are due at
maturity in 2006.  These  debentures  are  convertible  into  common  stock at a
conversion  price of 120% of the closing bid price on the date of  agreement  or
80% of the 3 lowest  closing  bid  prices 20 days prior to the  conversion.  The
debentures  are  convertible  at the  option of the holder at any time after the
purchase.

         Vertical  Computer  does not have  sufficient  funds  available to meet
these  obligations.  Vertical  Computer will need to raise  significant funds to
meet these  obligations.  Other than the Equity Line of Credit  discussed below,
Vertical Computer does not have any commitments for funding. Vertical Computer's
independent  accountants  have issued a going  concern  opinion on its financial
statements that raise  substantial  doubt about Vertical  Computer's  ability to
continue  as a going  concern.  This  going  concern  opinion  was issued due to
Vertical  Computer's  significant  recurring  operating losses,  the substantial
funds used in its operations and the need to raise  additional funds to meet its
obligations.  Vertical  Computer's  ability to  continue  as a going  concern is
dependent on its ability to raise additional  funds and to establish  profitable
operations.

         Effective August 2001, Vertical Computer entered into an Equity Line of
Credit Agreement. Under this agreement,  Vertical Computer may issue and sell to
Cornell Capital  Partners common stock for a total purchase price of up to $10.0
million.  Subject to certain  conditions,  Vertical Computer will be entitled to
commence  drawing  down on the equity line of credit when the common stock under
the  Equity  Line of Credit  is  registered  with the  Securities  and  Exchange
Commission  and will continue for two years  thereafter.  The purchase price for
the  shares  will be equal to 95% of the market  price,  which is defined as the
lowest  closing  bid price of the  common  stock  during the five  trading  days
following the notice date. The amount of each advance is subject to an aggregate
maximum  advance amount of $416,667 in any thirty-day  period.  Cornell  Capital
Partners will retain 4% of each advance. In addition,  Vertical Computer entered
into  a  placement   agreement  with  Westrock  Advisors,   Inc.,  a  registered
broker-dealer. Pursuant to the placement agent agreement, Vertical Computer will
pay a one-time placement agent fee of 500,000 shares of common stock.

         In  connection  with the  purchase  of the Human  Resource  Information
Application  Software  assets of Ross  Systems,  Inc.,  Now  Solutions  issued a
promissory  note to Ross  Systems for $1 million and  obtained  $5.5  million of
notes payable. The $1 million note is due in two payments,  the first payment of
$250,000  was due in February  2002 and the final  payment of $750,000 is due in
February  2003.  The $5.5 million note is due on the earlier of February 2006 or
if  terminated,  by  either  party,  in  accordance  with  the  terms  of  these
obligations.  Vertical Computer had pledged a $1.5 million deposit as collateral
pursuant to a deposit pledge agreement to guarantee the first 24 payments of the
loan to finance the purchase of HRIS.  Now  Solutions  has been  notified by the
lender  that  it  is  in  default  of  certain  covenants   contained  in  these
obligations.  Although Vertical Computer believes it is entitled to a portion of
its $1.5 million  deposit,  it is currently  in  discussions  with the lender to
resolve Now Solutions'  default.  Until a settlement is reached,  the default by
Now Solutions is cured, or Now Solutions continues to makes its payments through
February 2003, or Vertical Computer pursues legal action, Vertical Computer will
not obtain a return of its deposit, or any portion thereof.

         Net cash used in operating  activities  for the year ended December 31,
2001 was  $3,693,906.  This primarily  related to a net loss of  $9,032,895,  an
increase in accounts receivable of $1,118,623 and a minority interest in loss of
subsidiary of $667,667.  These items were partially  offset by depreciation  and
amortization expense of $1,433,440,  non-cash expenses of 2,156,771, an increase
in  accounts   payable  of  $1,395,728  and  deferred   revenue  of  $2,243,375.
Significant items in net loss included approximately  $6,110,000 cost of funding
product development by Vertical Computer, the costs of suspending the operations
of Pointmail and  Globalfare,  and the costs of supporting the start-up NOW, net
of approximately $2,416,000.  Net cash used in investing activities for the year
ended December 31, 2001 was $1,894,109,  consisting primarily of the restriction
of  cash  for a debt  guarantee  to  Coast  Bank of  $1,500,000,  as well as the
purchase of  equipment  and  software of  $900,528.  These items were  partially


                                       25
<PAGE>

offset by proceeds  received from release of restricted  cash from the sale of a
subsidiary of $506,419.  Net cash provided by financing  activities for the year
ended December 31, 2001 were $834,662, consisting primarily of proceeds from the
issuance of notes payable of $1,572,266 and convertible debt of $265,000.  These
items were partially offset by the payment of cash dividends of $100,000 and the
payment of notes  payable of  $902,604.  All of these  items  resulted  in a net
decrease in cash and cash  equivalents of $4,753,353 for the year ended December
31, 2001.


NEW ACCOUNTING PRONOUNCEMENTS

         In June 2001, the Financial  Accounting  Standards Board finalized FASB
statements No. 141, Business  Combinations (SFAS 141), and No. 142, Goodwill and
Other  Intangible  Assets  (SFAS  142).  SFAS 141 also  requires  the use of the
purchase method of accounting and prohibits the use of the  pooling-of-interests
method of accounting for business  combinations  initiated  after June 30, 2001.
SFAS 141 also requires  that Vertical  Computer  recognize  acquired  intangible
assets meet  certain  criteria.  SFAS 141 applies to all  business  combinations
initiated  after June 30, 2001 and for the  purchase  of  business  combinations
completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142,
that Vertical Computer reclassify the carrying amounts of intangibles assets and
goodwill based on the criteria in SFAS 141.

         SFAS 142  requires,  among  other  things,  that  companies  no  longer
amortize  goodwill,  but instead test goodwill for impairment at least annually.
In addition,  SFAS 142 requires that Vertical Computer identify  reporting units
for the purposes of assessing  potential  future  goodwill,  reassess the useful
lives of other existing recognized  intangible assets, and cease amortization of
intangible  assets with an indefinite  useful life. An intangible  asset with an
indefinite  useful life should be tested for  impairment in accordance  with the
guidance in SFAS 142 is required to be applied in fiscal years  beginning  after
December 15, 2001 to all goodwill and other intangible assets recognized at that
date,  regardless  of when those  assets  were  initially  recognized.  SFAS 142
requires Vertical Computer to complete a transitional  goodwill  impairment test
six months from the date of  adoption.  Vertical  Computer  is also  required to
reassess the useful lives of other  intangible  assets  within the first interim
quarter after adoption of SFAS 142.

         During 2001, Vertical  Computer's business  combinations were accounted
for using the purchase method.  As of December 31, 2001, the net carrying amount
of goodwill is $4,277,143 and software costs is $4,018,637. Amortization expense
during the year ended  December  31, 2001 was  $1,323,221.  Currently,  Vertical
Computer is assessing  but has not yet  determined  how the adoption of SFAS 141
and SFAS 142 will impact its financial position and results of operations.













                                       26
<PAGE>

FACTORS AFFECTING VERTICAL COMPUTER'S BUSINESS,  OPERATING RESULTS AND FINANCIAL
CONDITION

         We are subject to various risks that may materially  harm our business,
financial condition and results of operations. You should carefully consider the
risks and uncertainties described below and the other information in this filing
before  deciding  to  purchase  our  common  stock.  If any of  these  risks  or
uncertainties  actually occurs, our business,  financial  condition or operating
results  could be  materially  harmed.  In that case,  the trading  price of our
common stock could decline and you could lose all or part of your investment.


         WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE

         We have  historically  lost money.  In the year ended December 31, 2001
and 2000, we had net losses  applicable to common  shareholders  of $(9,546,607)
and $(15,053,907), respectively. Future losses are likely to occur. Accordingly,
we have and may  continue  to  experience  significant  liquidity  and cash flow
problems  because our operations are not profitable.  No assurances can be given
that we will be successful in reaching or maintaining profitable operations.


         WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO EVALUATE US

         We have a limited  operating  history upon which an  evaluation  of our
business  prospects can be based. Our business  operations  commenced in October
1999.  Our  prospects  must be  considered  in  light  of the  risks,  expenses,
difficulties  and  uncertainties   frequently  encountered  by  emerging  growth
companies in new and rapidly  evolving  markets for Internet  based products and
services. Our success will depend, in part, on our ability to:

         o     attain profitable operations;

         o     enter into distribution  relationships and strategic alliances to
               sell our Emily and SiteFlash technology products and applications
               and build traffic to our Web sites;

         o     effectively  establish,  develop and maintain  relationships with
               sponsors and other third parties;

         o     provide original and compelling products and services to Internet
               users;

         o     develop and upgrade our technology;

         o     effectively respond to competitive developments;

         o     continue to develop and extend our brand;

         o     effectively  generate  revenues  through  sponsored  services and
               placements; and

         o     attract and retain new qualified personnel.

         We may not succeed in addressing these risks.


         OUR AFFILIATE,  NOW SOLUTIONS, IS IN DEFAULT ON CERTAIN INDEBTEDNESS IN
         WHICH  WE HAVE  PLEDGED  A $1.5  MILLION  DEPOSIT  AS  COLLATERAL.  THE
         INABILITY  OF OUR  AFFILIATE  TO CURE  THIS  DEFAULT  OR TO  REPAY  THE
         INDEBTEDNESS  WOULD  JEOPARDIZE  OUR  AFFILIATE'S  ABILITY TO  CONTINUE
         OPERATIONS,  WOULD  RESULT IN THE LOSS OF A PORTION OF OUR $1.5 MILLION
         DEPOSIT AND RESULT IN A DECLINE IN OUR STOCK PRICE

         In  connection  with the  purchase  of the Human  Resource  Information
Application  Software  assets of Ross  Systems,  Inc.,  Now  Solutions  issued a
promissory note to Ross Systems for $1 million and assumed $5.5 million of notes
payable.  The $1  million  note is due in two  payments,  the first  payment  of
$250,000  was due in February  2002 and the final  payment of $750,000 is due in
February  2003.  The $5.5 million note is due on the earlier of February 2006 or
if  terminated,  by  either  party,  in  accordance  with  the  terms  of  these
obligations.  Vertical Computer had pledged a $1.5 million deposit as collateral
pursuant to a deposit pledge agreement to guarantee the first 24 payments of the
loan to finance the purchase of HRIS.  Now  Solutions  has been  notified by the
lender  that  it  is  in  default  of  certain  covenants   contained  in  these
obligations.  Although Vertical Computer believes it is entitled to a portion of
its $1.5 million  deposit,  it is currently  in  discussions  with the lender to


                                       27
<PAGE>

resolve NOW Solution's  default.  Until a settlement is reached,  the default by
Now Solutions is cured, or Now Solutions continues to makes its payments through
February 2003, Vertical Computer will not obtain a return of its deposit, or any
portion thereof.


         OUR SUCCESS DEPENDS ON OUR ABILITY TO GENERATE  SUFFICIENT  REVENUES TO
         PAY FOR THE EXPENSES OF OUR OPERATIONS

         We believe  that our  success  will depend upon our ability to generate
revenues  from  sales  of  our  Emily  and  SiteFlash  technology  products  and
sponsorship and e-commerce  fees from our Internet sites and increased  revenues
from Now  Solutions  products,  none of which can be  assured.  Our  ability  to
generate  revenues is subject to  substantial  uncertainty  and our inability to
generate  sufficient  revenues to support  our  operations  could  require us to
curtail or suspend operations. Such an event would likely result in a decline in
our stock price.


         OUR SUCCESS DEPENDS ON OUR ABILITY TO OBTAIN ADDITIONAL CAPITAL

         Vertical Computer has funding that is expected to be sufficient to fund
its present  operations  for two months.  After two months,  Vertical  Computer'
operations  may need to be curtailed or suspended if  additional  funding is not
received.  Vertical Computer,  however, will need significant additional funding
in order  to  complete  its  business  plan  objectives.  Accordingly,  Vertical
Computer will have to rely upon additional  external  financing  sources to meet
its cash  requirements.  Management will continue to seek additional  funding in
the form of equity or debt to meet its cash requirements.  However,  there is no
guarantee  Vertical  Computer  will raise  sufficient  capital  to  execute  its
business plan. In the event that Vertical Computer is unable to raise sufficient
capital,  our  business  plan will  have to be  substantially  modified  and our
operations curtailed or suspended.


         WE HAVE A WORKING CAPITAL DEFICIT,  WHICH MEANS THAT OUR CURRENT ASSETS
         ON  DECEMBER  31,  2001 WERE NOT  SUFFICIENT  TO  SATISFY  OUR  CURRENT
         LIABILITIES ON THAT DATE

         We  had a  working  capital  deficit  of  approximately  $6,500,000  at
December 31, 2001, which means that our current liabilities exceeded our current
assets  by  $6,500,000.  Current  assets  are  assets  that are  expected  to be
converted into cash within one year and,  therefore,  may be used to pay current
liabilities  as they become  due.  Our working  capital  deficit  means that our
current  assets on December 31, 2001 were not  sufficient  to satisfy all of our
current liabilities on that date.


         WE HAVE BEEN SUBJECT TO A GOING  CONCERN  OPINION FROM OUR  INDEPENDENT
         AUDITORS,  WHICH MEANS THAT WE MAY NOT BE ABLE TO  CONTINUE  OPERATIONS
         UNLESS WE OBTAIN ADDITIONAL FUNDING

         The report of our independent  certified public accountants included an
explanatory  paragraph in connection with our financial  statements for the year
ended  December 31, 2001.  This  paragraph  states that our recurring  operating
losses,  the  substantial  funds  used in our  operations  and the need to raise
additional funds to accomplish our objectives raise  substantial doubt about our
ability to continue as a going concern. Our ability to develop our business plan
and to continue as a going concern depends upon our ability to raise capital and
to achieve improved operating results.  Our financial  statements do not include
any adjustments that might result from the outcome of this uncertainty.


         OUR  OPERATING  RESULTS MAY  FLUCTUATE  BECAUSE OF A NUMBER OF FACTORS,
         MANY OF WHICH ARE OUTSIDE OF OUR CONTROL

         Our  operating  results  may  fluctuate  significantly  as a result  of
variety of factors,  many of which are  outside of our  control.  These  factors
include, among others:

         o     the demand for our Emily and SiteFlash technology;

         o     the level of usage of the Internet;

         o     the level of user traffic on our Web sites;

         o     seasonal trends and budgeting cycles in sponsorship;

         o     incurrence of costs  relating to the  development,  operation and
               expansion of our Internet operations;



                                       28
<PAGE>

         o     introduction   of  new  products  and  services  by  us  and  our
               competitors;

         o     costs incurred with respect to acquisitions;

         o     price competition or pricing changes in the industry;

         o     technical difficulties or system failures; and

         o     general economic  conditions and economic  conditions specific to
               the Internet and Internet media.


         OUR FAILURE TO PROVIDE SECURE  TRANSMISSIONS  OF  INFORMATION  OVER THE
         INTERNET MAY DISCOURAGE USERS OF OUR ON-LINE OFFERINGS

         A  requirement  of the  continued  growth of  e-commerce  is the secure
transmission of confidential information over public networks. We rely on public
key cryptography and digital certificate  technology to provide the security and
authentication  necessary for secure  transmission of confidential  information.
Various  regulatory  and  export  restrictions  may  prohibit  us from using the
strongest and most secure cryptographic  protection available and thereby expose
us to a risk  of data  interception.  A party  who is  able  to  circumvent  our
security measures could misappropriate  proprietary information or interrupt our
operations.  Any such  compromise or  elimination  of our security  could reduce
demand for our services.  We may be required to expend  significant  capital and
other  resources  to  protect  against  these  security  breaches  or to address
problems  caused by these  breaches.  Concerns over the security of the Internet
and other  on-line  transactions  and the privacy of users may also  inhibit the
growth of the Internet and other  on-line  services  generally,  and our on-line
business offerings in particular, especially as a means of conducting commercial
transactions.  Our security  measures  may not prevent  security  breaches,  and
failure to prevent  these  security  breaches  may  disrupt our  operations  and
discourage users of our on-line business offerings.


         THE MARKET FOR OUR PRODUCTS AND SERVICES IS NEW AND  EVOLVING,  AND THE
         MARKET  DEMAND AND  ACCEPTANCE  OF OUR  PRODUCTS AND SERVICES IS HIGHLY
         UNCERTAIN

         The market for our  products  and  services  is new and  evolving,  and
market demand and  acceptance of our products and services is highly  uncertain.
We cannot assure you that our products and services will be attractive enough to
a sufficient  number of Internet users to generate  sponsor revenues or to allow
the charging of a subscription fee for our products and services. There also can
be no assurance  that we will be able to  anticipate,  monitor and  successfully
respond to rapidly  changing  consumer tastes and business  preferences so as to
attract a growing  number of users to our  Internet  sites with  characteristics
desirable  to  advertisers  and  advertising  agencies  or those  users  who are
otherwise  willing  to pay to  access  specific  portions  of our  products  and
services.  Internet users can freely navigate and instantly switch among a large
number of Internet sites, many of which offer competitive products and services,
making it difficult  for us to  distinguish  our product  offerings  and attract
users.  In  addition,  many other  Internet  sites offer very  specific,  highly
targeted  products and services  that may have greater  appeal than the products
and services offered on our Internet sites. If we are unable to develop original
and  compelling  Internet-based  products  and  services,  we will be  unable to
generate sufficient advertising revenues to support our business operations.


         OUR  COMPETITORS  HAVE GREATER  RESOURCES THAN WE DO, WHICH MAY MAKE IT
         MORE DIFFICULT FOR US TO COMPETE AGAINST THEM

         Many,  if  not  all,  of our  competitors  have  significantly  greater
resources than we do. In particular,  our  competitors  have greater  financial,
editorial,  technical  and  marketing  resources,  longer  operating  histories,
greater name recognition,  and greater experience than we do. Additionally,  our
competitors are able to undertake more extensive  marketing campaigns and devote
substantially  more  resources to developing  products and services than we are.
There can be no assurance that we will be able to compete  successfully  against
current or future  competitors.  Our  failure to compete  would  jeopardize  our
ability to generate revenues sufficient to support our business operations.


         WE MAY HAVE  DIFFICULTY  MANAGING OUR GROWTH AND  INTEGRATING  RECENTLY
         ACQUIRED COMPANIES

         Our recent  growth has placed a significant  strain on our  managerial,
operational,  and financial resources. To manage our growth, we must continue to
implement  and  improve our  operational  and  financial  systems and to expand,
train, and manage our employee base. Any inability to manage growth  effectively
could have a material  adverse effect on our business,  operating  results,  and
financial condition. As part of our business strategy, we have completed several
acquisitions  and  expect to enter into  additional  business  combinations  and


                                       29
<PAGE>

acquisitions.  Acquisition  transactions  are  accompanied by a number of risks,
including:

         o     the  difficulty of  assimilating  the operations and personnel of
               the acquired companies;

         o     the potential  disruption of our ongoing business and distraction
               of management;

         o     the difficulty of  incorporating  acquired  technology or content
               and rights into our products and media properties;

         o     the correct assessment of the relative  percentages of in-process
               research and  development  expense which needs to be  immediately
               written  off as compared  to the amount  which must be  amortized
               over the appropriate life of the asset;

         o     the  failure  to  successfully  develop  an  acquired  in-process
               technology  resulting  in the  impairment  of  amounts  currently
               capitalized  as  intangible  assets;

         o     unanticipated expenses related to technology integration;

         o     the maintenance of uniform  standards,  controls,  procedures and
               policies;

         o     the impairment of relationships with employees and customers as a
               result of any integration of new management personnel; and

         o     the  potential  unknown  liabilities   associated  with  acquired
               businesses.

         We may  not be  successful  in  addressing  these  risks  or any  other
problems  encountered  in  connection  with these  acquisitions.  Our failure to
address these risks could negatively affect our business operations through lost
opportunities,  revenues or profits, any of which would likely result in a lower
stock price.


         WE DEPEND UPON THIRD PARTIES FOR CRITICAL ELEMENTS OF OUR BUSINESS

         We depend upon third parties in order to advertise our on-line business
offerings  on other  Internet  sites.  There  can be no  assurance  that we will
establish or maintain such arrangements in the future. We are dependent on third
parties for  uninterrupted  Internet  access.  In addition,  we are dependent on
various third parties for substantially all of our news and information. Loss of
these services from any one or more of third parties would impair our ability to
provide our on-line  offerings  and would likely result in the loss of any users
of our offerings.  No assurance can be given as to whether, or on what terms, we
would be able to obtain these  services from other third parties in the event of
the loss of any of these services.


         WE ARE SUBJECT TO SYSTEM DISRUPTIONS AND CAPACITY CONSTRAINTS

         The  satisfactory  performance,  reliability  and  availability  of our
Internet  sites  and  our  computer  network   infrastructure  are  critical  to
attracting  Internet  users and  maintaining  relationships  with  partners  and
potential  sponsors.  System  interruptions that result in the unavailability of
our Internet sites or slower response times for users would reduce the number of
advertisements  delivered and reduce the attractiveness of our Internet sites to
users and sponsors. We may experience periodic system interruptions from time to
time in the future.  Additionally,  any  substantial  increase in traffic on our
Internet  sites  may  require  us to  expand  and  adapt  our  computer  network
infrastructure.  Our inability to add additional computer software, hardware and
bandwidth  to  accommodate  increased  use  of  our  Internet  sites  may  cause
unanticipated  system disruptions and result in slower response times. We cannot
assure you that we will be able to expand our computer network infrastructure on
a timely  basis to meet  increased  use.  Any  system  interruptions  or  slower
response times  resulting from these factors could  discourage  advertisers  and
users from our on-line  offerings.  Our Internet  operations  are  vulnerable to
interruption by fire,  earthquake,  power loss,  telecommunications  failure and
other events beyond our control. There can be no assurance that interruptions in
service will not materially adversely affect our operations in the future. While
we carry business  interruption  insurance,  we cannot assure you that insurance
will be sufficient to provide for all losses or damages that we incur.




                                       30
<PAGE>

         WE ARE  SUBJECT  TO  U.S.  AND  FOREIGN  GOVERNMENT  REGULATION  OF THE
         INTERNET, THE IMPACT OF WHICH IS DIFFICULT TO PREDICT

         There are currently few laws or regulations  directly applicable to the
Internet.  The application of existing laws and regulations to Vertical Computer
relating  to issues  such as user  privacy,  defamation,  pricing,  advertising,
taxation,  gambling,  sweepstakes,  promotions,  content regulation,  quality of
products and services,  and intellectual the property ownership and infringement
can be unclear. In addition, we will also be subject to new laws and regulations
directly  applicable  to  our  activities.   Any  existing  or  new  legislation
applicable to us could expose us to substantial liability, including significant
expenses  necessary  to comply with these laws and  regulations,  and dampen the
growth in use of the Internet.

         Other  nations have taken actions to restrict the free flow of material
deemed to be  objectionable  on the  Internet.  The European  Union has recently
adopted privacy and copyright  directives that may impose additional burdens and
costs on our international operations. In addition,  several  telecommunications
carriers,  including America's  Carriers'  Telecommunications  Association,  are
seeking to have telecommunications over the Internet regulated by the FCC in the
same manner as other telecommunications  services. Many areas with high Internet
use have begun to experience interruptions in phone service, and local telephone
carriers,  such as Pacific Bell,  have  petitioned the FCC to regulate  Internet
providers and to impose access fees. A number of proposals have been made at the
federal, state and local level that would impose additional taxes on the sale of
goods and services through the Internet.  If any such proposals are adopted,  it
could  substantially  impair the growth of the Internet and adversely affect our
on-line offerings.  Several recently passed federal laws could have an impact on
our  business.  The Digital  Millennium  Copyright Act is intended to reduce the
liability of on-line service providers for listing or linking to third-party Web
sites that include materials that infringe copyrights or other rights of others.
The  Children's  On-line  Protection  Act and  the  Children's  On-line  Privacy
Protection  Act are intended to restrict the  distribution  of materials  deemed
harmful to children and impose additional restrictions on the ability of on-line
services to collect user information from minors. In addition, the Protection of
Children From Sexual Predators Act of 1998 requires on-line service providers to
report  evidence of  violations  of federal  child  pornography  laws under some
circumstances.  Such legislation may impose significant  additional costs on our
business or subject us to additional liabilities.

         Due  to  the  global  nature  of  the  Web,  it is  possible  that  the
governments of other states and foreign  countries might attempt to regulate its
transmissions   or  prosecute  us  for   violations  of  their  laws.  We  might
unintentionally  violate  these laws.  These laws may be  modified,  or new laws
enacted,  in the future.  Any such  developments  could have a material  adverse
effect on our business, results of operations, and financial condition.


         WE MAY BE SUBJECT TO A VARIETY OF LEGAL  UNCERTAINTIES  THAT IMPAIR OUR
         BUSINESS

         As a  distributor  of  content  over the  Internet,  we face  potential
liability   for   defamation,   negligence,   copyright,   patent  or  trademark
infringement  and other claims based on the nature and content of the  materials
that we publish or  distribute.  In  addition,  we could be exposed to liability
with respect to the content or unauthorized  duplication of material  indexed in
our search services.  Although we carry liability  insurance,  our insurance may
not cover  potential  claims of this type or may not be adequate to indemnify us
for all liability that may be imposed.

         We host a variety of  services  that  enable  individuals  to  exchange
information,  generate  content,  conduct business and engage in various on-line
activities.  The law relating to the  liability  of  providers of these  on-line
services for activities of their users is currently  unsettled.  Claims could be
made against us for defamation, negligence, copyright or trademark infringement,
unlawful  activity,  tort,  including  personal injury,  fraud or other theories
based on the nature and content of information that we provide, links to or that
may be posted on-line or generated by our users. These types of claims have been
brought,  and  sometimes  successfully   prosecuted,   against  on-line  service
providers in the past.

         It is also possible that, if any  information  provided  directly by us
contains  errors or is otherwise  negligently  provided to users,  third parties
could make claims against us. For example,  we offer  Web-based  email services,
which expose us to potential risks, such as liabilities or claims resulting from
unsolicited  email, lost or misdirected  messages,  illegal or fraudulent use of
e-mail, or interruptions or delays in email service.

         We also  periodically  enter  into  arrangements  to offer  third-party
products, services, or content under Vertical Computer brand or via distribution
on our  properties,  including stock quotes and trading  information.  We may be
subject to claims  concerning  these products,  services or content by virtue of
our  involvement in marketing,  branding,  broadcasting  or providing  access to
them,  even if we do not ourself host,  operate,  provide,  or provide access to
these  products,  services or content.  While our agreements  with these parties
often  provide  that we will  be  indemnified  against  such  liabilities,  such
indemnification may not be adequate.






                                       31
<PAGE>

         OUR  SUCCESS   DEPENDS  ON  OUR  ABILITY  TO  PROTECT  OUR  PROPRIETARY
         TECHNOLOGY

         Our  success is  dependent,  in part,  upon our  ability to protect and
leverage the value of our original Emily and SiteFlash  technology  products and
Internet content, as well as our trade secrets, trade names, trademarks, service
marks, domain names and other proprietary rights we either currently have or may
have in the future.  Given the uncertain  application of existing trademark laws
to the  Internet and  copyright  laws to software  development,  there can be no
assurance  that  existing  laws  will  provide   adequate   protection  for  our
technologies,   sites  or  domain  names.   Policing  unauthorized  use  of  our
technologies, content and other intellectual property rights entails significant
expenses and could  otherwise be difficult or  impossible to do given the global
nature of the Internet and our potential markets.


         OUR STOCK PRICE HAS HISTORICALLY BEEN VOLATILE,  WHICH MAY MAKE IT MORE
         DIFFICULT  FOR YOU TO RESELL  SHARES  WHEN YOU  CHOOSE TO AT PRICES YOU
         FIND ATTRACTIVE

         The trading  price of our common  stock has been and may continue to be
subject to wide  fluctuations.  The stock price may  fluctuate  in response to a
number of events and factors, such as quarterly variations in operating results,
announcements of technological  innovations or new products and media properties
by us or our competitors,  changes in financial estimates and recommendations by
securities  analysts,  the  operating  and  stock  price  performance  of  other
companies  that  investors  may deem  comparable,  and news reports  relating to
trends in our markets. In addition,  the stock market in general, and the market
prices for Internet-related and technology-related companies in particular, have
experienced  extreme  volatility  that often has been unrelated to the operating
performance of such companies.  These broad market and industry fluctuations may
adversely   affect  the  price  of  our  stock,   regardless  of  our  operating
performance.


         OUR COMMON STOCK IS DEEMED TO BE "PENNY  STOCK," WHICH MAY MAKE IT MORE
         DIFFICULT  FOR  INVESTORS  TO  SELL  THEIR  SHARES  DUE TO  SUITABILITY
         REQUIREMENTS

         Our common stock is deemed to be "penny  stock" as that term is defined
in Rule 3a51-1  promulgated  under the  Securities  Exchange Act of 1934.  Penny
stocks are stock:

         o     With a price of less than $5.00 per share;

         o     That are not traded on a "recognized" national exchange;

         o     Whose  prices are not quoted on the  Nasdaq  automated  quotation
               system  (Nasdaq  listed stock must still have a price of not less
               than $5.00 per share); or

         o     In issuers  with net  tangible  assets less than $2.0 million (if
               the issuer has been in  continuous  operation  for at least three
               years) or $5.0 million (if in continuous  operation for less than
               three years),  or with average revenues of less than $6.0 million
               for the last three years.

         Broker/dealers   dealing  in  penny  stocks  are  required  to  provide
potential  investors  with a  document  disclosing  the  risks of penny  stocks.
Moreover,  broker/dealers  are required to determine  whether an investment in a
penny  stock  is  a  suitable  investment  for  a  prospective  investor.  These
requirements  may reduce the  potential  market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third  parties or to otherwise  dispose of
them. This could cause our stock price to decline.


         WE ANTICIPATE INCREASED OPERATING EXPENSES AND MAY EXPERIENCE LOSSES

         Our lack of an extensive  operating  history makes prediction of future
operating  results  difficult.  We believe  that a comparison  of our  quarterly
results is not meaningful.  As a result,  you should not rely on the results for
any period as an indication of our future performance. Accordingly, there can be
no assurance that we will generate  significant revenues or that we will sustain
a level of  profitability  in the  future.  We  currently  intend to expand  and
improve our  Internet  operations,  fund  increased  advertising  and  marketing
efforts,  expand and improve our Internet user support  capabilities and develop
new Internet technologies, products and services. As a result, we may experience
significant losses on a quarterly and annual basis.






                                       32
<PAGE>

         WE MUST CONTINUE TO DIVERSIFY OUR REVENUE STREAMS

         From time to time,  we may  entertain  new business  opportunities  and
ventures  in a broad  range of areas.  Typically,  these  opportunities  require
extended negotiations,  the outcome of which cannot be predicted.  If we were to
enter into such a venture,  we could be required to invest a substantial  amount
of  capital,  which  could  have a  material  adverse  effect  on our  financial
condition and our ability to implement our existing business  strategy.  Such an
investment  could also result in large and  prolonged  operating  losses for us.
Further,  these  negotiations  or ventures could place  additional,  substantial
burdens on our management  personnel and our financial and operational  systems.
There can be no assurance that such a venture would ever achieve  profitability,
and a failure by us to recover the substantial investment required to launch and
operate such a venture  would have a material  adverse  effect on our  business,
financial condition and operating results.























                                       33
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS





























                                       34
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES



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




                        CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000



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















                                      F-1
<PAGE>


                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES


                                    CONTENTS



Report of Independent Certified Public Accountants...........................F-3

Consolidated Financial Statements:
     Consolidated Balance Sheet..............................................F-4
     Consolidated Statements of Operations and Other Comprehensive Loss......F-6
     Consolidated Statements of Stockholders' Equity.........................F-7
     Consolidated Statements of Cash Flows..................................F-11

     Notes to Consolidated Financial Statements.............................F-13





















                                      F-2
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors
Vertical Computer Systems, Inc. and Subsidiaries
Los Angeles, California


We have audited the accompanying consolidated balance sheet of Vertical Computer
Systems,  Inc.  and  Subsidiaries  as of  December  31,  2001  and  the  related
consolidated   statements   of   operations   and  other   comprehensive   loss,
stockholders'  equity  and cash  flows for each of the two  years in the  period
ended  December  31,  2001.  These  consolidated  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Vertical Computer
Systems,  Inc. and Subsidiaries as of December 31, 2001 and the results of their
operations and cash flows for each of the two years in the period ended December
31, 2001 in conformity  with  accounting  principles  generally  accepted in the
United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
the Company  will  continue as a going  concern.  As  discussed in Note 1 to the
consolidated   financial   statements,   the  Company  has  suffered   recurring
significant  operating  losses  and used  substantial  funds  in its  operation.
Additionally,  at December 31, 2001, the Company had negative working capital of
approximately  $6,500,000 and had defaulted on several of its debt  obligations.
These conditions raise substantial doubt about the Company's ability to continue
as a going  concern.  Management's  plans in  regard to these  matters  are also
described in Note 1. The  consolidated  financial  statements do not include any
adjustments that might result from the outcome of this uncertainty.



                                     /s/BDO Seidman, LLP

Los Angeles, California
April 15, 2002




                                      F-3
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET

Item 1. Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                                                   December 31,
                                                                                                       2001
-------------------------------------------------------------------------------------------------------------------
                                      Assets
<S>                                                                                            <C>
Current Assets
      Cash                                                                                     $           845,459
      Restricted cash                                                                                    1,500,000
      Securities available for sale                                                                        176,000
      Accounts receivable, net of allowance for bad debts of $83,460                                     1,041,601
      Other receivable                                                                                     419,489
      Receivables from officers and employees                                                               44,887
      Prepaid expenses and other assets                                                                     77,884
-------------------------------------------------------------------------------------------------------------------

Total Current Assets                                                                                     4,105,320

Property and equipment, net of accumulated depreciation                                                    514,143
Goodwill, license and software costs, net                                                                7,724,618
Deposits and other                                                                                          20,506
-------------------------------------------------------------------------------------------------------------------

Total Assets                                                                                   $        12,364,587
===================================================================================================================

               Liabilities, Convertible Preferred Stock and Stockholder's Equity

Current liabilities
      Accounts payable and accrued liabilities                                                 $         1,925,893
      Deferred Revenue                                                                                   2,243,375
      Accrued dividends                                                                                    513,712
      Current portion-notes payable, net of discount of $79,042                                          5,908,662
-------------------------------------------------------------------------------------------------------------------

Total current liabilities                                                                               10,591,642

      Convertible debt                                                                                     265,000
      Notes payable, net of discount and current portion                                                 1,305,000
-------------------------------------------------------------------------------------------------------------------

Total liabilities                                                                                       12,161,642
===================================================================================================================


                       See accompanying  notes to the  consolidated  financial statements.
</TABLE>




                                                 F-4
<PAGE>

<TABLE>
                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET

<S>                                                                                            <C>
Series B 10% Convertible Preferred stock; $0.001 Par Value; 375,000
      Shares authorized; 7,200 shares issued and outstanding                                                45,000

Series D 15% Convertible Preferred stock; $0.001 Par Value; 300,000
      Shares authorized; 25,000 shares issued and outstanding                                              156,250

Stockholders' Equity

Common Stock; $0.00001 par value; 1,000,000,000 shares authorized
      615,191,422 issued and outstanding                                                                     6,153

      Series A 4% Convertible Cumulative Preferred stock; $0.001 par value;
      250,000 shares authorized; 50,000 shares issued and outstanding                                           50

      Series A Preferred Stock; par value $0.001; 750,000 shares authorized;
      no shares issued and outstanding                                                                           0

Series C 4%  Convertible   Preferred  stock;  $100  par  value;  200,000  shares
      authorized; 80,000 shares issued and outstanding
      of which 30,000 are issued to a subsidiary of the Company                                            350,000

      Series C Preferred stock; par value $0.001; 175,000 shares authorized;
      no shares issued and outstanding                                                                           0

      Subscription Receivable                                                                              (2,000)

      Additional paid-in-capital                                                                        24,670,149

      Accumulated deficit                                                                             (25,022,657)
-------------------------------------------------------------------------------------------------------------------

Total Stockholders' equity                                                                                   1,695
-------------------------------------------------------------------------------------------------------------------

Total liabilities, convertible preferred stock and
stockholders' equity                                                                           $        12,364,587
===================================================================================================================


                        See accompanying  notes to the  consolidated  financial statements.
</TABLE>




                                               F-5
<PAGE>

<TABLE>
                                   VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
                          CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
                                    FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

<CAPTION>
                                                                  For the years ended December 31,
                                                                      2001                2000
                                                               -------------------  ------------------
<S>                                                              <C>                <C>
Revenues
  Licensing and maintenance                                      $      2,239,736   $               -
  Software Development                                                    527,034                   -
  Consulting Services                                                   1,290,719                   -
  Other                                                                    98,599             137,451
                                                               -------------------  ------------------

Total Revenues                                                          4,156,088             137,451

Selling, general and administrative expenses                           13,296,508           5,865,898
                                                               -------------------  ------------------

Operating loss                                                        (9,140,420)         (5,728,447)

Other Income and (expenses)
  Interest income                                                         164,347                   -
  Interest expense                                                      (724,489)                   -
  Gain on sale of subsidiary                                                    -             863,252
                                                               -------------------  ------------------

Loss before minority interest                                         (9,700,562)         (4,865,195)

Minority interest in loss of subsidiary                                   667,667                   -
                                                               -------------------  ------------------

Net loss                                                              (9,032,895)         (4,865,195)
                                                               -------------------  ------------------

Dividend applicable to preferred stock                                  (513,712)           (188,712)

Deemed dividend on issuance of Series A Preferred Stock                         -        (10,000,000)
                                                               ---------------------------------------

Net loss applicable to common stockholders                       $    (9,546,607)   $    (15,053,907)
                                                               ===================  ==================

Basic and diluted loss per share                                 $         (0.02)   $          (0.02)
                                                               ===================  ==================

Basic and diluted weighted average of common shares
Outstanding                                                           585,745,315         745,784,714
                                                               ===================  ==================
Comprehensive income (loss) and its components
  consist of the following:
  Net loss                                                       $    (9,032,895)   $     (4,865,195)
  Gain/(Loss) on securities available for sale                          (420,000)             420,000
                                                               -------------------  ------------------
  Comprehensive loss                                             $    (9,452,895)   $     (4,445,195)
                                                               ===================  ==================

                           See accompanying notes to the consolidated financial statements.
</TABLE>



                                                         F-6
<PAGE>

<TABLE>
                                        VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                         FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

<CAPTION>
                                                               Series A Preferred       Series C Preferred
                                         Common Stock                 Stock                    Stock               Note Receivable
                                      -----------------------  ----------------------  --------------------------     Due From
                                         Shares       Amount    Shares       Amount      Shares        Amount        Shareholder
                                      -----------  ----------- ----------  ----------   --------  --------------- ------------------
<S>                                   <C>           <C>          <C>      <C>                        <C>       <C>
Balance, December 31, 1999             935,548,399  $   9,355          -  $         -           -    $      -  $        (166,984)

Cancellation of Shares in
   connection with a legal
   settlement                         (246,470,580)    (2,465)         -            -           -           -            (11,802)
Issuance of Series A Preferred
   Stock, value $0.001 net of
   issuance cost of $1,000,000                   -          -     50,000           50           -           -                  -
Shares issued for professional
   services                                879,688          9          -            -           -           -                  -
Preferred stock dividends                        -          -          -            -           -           -                  -
Shares cancelled in connection
   with sale of Externet World,
   Inc.                               (144,850,000)    (1,449)         -            -           -           -            178,786
Stock options and warrants
   exercised                            59,310,000        594          -            -           -           -                  -
Shares and subscription
   receivable cancelled in
   connection with stock
   rescission                          (31,710,000)      (317)          -            -           -           -                  -
Non-employee compensation
   expense for stock options
   issued                                        -          -          -            -           -           -                  -
Deemed dividend on issuance
   of Series A Preferred Stock                   -          -          -            -           -           -                  -
Comprehensive Loss:
   Net loss                                      -          -          -            -           -           -                  -
   Unrealized gain on securities
   available for sale                            -          -          -            -           -           -                  -
                                  -----------------  --------- ----------  ----------- -----------  ----------  -----------------
   Balance, December 31, 2000          572,707,507 $    5,727     50,000  $        50           -    $      -   $              -
                                  -----------------  --------- ----------  ----------- -----------  ----------  -----------------

                                See accompanying notes to the consolidated financial statements.
</TABLE>





                                                              F-7
<PAGE>

<TABLE>
                                        VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                         FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

<CAPTION>
                                                                              Accumulated Other
                                           Subscription         Paid-in         Comprehensive       Accumulated
                                            Receivable          Capital              Loss             Deficit             Total
                                       ------------------ -----------------  ----------------- ------------------- -----------------
<S>                                     <C>              <C>                 <C>               <C>                 <C>
Balance, December 31, 1999              $            -   $       389,953     $           -     $     (245,923)     $      (13,599)

Cancellation of Shares in connection
   with a legal settlement                           -             2,465                 -                   -            (11,802)
Issuance of Series A Preferred Stock
   par value $0.001 net of
   issuance cost of $1,000,000                       -         8,999,950                 -                   -           9,000,000
Shares issued for professional
   services                                          -           238,335                 -                   -             238,344
Preferred stock dividends                            -                 -                 -            (364,932)           (364,932)
Shares cancelled in connection
   with sale of Externet World, Inc.                 -             1,449                 -                   -             178,786
Stock options and warrants
   Exercised                                (1,443,700)        3,235,310                 -                   -           1,792,204
Shares and subscription
   Receivable cancelled in
   Connection with stock
   Rescission                                1,441,700        (1,345,758)                -                   -              95,625
Non-employee compensation
   expense for stock options
   Issued                                            -         1,303,264                 -                   -           1,303,264
Deemed dividend on issuance
   of Series A Preferred Stock                       -        10,000,000                 -         (10,000,000)                  0
Comprehensive Loss:
   Net loss                                          -                 -                 -          (4,865,195)         (4,865,195)
   Unrealized gain on securities
   available for sale                                -                 -           420,000                   -             420,000
                                          -------------    --------------    -------------- ---  --------------  --  --------------
   Balance, December 31, 2000            $      (2,000)  $    22,824,968     $     420,000     $   (15,476,050)    $     7,772,695
                                          -------------    --------------    -------------- ---  --------------  --  --------------

                                See accompanying notes to the consolidated financial statements.
</TABLE>




                                                              F-8
<PAGE>

<TABLE>
                                        VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                         FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

<CAPTION>
                                                               Series A Preferred       Series C Preferred
                                         Common Stock                 Stock                    Stock               Note Receivable
                                      -----------------------  ----------------------  --------------------------     Due From
                                       Shares         Amount    Shares       Amount      Shares        Amount        Shareholder
                                      -----------  ----------- ----------  ----------   --------  --------------- ------------------
<S>                                   <C>          <C>             <C>     <C>                     <C>            <C>
Balance, December 31, 2000            572,707,507  $     5,727     50,000  $       50          -   $            - $              -

Issuance of warrants for the
   acquisition of NOW Solutions                 -            -          -           -          -                -                -
Issuance of shares for the equity
line with Cornell Capital               7,142,857           72          -           -          -                -                -
Issuance of common stock shares
   for professional services           35,341,058          354          -           -          -                -                -
Preferred stock dividends                       -            -          -           -          -                -                -
Issuance of series C preferred 4%
     cumulative convertible
   stock, par value $100 for the
   acquisition of intellectual
   property                                     -                                         50,000          350,000
Non-employee compensation
   expense for stock options issued             -            -          -           -          -                -                -
Beneficial conversion feature on 6%
   Convertible debentures issued                -            -          -           -          -                -                -
Comprehensive Loss:
   Net loss                                     -            -          -           -          -                -                -
   Unrealized loss on securities
   available for sale                           -            -          -           -          -                -                -

                                    -------------- ----------------------- ----------- ----------  --------------------------------
Balance, December 31, 2001            615,191,422  $     6,153     50,000  $       50     50,000   $      350,000 $              -
                                    ============== ======================= =========== ==========  ================================


                          See accompanying notes to the consolidated financial statements
</TABLE>





                                                              F-9
<PAGE>

<TABLE>
                                        VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                         FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

<CAPTION>
                                                                              Accumulated Other
                                            Subscription         Paid-in       Comprehensive       Accumulated
                                             Receivable          Capital            Loss             Deficit            Total
                                          ---------------- -----------------  --------------   -----------------  ----------------
<S>                                         <C>             <C>               <C>              <C>                 <C>
Balance, December 31, 2000                  $    (2,000)    $   22,824,968    $      420,000   $   (15,476,050)    $    7,772,695
Issuance of warrants for the
   acquisition of NOW Solutions                        -           798,500                 -                  -           798,500
Issuance of shares for the equity line
  with Cornell Capital                                             199,928                                                200,000
Issuance of shares of common stock
   for professional services                           -           572,596                 -                  -           572,950
Preferred stock dividends                              -                 -                 -          (513,712)         (513,712)
Issuance of series C preferred 4%
  cumulative convertible
   stock, par value $100 for the
   acquisition of intellectual property                -                 -                 -                  -           350,000
Non-employee compensation
   expense for stock options issued                    -           207,907                 -                  -           207,907
Beneficial conversion feature on 6%
   Convertible debentures issued                       -            66,250                 -                  -            66,250
Comprehensive Loss:
   Net loss                                            -                 -                 -        (9,032,895)       (9,032,895)
   Unrealized loss on securities
   available for sale                                  -                 -         (420,000)                  -         (420,000)

                                          --------------- ----------------- ----------------- ------------------  ----------------
Balance, December 31, 2001                  $    (2,000)    $   24,670,149    $            -   $   (25,022,657)    $        1,695
                                          =============== ================= ================= ==================  ================


                          See accompanying notes to the consolidated financial statements
</TABLE>





                                                              F-10
<PAGE>

<TABLE>
                                        VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
                                             CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>
                                                                                          For the years ended December 31,
                                                                                               2001                2000
                                                                                       --------------------- ------------------
<S>                                                                                        <C>                <C>
Cash flows from operating activities

Net loss                                                                                   $    (9,032,895)   $    (4,865,195)

Adjustments to reconcile net loss to net cash used in operating activities:
    Minority interest in loss of subsidiary                                                       (667,667)                  -
    Realized gain on sale of subsidiary                                                                   -          (863,252)
    Depreciation and amortization                                                                 1,433,440            100,702
    Equity loss of unconsolidated affiliate                                                               -             31,453
    Non-employee compensation expense for stocks options issued                                     207,907          1,303,264
    Issuance of common shares for professional services                                             572,950            238,344
    Issuance of common shares for the equity line with Cornell Capital                              200,000                  -
    Beneficial conversion on 6% debentures                                                           66,250                  -
    Compensation expense for stock rescission                                                             -             95,625
    Allowance for bad debts                                                                          83,460                  -
    Write off of royalties                                                                           80,000                  -
    Write off of fixed assets                                                                       203,657                  -
    Write off of investments                                                                        618,547                  -
    Write down of marketable securities                                                             124,000                  -
    Changes in operating assets and liabilities:
      Accounts receivable                                                                       (1,118,623)            (7,781)
      Other receivable                                                                             (24,588)             25,000
      Receivable related party                                                                     (23,257)             38,343
      Royalties Receivable                                                                           20,000          (100,000)
      Prepaids                                                                                     (36,035)           (41,849)
      Deposits                                                                                       48,557           (61,064)
      Accounts payable                                                                            1,395,728             66,438
      Deferred Revenue                                                                            2,243,375                  -
      Dividends payable                                                                            (88,712)                  -
                                                                                        -------------------- ------------------
Net cash used in operating activities:                                                           (3,693,906)       (4,039,972)
                                                                                        ---------------------------------------

Cash flow from investing activities:
    Restriction of cash for debt guarantee                                                      (1,500,000)                  -
    Proceeds from release of restricted cash from
      sale of Subsidiary, net of restricted cash                                                          -            575,779
    Proceeds from release of restricted cash from sale of Subsidiary                                506,419                  -
    Purchase of equipment                                                                         (219,400)          (734,012)
    Purchase of software                                                                          (681,128)                  -
    Purchase of investments                                                                               -          (950,000)
                                                                                        -------------------- ------------------
Net cash used in investing activities                                                           (1,894,109)        (1,108,233)
                                                                                        -------------------- ------------------
</TABLE>




                                                             F-11
<PAGE>

<TABLE>
                            VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
<S>                                                                <C>                    <C>
Cash flow from financing activities:
    Proceeds from issuance of Series A Preferred Stock                             -         9,000,000
    Proceeds from stock options exercised                                          -         1,792,204
    Payment of cash dividends                                              (100,000)         (211,111)
    Proceeds from Convertible Debt                                           265,000                 -
    Payment of Notes Payable                                               (902,604)          (45,000)
    Proceeds from issuance of Notes Payable                                1,572,266                 -
                                                                   ------------------    --------------
Net cash provided by financing activities                                    834,662        10,536,093
                                                                   ------------------    --------------

Net increase (decrease) in cash and cash equivalents,                    (4,753,353)         5,387,888
Cash and cash equivalents, beginning of year                               5,598,812           210,924
                                                                   ------------------ -----------------
Cash and cash equivalents, end of year                             $         845,459   $     5,598,812
                                                                   ================== =================


                    See accompanying notes to the consolidated financial statements

</TABLE>






















                                                             F-12
<PAGE>

NOTE 1.  ORGANIZATION AND BASIS OF PRESENTATION

Vertical Computer Systems, Inc. (the "Company") was incorporated in the State of
Delaware  in April 1993.  On October 21,  1999,  the  Company  acquired  all the
outstanding  capital stock of Externet World, Inc. ("EW"),  with the issuance of
786,433,100 shares of the Company's common stock.  Generally accepted accounting
principles  require  that the company  whose  stockholders  retain the  majority
interest  in a  combined  business  be treated as the  acquirer  for  accounting
purpose.  Therefore,  this  transaction  has been  accounted  for as a  "reverse
acquisition" for financial reporting purposes.  The relevant acquisition process
utilizes the capital structure of Vertical Computer Systems, Inc. and the assets
and  liabilities  of EW  are  recorded  at  their  historical  cost.  EW is  the
continuing  operating entity for financial  reporting  purposes.  Although EW is
deemed to be the  acquiring  company  for  financial  accounting  and  reporting
purpose,  the legal status of the Company as the surviving  corporation does not
change.  In October 2000,  Vertical  Computer  sold its wholly owned  subsidiary
Externet World,  Inc. to Eurovest,  Inc., a company of which Terry  Washburn,  a
former  member  of  Vertical  Computer's  Board of  Directors,  is an  executive
officer. Eurovest subsequently sold Externet World to two former shareholders of
Vertical Computer and received  147,350,980 shares of Vertical Computer's common
stock. As part of a settlement  agreement,  144,850,000 common stock shares were
cancelled  and 2,000,980  shares were  retained in trust for Vertical  Computer.
Further,  Eurovest  received  fees of $72,000  and  500,000  shares of  Vertical
Computer's common stock.

The consolidated  financial  statements  include the accounts of the Company and
its wholly subsidiaries,  Enfacet, Inc. ("ENF"),  Globalfare.com,  Inc. ("GFI"),
Pointmail.com,  Inc.  ("PMI"),  Scientific  Fuel, Inc. ("SFI") and its 60% owned
subsidiary, NOW Solutions, Inc. ("NOW").


BUSINESS

Vertical  Computer  Systems,  Inc. is a multinational  provider of Web services,
underpinning Web technologies,  and  administrative  software services through a
global partner  distribution  network.  Web services  involve the outsourcing of
administrative  services  software  via the  Internet,  such  as  ResponseFlash,
UniversityFlash   and  the  Emily  Agent.   Underpinning  Web  technologies  are
foundation technologies like our SiteFlash and Emily technologies,  which can be
used to build  Web  services.  Administrative  software  services  are  software
products,   such  as  human   resources  or  procurement   that  provides  basic
functionality to any operational entity.







                                      F-13
<PAGE>

NOTE 1.  ORGANIZATION (CONTINUED)


GOING CONCERN UNCERTAINTY

The accompanying  consolidated  financial statements for the year ended December
31, 2001, have been prepared  assuming that the Company will continue as a going
concern which  contemplates  the  realization of assets and the  satisfaction of
liabilities in the normal course of business.

The  carrying  amounts  of assets and  liabilities  presented  in the  financial
statements  do not purport to represent  realizable or  settlement  values.  The
Company has suffered  significant  recurring  operating losses, used substantial
funds in its operations,  and needs to raise  additional funds to accomplish its
objectives. Additionally, at December 31, 2001, the Company had negative working
capital of  approximately  $6,500,000  and has  defaulted on several of its debt
obligations.  These  conditions  raise  substantial  doubt  about the  Company's
ability to continue as a going concern.

In  August  2001,  Vertical  Computer  entered  into an  Equity  Line of  Credit
Agreement. Under this agreement, Vertical Computer may issue and sell to Cornell
Capital Partners common stock for a total purchase price of up to $10.0 million.
The Company  will be entitled  to  commence  drawing  down on the equity line of
credit upon the effectiveness of a Registration  Statement  registering the sale
of the shares to be issued under the equity line of credit.  However the Company
will require additional capital to fund operations and pay down its liabilities,
as well as fund its expansion plans  consistent  with the Company's  anticipated
changes in operations and infrastructure.  The consolidated financial statements
contain no adjustment for the outcome of this uncertainty.

The Company is continuing its efforts to secure working  capital for operations,
expansion  and possible  acquisitions,  mergers,  joint  ventures,  and/or other
business combinations.  However, there can be no assurance that the Company will
be able to secure  additional  capital,  or that if such  capital is  available,
whether the terms or conditions would be acceptable to the Company.

To date,  the  Company has  primarily  generated  revenues  from  licensing  and
maintenance   agreements  from  NOW  Solutions   ("NOW"),   its  majority  owned
subsidiary.

Furthermore,  the Company is exploring  certain  opportunities  with a number of
companies to participate in the marketing of its products.  The exact results of
these opportunities are unknown at this time.


NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


PRINCIPLES OF CONSOLIDATION

The consolidated  financial  statements  include the accounts of the Company and
its  subsidiaries.   All  intercompany   accounts  and  transactions  have  been
eliminated.


CASH AND CASH EQUIVALENTS

For purposes of the  statement of cash flows,  the Company  considers all highly
liquid  investments with original  maturities of three months or less to be cash
equivalents.


CONCENTRATION OF CREDIT RISK

The Company  maintains its cash in bank deposit  accounts which,  at times,  may
exceed federally insured limits. The Company has not experienced any such losses
in these accounts.



                                      F-14
<PAGE>

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PROPERTY AND EQUIPMENT

Property and  equipment are stated at cost.  Expenditures  for  maintenance  and
repairs are charged to operations as incurred, whereas, additions, renewals, and
betterments are  capitalized.  Depreciation is computed using the  straight-line
method over the estimated  useful lives of the related assets,  ranging from one
to fifteen years.


CAPITALIZED SOFTWARE COSTS

Software costs incurred  internally in creating  computer  software products are
expensed until technological feasibility has been established upon completion of
a detailed  program  design.  Thereafter,  all  software  development  costs are
capitalized  until the point that the product is ready for sale and subsequently
reported at the lower of unamortized  cost or net realizable  value. The Company
considers annual  amortization of capitalized  software costs based on the ratio
of current year revenues by product to the product's  total  estimated  revenues
method,  subject to an annual minimum based on straight-line  amortization  over
the product's  estimated  economic  useful life,  not to exceed five years.  The
Company periodically reviews capitalized software costs for impairment where the
fair value is less than the carrying  value. At December 31, 2000, no costs have
been  capitalized due to the  insignificance  of amounts.  At December 31, 2001,
$3,800,000 of the purchase price of NOW Solutions,  L.L.C. and $740,000 from the
purchase of the software  assets of Adhesive  Software  Inc.  were  allocated to
software costs.


LONG-LIVED ASSETS

Long-lived assets, such as property and equipment,  are evaluated for impairment
when events or changes in circumstances indicate that the carrying amount of the
assets may not be  recoverable  through the estimated  undiscounted  future cash
flows from the use of these assets. When any such impairment exists, the related
assets are written down to fair value.


REVENUE RECOGNITION

For the  Company's  various  services,  revenue  is  generally  recognized  when
services are rendered.  In accordance with Statement of Position 97-2, "Software
Revenue  Recognition",  ("SOP 97-2"), the Company recognizes revenue on sales of
its  payroll  software  products  when  the  following  criteria  are  met:  (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred and the
system is functional,  (iii) the vendor's fee is fixed or determinable  and (iv)
collectability is probable.

Service  revenues are recognized  ratably over the contractual  period or as the
services are provided.

Deferred revenue on maintenance  contracts represent cash received in advance or
accounts  receivable from system service  consulting sales,  which is recognized
over the life of the contract.





                                      F-15
<PAGE>

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation"  SFAS 123,  establishes  a fair  value  method of  accounting  for
stock-based  compensation plans and for transactions in which a company acquires
goods or services from  non-employees  in exchange for equity  instruments.  The
Company has adopted this accounting standard.  SFAS 123 also gives the option to
account for  stock-based  employee  compensation  in accordance  with Accounting
Principles  Board  Opinion  No. 25 (APB  25),  "Accounting  for Stock  issued to
Employees,"  or SFAS 123. The Company  elected to follow APB 25, which  measures
compensation  cost for employee stock options as the excess, if any, of the fair
market price of the Company's stock at the  measurement  date over the amount an
employee must pay to acquire stock.


INVESTMENTS

Investments in entities in which the Company  exercises  significant  influence,
but does not control, are accounted for using the equity method of accounting in
accordance with Accounting Principles Board Opinion No. 18 "The Equity Method of
Accounting for  Investments in Common Stock".  Investments in securities  with a
readily  determinable  market  value  in which  the  Company  does not  exercise
significant  influence,  does not have control,  and does not plan on selling in
the near term are accounted  for as available for sale  securities in accordance
with Statement of Financial  Accounting Standard No. 115 "Accounting for Certain
Investments in Debt and Equity Securities".


INCOME TAXES

The Company provides for income taxes in accordance with Statements of Financial
Accounting  Standards No. 109,  "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires a company to use the asset and liability  method of accounting  for
income taxes.

Under the asset and liability  method,  deferred income taxes are recognized for
the tax consequences of "temporary  differences" by applying  enacted  statutory
tax rates  applicable  to future  years to  differences  between  the  financial
statement carrying amounts and the tax basis of existing assets and liabilities.
A valuation allowance is provided when management cannot determine whether it is
more likely than not the deferred  tax asset will be  realized.  Under SFAS 109,
the effect on deferred  income taxes of a change in tax rates is  recognized  in
income in the period that includes the enactment date.


EARNINGS PER SHARE

Statement of Financial  Accounting Standards FASB No. 128, "Earnings per Share",
which replaces the calculation of primary and fully diluted  earnings (loss) per
share with basic and diluted  earnings  (loss) per share,  is used to  calculate
earnings per share.  Basic earnings (loss) per share includes no dilution and is
computed by dividing  income  (loss)  available  to common  shareholders  by the
weighted  average  number of  shares  outstanding  during  the  period.  Diluted
earnings  (loss) per share  reflects the potential  dilution of securities  that
could share in the  earnings  of an entity,  similar to fully  diluted  earnings
(loss) per share.  As of December 31, 2001 and 2000, the Company had 251,247,275
and  67,658,338  potentially  dilutive  shares,  respectively,  which  were  not
included  in the  calculation  of  diluted  loss per  share  because  they  were
anti-dilutive.

On  February  7,  2000,  the  Company  executed a  20-for-1  stock  split of the
Company's  Common Stock.  Accordingly,  all weighted average share and per share
amounts have been restated to reflect the stock split for all periods presented.




                                      F-16
<PAGE>

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


FAIR VALUE OF FINANCIAL INSTRUMENTS

For certain of the Company's  instruments,  including cash and cash equivalents,
accounts receivable and accrued expenses,  the carrying amounts approximate fair
value due to the short maturity of these instruments.  The carrying value of the
Company's  long-term debt approximates its fair value based on the quoted market
prices  for the same or  similar  issues or the  current  rates  offered  to the
Company for debt of the same  remaining  maturities.  The fair value of the loan
from shareholder cannot be estimated due to its related party nature.


USE OF ESTIMATES

In  preparing  financial   statements  in  conformity  with  generally  accepted
accounting  principles,  management  makes estimates and assumptions that affect
the reported  amounts of assets and  liabilities  and  disclosures of contingent
assets and liabilities at the date of the financial  statements,  as well as the
reported  amounts of revenues and expenses during the reporting  period.  Actual
results could materially differ from those estimates.


NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board finalized FASB statements
No. 141,  Business  Combinations  (SFAS 141),  and No. 142,  Goodwill  and Other
Intangible  Assets  (SFAS 142).  SFAS 141 also  requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business  combinations  initiated  after June 30, 2001.  SFAS 141
also requires that the Company recognize acquired intangible assets meet certain
criteria. SFAS 141 applies to all business combinations initiated after June 30,
2001 and for the purchase of business combinations completed on or after July 1,
2001. It also requires,  upon adoption of SFAS 142, that the Company  reclassify
the carrying amounts of intangibles assets and goodwill based on the criteria in
SFAS 141.

SFAS 142  requires,  among  other  things,  that  companies  no longer  amortize
goodwill,  but instead  test  goodwill  for  impairment  at least  annually.  In
addition,  SFAS 142 requires that the Company  identify  reporting units for the
purposes of assessing  potential future  goodwill,  reassess the useful lives of
other  existing   recognized   intangible  assets,  and  cease  amortization  of
intangible  assets with an indefinite  useful life. An intangible  asset with an
indefinite  useful life should be tested for  impairment in accordance  with the
guidance in SFAS 142 is required to be applied in fiscal years  beginning  after
December 15, 2001 to all goodwill and other intangible assets recognized at that
date,  regardless  of when those  assets  were  initially  recognized.  SFAS 142
requires the Company to complete a  transitional  goodwill  impairment  test six
months from the date of adoption.  The Company is also  required to reassess the
useful lives of other  intangible  assets within the first interim quarter after
adoption of SFAS 142.

During 2001, the Company's  business  combinations  were accounted for using the
purchase method. As of December 31, 2001, the net carrying amount of goodwill is
$3,705,981  and software costs is  $4,018,637.  Amortization  expense during the
year ended December 31, 2001 was $1,251,951. Currently, the Company is assessing
but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact
its financial position and results of operations.




                                      F-17
<PAGE>

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SFAS 143, Accounting for Asset Retirement  Obligations,  was issued in June 2001
and is  effective  for fiscal  years  beginning  after June 15,  2002.  SFAS 143
requires  that any legal  obligation  related to the  retirement  of  long-lived
assets be  quantified  and  recorded as a liability  with the  associated  asset
retirement  cost  capitalized  on the balance sheet in the period it is incurred
when a reasonable estimate of the fair value of the liability can be made.

SFAS 144,  Accounting for the Impairment or Disposal of Long-Lived  Assets,  was
issued in August 2001 and is  effective  for the fiscal  years  beginning  after
December 15, 2001. SFAS 144 provides a single,  comprehensive  accounting  model
for impairment and disposal of ling-lived assets and discontinued operations.

SFAS 143 and SFAS 144 will be adopted on their effective dates, material effects
of the adoption, if any, cannot be determined at this time.


NOTE 3.  BUSINESS COMBINATIONS

In February 2001,  Vertical  Computer  acquired a 60% interest in NOW Solutions,
LLC, a company that develops and maintains human resource software,  in exchange
for  $1,000,000.  Also in  February  2001,  NOW  Solutions  purchased  the Human
Resource  Information  Service  Application  Software  assets  ("HRIS")  of Ross
Systems,  Inc. ("Ross") in exchange for $5,100,000 in cash and a promissory note
due to Ross for  $1,000,000.  In  addition,  the  agreement  calls  for  various
earn-out  provisions  to be paid to Ross if certain sales levels are achieved by
NOW Solutions  during the two years  subsequent  to the purchase.  NOW Solutions
acquired a $5,500,000 note payable to finance the Ross  acquisition and used the
excess amount for working capital.  Vertical Computer had pledged a $1.5 million
deposit as collateral  pursuant to a deposit  pledge  agreement to guarantee the
first 24 payments of the loan to finance the purchase of HRIS. Although Vertical
Computer believes it is entitled to a portion of its $1.5 million deposit, it is
currently  in  discussions  with the lender to resolve NOW  Solution's  default.
Until a settlement is reached,  the default by NOW Solutions is cured,  Vertical
Computer pursues legal action, or NOW Solutions  continues to makes its payments
through  February  2003,  Vertical  Computer  will not  obtain  a return  of its
deposit, or any portion thereof.




                                      F-18
<PAGE>

NOTE 3.  BUSINESS COMBINATIONS (CONTINUED)

Arglen Acquisitions,  LLC, ("Arglen") facilitated the NOW Solutions transactions
and acquired a 30% interest in NOW Solutions for services  provided and received
warrants of the Company to  purchase  5% of the total  outstanding  stock of the
Company,  initially equal to 30,763,943  shares.  If, during the last 90 trading
day period of the first year from the date of the issuance of the initial set of
warrants,  the per share value of Vertical  Computer's shares,  adjusted for any
forward or reverse  splits and any other  dilutive  effect,  is less than $0.50,
then  Arglen  will be entitled  to  additional  warrants to purchase  25,000,000
common shares. If, during the last 90 trading day period of the second year from
the date the issuance of the initial set of warrants, the per share value of the
Company,  adjusted  for any  forward  or reverse  splits and any other  dilutive
effect, is less than $1.00, then Arglen,  provided it has not exercised and sold
more than 25% of the 55,763,943  shares  underlying the previous stock warrants,
shall be entitled to additional  warrants to purchase  25,000,000 common shares.
The exercise  price of the warrants is $0.08,  and the warrants are  exercisable
for a period of 5 years from the date the warrants are  registered for resale or
an exemption from registration  becomes available.  Pursuant to the terms of the
operating  agreement of NOW Solutions,  the Company's  interest in NOW Solutions
will be reduced to 51% over three years as  employees of NOW  Solutions  will be
entitled to receive  shares of NOW Solutions'  common stock.  The NOW Solutions'
purchase was accounted for under the purchase method of accounting, with cash of
$5,100,000  paid to Ross and a note payable of $1,000,000 due to Ross.  Vertical
Computer Systems  incurred  $667,000 for Arglen's 30% interest in NOW Solutions,
$798,000  for the  value of the  Vertical  Computer  warrants  issued  to Arglen
(valued using the  Black-Scholes  valuation  model),  $3,800,000  for intangible
assets,  and $229,000 in a finders fee and professional  charges,  $1,800,000 in
goodwill,  all  included  as part of the  purchase  price.  The  Company and NOW
Solutions recognized  approximately  $7,294,000 of goodwill and other intangible
assets in connection with the purchase,  which were being amortized over a three
to eight year period.

In August 2001, the Company acquired 100% of EnFacet,  Inc. for 30,000 shares of
Series  C  4%  Cumulative   Convertible  preferred  stock,  which  eliminate  in
consolidation,  an assumption of approximately  $642,000 in accrued  liabilities
and notes payable, and direct costs of $115,000.

Additionally,  in December  2001, the Company  entered into an option  agreement
with iNet  Purchasing  ("iNet") to purchase  an  additional  interest in iNet in
April 2002 (the Company is currently  negotiating to extend this date),  whereby
Vertical  Computer  would obtain an  aggregate  56%  ownership  interest in iNet
pursuant to the Stock Purchase  Agreement and the Stockholder's  Agreements.  In
accordance  with the option  agreement,  the Company  shall pay $140,000 in four
equal monthly installments beginning in December 2001 and grant stock options to
three iNet  employees,  Basil Nikas,  Robin  Mattern,  and Wayne Savage,  in the
amount of 1,500,000,  1,500,000, and 500,000 shares,  respectively.  The options
are vested,  have a strike price of $0.01,  and are exercisable for a three year
period.  Pursuant  to  the  terms  of  the  Stock  Purchase  Agreement  and  the
Stockholders  Agreements,  if the  Company  exercises  its  option  to  obtain a
majority interest in iNet in April 2002 (the Company is currently negotiating to
extend this date),  the Company shall pay to iNet $860,000 in cash or marketable
securities,  70,000 shares of Series "C" Preferred Stock, and issue additional 3
year  warrants  and  options,  as the case may be,  to  purchase  an  additional
6,000,000  shares of common stock each to Nikas and Mattern and 2,000,000 common
stock  shares to Savage.  The strike  price is the closing  price of the Company
common stock on the date of January 6, 2002,  and, in the event that the Company
does not acquire a majority interest in iNet, these options and warrants will be
automatically cancelled.




                                      F-19
<PAGE>

NOTE 4.  INVESTMENTS

During 2000, the Company paid $400,000 to acquire securities in iNet Purchasing,
Inc. ("iNET"). The Company accounts for the investment at cost. In addition, the
Company  paid  $100,000  to  receive  a  royalty  of 1% on all iNET  sales up to
$500,000 and .5% on all sales thereafter. The royalty period is twenty years and
all payments are to be made on a quarterly basis.  Vertical has not received any
payments.

During 2000, the Company made  immaterial  investments  in four joint  ventures,
which the Company  intends to assist in  development of software  products.  The
Company owns 50% of all the joint  ventures  and  accounts  for the  investments
using the equity  method of  accounting.  As of December 31,  2000,  the Company
fully  reserved for the carrying value of all joint venture  investments,  since
they were still in the  developmental  stages,  had not begun to  recognize  any
revenue, and recovery of the investment was not considered likely.

During 2000, the Company paid $300,000 to acquire 800,000 shares of common stock
of  Flightserv.com,  Inc.  ("FSI").  The Company  accounts for the investment as
securities available for sale with all unrealized gains and losses recognized as
other comprehensive income/(loss), a component of stockholders' equity.

During  2000,  the Company  paid  $250,000  to acquire a 30%  interest in Apollo
Industries,  Inc.  ("Apollo"),  a company  that is in the process of  developing
smart card technology.  The Company accounts for the investment under the equity
method of accounting and recognized a $31,453 equity loss in the  unconsolidated
affiliate  for the year ended  December 31,  2000.  In addition the Company paid
$25,000  to  receive a royalty  of 2% on all  Apollo  sales  until the  original
investment is recouped.  After the original investment is recouped,  the Company
shall receive 1% of all Apollo sales,  up to a maximum of $30,000 per year.  The
royalty  agreement  expires  October  2020.  At December  31,  2000,  due to the
uncertainty  regarding  the recovery of the royalty,  the Company  wrote off the
$25,000. In 2001, Vertical Computer loaned Apollo $24,000, which was due on June
30, 2001 and an additional $24,000 which was due on July 16, 2001. The loans are
secured pursuant to a stock pledge in the amount of 500,000 shares of Apollo for
each of the two loans. Apollo is in default of the two loans and since repayment
is uncertain the Company has fully reserved the  investment and the  outstanding
notes receivable balances at December 31, 2001.


NOTE 5.  RELATED PARTY TRANSACTIONS

During the years ended  December  31, 2001 and 2000,  the Company  paid  Parker,
Mills & Patel LLP ("PMP"), its general legal counsel, approximately $182,000 and
$4,000 in consideration for legal services rendered. William Mills, a partner at
PMP, is also a director of the Company.  During 2001, we issued 4,182,000 shares
of common  stock with a value of  $121,000 to William  Mills of Parker,  Mills &
Patel LLP for partial payment of legal services.

During  2001,  PMP made  advances  of  approximately  $30,000  on  behalf of the
Company.  In exchange,  PMP received a 6% promissory note due January 2002 and 3
year warrants to purchase  300,000 shares of common stock at a purchase price of
$0.014 per share. This note is currently in default.

In February 2000,  Vertical  Computer reached an agreement with Marc Elalouf,  a
shareholder of Externet  World,  in which  246,470,580  common stock shares were
cancelled.   Vertical  Computer  also  recorded  an  additional  $11,000  for  a
receivable due from the former owner.




                                      F-20
<PAGE>

NOTE 5.  RELATED PARTY TRANSACTIONS (CONTINUED)

In October 2000,  Vertical  Computer sold its wholly owned  subsidiary  Externet
World, Inc. for $1,200,000 to Eurovest, Inc., a company of which Terry Washburn,
a former  member of Vertical  Computer's  Board of  Directors,  is an  executive
officer. Eurovest subsequently sold Externet World to two former shareholders of
Vertical Computer and received  147,350,980 shares of Vertical Computer's common
stock. As part of a settlement  agreement,  144,850,000 common stock shares were
cancelled and 2,000,980 shares were retained in trust for Vertical Computer.  As
part of the transaction, Eurovest received fees of $72,000 and 500,000 shares of
Vertical Computer's common stock.

In October 2001,  Vertical Computer executed a $100,000  promissory note with an
unrelated  party.  The note  bears  interest  at 12% per  annum  and all  unpaid
principal and interest was due February 2002. The note is secured by third party
securities  owned by  Vertical  Computer,  which it  intends to sell in order to
repay the loan and by a pledge against the loan by the Mountain Reservoir Corp.,
to sell up to 5,225,000 shares of common stock owned by Mountain Reservoir Corp.
to cover any shortfall.  Mountain Reservoir Corp. is a corporation controlled by
the W5 Family  Trust.  Mr.  Wade,  the  President  and CEO of Vertical  Computer
Systems, is the trustee of the W5 Family Trust. In April 2002, Vertical Computer
entered into an amendment  agreement whereby Vertical and the third party waived
any  default and agreed to  continue  to sell the  400,000  shares of  eResource
Capital  Group  stock,  which  Vertical  pledged  pursuant  to the Stock  Pledge
Agreement as collateral. Vertical Computer further agreed to use the proceeds of
the eResource  Capital Group sales of stock to reduce the obligations  under the
note accordingly.  Pursuant to this amendment, Vertical agreed to make a minimum
payment of no less than  $31,500 by April 5, 2002,  a payment of $8,500 by April
6, 2002, ten (10) weekly  installment  payments of $6,000 beginning on April 15,
continuing  until  all  principal  then  outstanding  with all  interest,  fees,
charges,  and other  amounts owing  hereunder and then unpaid by June 2002.  The
first  $6,000  payment  has not been  paid and the  Company  is  negotiating  an
extension.

In November 2001,  Vertical Computer executed a $100,000 promissory note with an
unrelated  party.  The note  bears  interest  at 12% per  annum  and all  unpaid
principal and interest was due February 2002. The note is secured by third party
securities  owned by  Vertical  Computer,  which it intends to sell to repay the
loan, and by a pledge against the loan by Mountain  Reservoir  Corp., to sell up
to  5,225,000  shares of common  stock owned by Mountain  Reservoir to cover any
shortfall.   In  January  2001,   Vertical  Computer   executed   indemnity  and
reimbursement  agreements  with  Mountain  Reservoir  Corporation  to cover  the
10,450,000  shares of stock  pledged by  Mountain  Reservoir  with regard to the
October and November  2001 notes,  whereby  Vertical  Computer  would  reimburse
Mountain  Reservoir  with an  number  of  shares  equal  to any  shares  sold as
collateral  to cover the  default of any loan.  Mountain  Reservoir  Corp.  is a
corporation  controlled by the W5 Family Trust.  Mr. Wade, the President and CEO
of Vertical  Computer  Systems,  is the trustee of the W5 Family Trust. In April
2002, Vertical Computer entered into an amendment agreement concerning the note,
whereby  Vertical  and the third party  agreed  waive any  default and  Vertical
agreed to make monthly installment  payments in the amount of $7,500 each on the
fifteenth day of each month,  beginning in May 2002. Pursuant to this amendment,
all principal  then  outstanding,  and all interest,  fees,  charges,  and other
amounts  owing  hereunder  and then unpaid shall be paid by the end of September
2002.  The first $7,500 payment has not been paid and the Company is negotiating
an extension.

In December  2001,  Vertical  Computer  executed a $425,000  note payable with a
third  party.  Vertical  Computer  received  proceeds  of  $300,000  and  paid a
commitment fee of $125,000.  The note accrues  interest at 12% per annum and was
due January 31, 2002.  The note is secured by 36,303,932  shares of common stock
of  Vertical  Computer  that is owned by  Mountain  Reservoir  Corporation,  and
15,000,000  shares of common  stock of  Vertical  Computer  that is owned by Mr.
Valdetaro,  Vertical Computer's Chief Technology Officer, to cover any shortfall
in the event of default. Mountain Reservoir Corp. is a corporation controlled by
the W5 Family  Trust.  Mr.  Wade,  the  President  and CEO of Vertical  Computer
Systems,  is the  trustee  of the W5 Family  Trust.  In January  2001,  Vertical
Computer executed separate indemnity and reimbursement  agreements with Mountain
Reservoir Corporation and Mr. Valdetaro to cover their pledges of 36,303,932 and
15,000,000 shares of common stock,  respectively.  Pursuant to these agreements,
Vertical Computer agreed to reimburse  Mountain  Reservoir and Mr. Valdetaro for
any shares  sold as  collateral  to cover the  default of any loan.  The Note is
currently  in default and the  collateral  is  currently  being  transferred  to
Vertical Computer's account to cover the amounts currently due.



                                      F-21
<PAGE>

NOTE 6.  GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets consist of the following:

                                                                 DECEMBER 31,
                                                                     2001
                                                                     ----

         Goodwill                                               $  4,478,397
         Licenses and software costs purchased                     4,477,743
                                                                ------------
         Total                                                     8,956,140
         Less accumulated amortization                           (1,231,522)
                                                                ------------
                                                                $  7,724,618
                                                                ============

Amortization  expense  related to goodwill,  licenses and software assets during
2001 and 2000 was $1,251,951 and $0 respectively.

In August  2001,  the  Company  acquired  the  stock of  Enfacet  for  $757,000,
excluding  the fair  market  value of  $312,000  of  Series C stock  issued  and
eliminated in  consolidation.  The net  liabilities  acquired in 2001 related to
this acquisition are as follows:

                   Accounts payable and accrued expenses           $198,075
                   Notes payable                                    444,000
                                                            ----------------
                   Total Liabilities acquired                      $642,075
                                                            ================

NOTE 7.  PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

                                                             December 31,
                                                                 2001
                                                         ------------------
Equipment                                              $           691,912
Leasehold improvements                                              70,130
Furniture and fixtures                                               2,950
                                                         ------------------
Total                                                              764,991
Less accumulated depreciation                                    (250,848)
                                                         ------------------

                                                       $           514,143
                                                         ------------------

Depreciation  expense for the year ended December 31, 2001 and 2000 was $181,490
and $100,702, respectively.


NOTE 8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued liabilities consist of the following:

                                                             December 31,
                                                                2001
                                                          -----------------

Accounts payable                                        $        1,263,257
Accrued payroll                                                    165,701
Accrued liabilities                                                138,280
Accrued sales taxes                                                158,655
Accrued financing fees                                             200,000
                                                          -----------------
                                                        $        1,925,893
                                                          -----------------



                                      F-22
<PAGE>

NOTE 9.  OTHER RECEIVABLE

Other receivable is primarily comprised of $419,489 in amounts due from Ross for
NOW customer  prepayments on maintenance  contracts for the period subsequent to
the acquisition.  NOW is withholding  payment of $250,000 on the note payable to
Ross as an offset to this receivable.


NOTE 10. NOTES PAYABLE AND CONVERTIBLE DEBT

<TABLE>
<S>                                                                                                                  <C>
Note payable in the amount of $5,500,000 to Coast Bank,  bearing  interest at prime plus 1.5% (prime
was 4.75% at December 31, 2001),  monthly principal and interest  payments of $91,500,  due February
2004.  NOW  Solutions  is in violation  of certain of the loan  covenants.  The note is secured with
all of the assets of NOW Solutions,  LLC, a 60% subsidiary and a $1,500,000  security deposit by the
Company.  Vertical  Computer had pledged a $1.5 million deposit as collateral  pursuant to a deposit
pledge  agreement  to  guarantee  the first 24 payments of the loan to finance the purchase of HRIS.
Although Vertical  Computer believes it is entitled to a portion of its $1.5 million deposit,  it is
currently in discussions  with the lender to resolve NOW Solution's  default.  Until a settlement is
reached,  the default by NOW Solutions is cured,  Vertical  Computer  pursues  legal action,  or NOW
Solutions  continues to makes its payments through February 2003,  Vertical Computer will not obtain
a return of its deposit, or any portion thereof.  As such the entire balance is recorded as current.                 $ 4,676,819

Note payable,  unsecured,  in the amount of $1,000,000 to Ross, the note is non-interest bearing and
was recorded  with a discount of $79,042,  payments of $250,000  and  $750,000  were due in February
2002 and 2003,  respectively.  The February 2002 payment has not been made, pending an offset to the
Ross receivable.                                                                                                         920,958

Note payable in the amount of $27,558 to Parker,  Mills, Patel, a related party, bearing interest at
6%, unsecured, principal and interest due at January 2002.  The note is delinquent.                                       27,558

Note  payable  in the  amount of $28,190 to Luiz  Valdetaro,  an  officer  of the  Company,  bearing
interest at 10%, unsecured, principal and interest due on demand.                                                         28,190

Note  payable in the amount of  $100,000  to Robert  Farias,  bearing  interest  at 12%,  secured by
eResource  Capital  Group and Vertical  Computer  common  stock,  payable  with a $46,000  principal
payment due by April 15,  2002,  and any  outstanding  principal  and interest is due June 10, 2002.
The payment is delinquent.                                                                                               100,000

Note  payable in the amount of  $100,000  to Robert  Farias,  bearing  interest  at 12%,  secured by
Vertical  Computer common stock,  payable with monthly  principal  payments of $7,500 commencing May
2002 and outstanding principal and interest is due September 30, 2002.                                                   100,000

Note  payable in the amount of $280,000 to Robert  Farias,  bearing  interest at 4%,  secured by the
SiteFlash  technology,  payable with three principal  payments of $5,000 commencing in May 2002, and
$10,000  monthly  payment  commencing in August 2002 and  outstanding  principal and interest is due
September  1, 2004.  The May 1, 2002  payment  has not been made and the Company is  negotiating  an
extension.                                                                                                               280,000

Note  payable in the amount of  $211,137  to the  Berche  Family  Trust,  bearing  interest  at 12%,
secured by 400,000 shares of eResource (the marketable  security available for sale), with principal
and interest due at maturity on July 31, 2002.                                                                           211,137

Note payable in the amount of $425,000,  to Brighton  Opportunity Fund, LP, bearing interest at 12%,
secured by 51,303,932  shares of the  Company's  common  stock,  with  principal and interest due at
maturity on January 31, 2002.  The note is delinquent.                                                                   425,000
</TABLE>



                                      F-23
<PAGE>

NOTE 10.  NOTES PAYABLE AND CONVERTIBLE DEBT (CONTINUED)

<TABLE>
<S>                                                                                                                  <C>
Note payable in the amount of  $350,000 to Robert Mokhtarian, bearing interest
at 8%, unsecured, principal and interest due at maturity on February 28, 2003.                                           350,000

Note  payable  in the amount of  $84,000  to Robert  Farias  dated June 1, 2001,
bearing interest at 8%, unsecured, with principal and interest due at maturity
on June 1, 2002.                                                                                                          84,000

Note payable in the amount of $10,000 to Daniel Peterson, bearing interest at 8%, unsecured,
principal and interest due at maturity on June 1, 2002.                                                                   10,000
                                                                                                                      ==========

                   Total notes payable                                                                                 7,213,662

                   Less: current maturities, net of discount                                                           5,908,662
                                                                                                                      ----------
                   Long-Term portion of notes payable                                                                 $1,305,000
                                                                                                                      ==========
</TABLE>

The minimum  principal  payments,  including the discount of $79,042 required in
excess of one year at December 31, 2001 are as follows:

                     YEAR ENDING DECEMBER 31,                         AMOUNT
                                                              ---------------
                     2002                                        $ 5,908,662
                     2003                                          1,220,000
                     2004                                             85,000
                                                                 -----------
                     Total                                       $ 7,213,662
                                                                 ===========

CONVERTIBLE DEBENTURES

<TABLE>
<S>                                                                                                          <C>
            Convertible debentures dated September 11, 2001 payable to Cornell Capital Partners, LP,
            bearing interest at 6%, convertible into shares of the Company's common stock at either 120%
            of the closing bid price on the date of agreement  or 80% of the 3 lowest  closing bid prices
            20 days prior to the conversion.  The debentures are convertible at the option of the holder,
            at any time after the  purchase.  Principal  and interest are due at maturity on September 1,
            2006                                                                                              $ 125,000

            Convertible  debentures  dated  October  5, 2001  payable to Cornell  Capital  Partners,  LP,
            bearing interest at 6%, convertible into shares of the Company's common stock at either 120%
            of the closing bid price on the date of agreement or 80% of the 3 lowest closing bid prices
            20 days prior to the conversion.  The debentures are convertible at the option of the holder,
            at any time after the purchase.  Principal and interest are due at maturity on October 5, 2006      140,000
                                                                                                              ---------
            Total convertible debentures                                                                      $ 265,000
                                                                                                              =========
</TABLE>

NOTE 11.  INCOME TAXES

At December 31, 2001, the Company had available  federal and state net operating
loss  carryforwards  of  approximately  $9,300,000 and $4,600,000 for income tax
purposes,  which expire in varying amounts through 2021 and 2006,  respectively.
Among potential  adjustments which may reduce available loss carryforwards,  the
Internal  Revenue Code of 1986, as amended,  (IRC),  reduces the extent to which
net operating loss  carryforwards may be utilized in the event there has been an
"ownership change" of a company as defined by applicable IRC provisions.


                                      F-24
<PAGE>

NOTE 11.  INCOME TAXES (CONTINUED)

Our operations  generate  permanent and temporary  differences for depreciation,
amortization,   valuation   allowances  and  expense  reserves.   The  temporary
differences  and the net  operating  loss  carryforward  generated  deferred tax
assets of approximately  $5,400,000. We have recorded a 100% valuation allowance
against our deferred tax assets, including net operating loss carryforwards,  in
accordance  with the provisions of Statement of Financial  Accounting  Standards
No. 109.  Such  allowance  is  recognized  if,  based on the weight of available
evidence,  it is more likely than not that some  portion or all of the  deferred
tax assets will not be realized.


NOTE 12.  COMMON STOCK OPTIONS/WARRANTS

The Company may issue a maximum of 60,000,000  options to acquire  shares of its
common   stock  under  its  stock  option   plan.   Most   options   issued  are
non-assignable,  non-transferable,  have a  vesting  period of one year from the
date of grant and usually expire five years from the date of grant.

As of December 31, 2001, the Company had a subscription receivable of $2,000 due
in relation to warrants that were exercised.

On  December  27,  2000,  the Company  executed a  rescission  agreement  with a
majority of the  individuals  that  exercised  their stock options during fiscal
2000. As part of the rescission,  the individuals returned the previously issued
shares in exchange for the  cancellation  of the notes they executed to purchase
the options.  The Company recognized $95,625  compensation expense in connection
with the  rescission.  During  fiscal  2000,  the Company  received  proceeds of
$1,792,204 from the exercise of 59,310,000 options and warrants.

Option activity within each plan is as follows:

<TABLE>
<CAPTION>
                                                                               Non-                                Weighted
                                                        Incentive            Statutory                              Average
                                                      Stock Option             Stock                                 Price
                                                          Plans               Options            Warrants          Per Share
                                                     ----------------      --------------      --------------     ------------
<S>                                                      <C>                 <C>                 <C>            <C>
Balance outstanding, December 31, 1999                    10,200,000          21,400,000          24,000,000    $        0.03
Options/warrants granted range from $2.00 to
  $0.05 per share                                          2,300,000           2,400,000           9,836,364             0.36
Options/warrants exercised range from $0.50 to
  $0.01 per share                                        (10,710,000)        (22,400,000)        (26,200,000)           (0.04)
Options/warrants rescinded range from $0.50 to
  $0.01 per share                                         10,710,000          21,000,000                   -             0.04
                                                     ----------------      --------------      --------------
Balance/warrants outstanding, December 31, 2000           12,500,000          22,400,000           7,636,364             0.17
Options/warrants granted range from $0.01 to
  $.11 per share                                           8,940,000           3,500,000         126,687,399             0.07
                                                     ----------------      --------------      --------------     ------------
Options/warrants outstanding , December 31, 2001          21,440,000          25,900,000         134,323,763             0.10
                                                     ================      ==============      ==============     ============
</TABLE>



                                      F-25
<PAGE>

NOTE 12.  COMMON STOCK OPTIONS/WARRANTS


Information  relating to stock  options/warrants at December 31, 2001 summarized
by exercise price are as follows:

<TABLE>
<CAPTION>
                                                               Outstanding                              Exercisable
                                              ----------------------------------------------    -----------------------------
                                                            Weighted Average                          Weighted Average
                                              ----------------------------------------------
                                                                  Life           Exercise                         Exercise
Exercise Price Per Share                         Shares         (Months)          Price            Shares           Price
                                              --------------   ------------    -------------    -------------    ------------
<S>                                             <C>                   <C>    <C>                  <C>          <C>
Incentive Stock Options:
   $0.01 - $0.50                                 19,940,000           27.5   $         0.05       19,940,000   $       0.050
   $0.51 - $1.25                                  1,500,000           18.0             1.25        1,500,000            1.25
                                               -------------   ------------    -------------    -------------    ------------
                                                 21,440,000           26.8   $         0.13       21,440,000   $        1.30
                                               =============   ============    =============    =============    ============
Nonstatutory Stock Options:
   $0.01 - $0.50                                 25,100,000           33.4   $         0.06       25,100,000   $        0.06
   $0.58 - $2.00                                    800,000           19.9             1.11          800,000            1.11
                                               -------------   ------------    -------------    -------------    ------------
                                                 25,900,000           32.9   $         0.09       25,900,000   $        1.17
                                               =============   ============    =============    =============    ============

Warrants
   $0.01 - $0.35                                134,323,763           40.6   $         .009       51,992,953   $        0.08
                                               =============   ============    =============    =============    ============
</TABLE>

All stock options  issued to employees  have an exercise price not less than the
fair market value of the Company's common stock on the date of the grant, and in
accordance with accounting for such options utilizing the intrinsic value method
there is no related compensation expense recorded in the Company's  consolidated
financial  statements.  Had compensation cost for stock-based  compensation been
determined based on the fair value of the grant dates consistent with the method
of FASB 123,  the  Company's  net loss and loss per  share  for the years  ended
December 31, 2001 and 2000 would have been  increased  to the pro forma  amounts
presented:

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

Net loss attributable to common stockholders       $(9,456,607)  $ (15,053,907)
Pro forma                                          $(9,527,592)  $ (15,371,423)

Basic and diluted loss per common share            $     (0.02)  $      (0.02)
Pro forma                                          $     (0.02)  $      (0.03)

The fair value of option grants is estimated on the date of grant  utilizing the
Black-Scholes   option-pricing   model  with  the  following   weighted  average
assumptions  for  grants;  expected  life of  options  was 1.5  years,  expected
volatility of 66%,  risk-free  interest rate of 5% and a 0% dividend yield.  The
weighted  average  fair value on the date of grants for options  granted  during
2001 was $0.17 per option.


NOTE 13.  STOCKHOLDERS' EQUITY


COMMON STOCK

During  2000 the  Company  issued  879,688  shares of common  stock for  various
marketing  services.  The  Company  recognized  an expense of  $238,344  for the
services, which was equal to the fair market value of the shares on the dates of
issuance.

In August 2001,  the Company  entered  into an Equity Line of Credit  agreement,
whereby up to  $10,000,000 of the Company's  common stock may be purchased.  The
shares must be registered before the sale and the shares can be purchased at 95%
of the closing  bid price,  on the date of  purchase.  The equity line of credit
contains a fee of  $400,000  payable  in common  stock in two  installments.  In
September 2001, Vertical Computer issued 7,142,857 shares of common stock valued
at  $200,000  for the first  installment  and  12,500,000  shares as part of the
second installment, which was paid in March 2002.




                                      F-26
<PAGE>

NOTE 13.  STOCKHOLDERS' EQUITY (CONTINUED)

During the year ended December 31, 2001, the Company issued 35,341,058 shares of
common stock for various services. The Company recognized an expense of $572,950
for the  services,  which is equal to the fair market value of the shares on the
dates of issuance.


PREFERRED STOCK

In February 2000, the Company raised  $9,000,000,  net of $1,000,000 in offering
costs,  in  connection  with the issuance of 50,000 shares of Series A Preferred
stock.  The Series A shares have cumulative  dividends of 4% and are convertible
into 500 shares of common stock for every one share of Series A.

In  connection  with the Series A  issuance,  the  Company  recognized  a deemed
dividend of $10,000,000, which is the beneficial conversion feature the Series A
shareholders  received when they  purchased  the shares,  limited to the maximum
amount of proceeds raised by the Company.

During  fiscal 2001,  the Company  paid cash  dividends of $100,000 or $4.22 per
share of Series A, in  addition  to having  $513,712  and  $364,932  of  accrued
dividends at December 31, 2001 and 2000, respectively.

At  December  31, 2001 and 2000,  the  Company had 7,200  shares of Series B 10%
cumulative convertible preferred stock outstanding. The Series B has a par value
of $0.001 and is  convertible  into 3.788  shares of common  stock for every one
share of Series B. The Series B is not considered  equity of the company,  since
the Series B  shareholders'  are entitled to receive a portion of any securities
or assets  that are the  result of the  Company  executing  a  recapitalization,
consolidation, sale or merger ("Special Transactions").

At  December  31, 2001 and 2000,  the Company had 25,000  shares of Series D 15%
cumulative convertible preferred stock outstanding. The Series D has a par value
of $0.001 and is  convertible  into 3.788  shares of common  stock for every one
share of Series D. The Series D is not considered  equity of the Company,  since
the Series D  shareholders'  are  entitled  to receive  the same  portion of any
securities  or assets  as the  Series B  shareholders'  are  entitled  to on any
Special Transactions.

At  December  31,  2001,  the Company  had issued  80,000  shares of Series C 4%
cumulative  convertible  preferred  stock, of which 30,000 was issued to Enfacet
and, accordingly,  was eliminated in consolidation.  The remaining 50,000 shares
were issued at a value of $350,000 for the acquisition of intellectual property.
The Series C 4% Cumulative has a par value of $100 and is  convertible  into 400
shares of common  stock  for  every one share of Series C. The  dividend  on the
Series  "C" 4%  Cumulative  Convertible  Preferred  Stock  has  cumulative  cash
dividends  accruing at the annual rate of 4% of the  Liquidation  Value  payable
quarterly  on the first day of April,  July,  October  and  January in each year
beginning  the  later of July 1,  2000.  The  initial  dividend  paid  after the
original  issuance of any shares of the Series "C" Preferred  Stock shall accrue
from such date of  issuance on a pro rata  basis.  In the event of  liquidation,
each share will be entitled to a  preference  of $100,  plus  accrued but unpaid
dividends, prior to the holders of any junior class of stock.

NOTE 14.  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Supplemental  cash flow  information  for the years ended  December 31, 2001 and
2000 are as follows:

                                                           DECEMBER 31,
                                                           ------------
                                                      2001             2000
                                                      ----             ----

                Cash paid for interest               $  535           $  196
                                                     =======          =======


                                      F-27
<PAGE>

NOTE 14.  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (CONTINUED)

Non-cash  financing  activities  for the years ended  December 31, 2001 and 2000
were as follows:

<TABLE>
<CAPTION>
                                                                                                     December 31,
                                                                                          ------------------------------------
                                                                                              2001                  2000
                                                                                          ----------------     ---------------
<S>                                                                                     <C>                   <C>
Series A cumulative stock dividends                                                     $         488,712     $      (153,821)

Series C cumulative stock dividends                                                                25,000                   -

Deemed dividend                                                                                       -            10,000,000

Exercise of 35,900,000 stock options for notes receivable                                             -            (1,443,700)

Rescission of 31,700,000 stock options and related notes receivable                                   -             1,441,700

Cancellation of 246,470,580 shares of common stock in connection with litigation
   settlement                                                                                         -                (2,465)

Debt incurred to acquire NOW Solutions net of a discount of $79,042                             6,020,958

Issuance of 30,764,943 warrants to purchase shares of the
   Company's common stock for the acquisition of NOW Solutions                                    798,500                   -

Liabilities in excess of assets acquired for the acquisition of Enfacet                           757,075                   -

Issuance of 7,142,857 shares of the Company's common stock
   for the equity line of credit with Cornell Capital                                             200,000                   -

Issuance of 35,341,058 shares of the Company's
   common stock for professional services                                                         572,950             238,344

Issuance of 50,000 shares of series C preferred 4% cumulative
   convertible stock for the acquisition of intellectual property                                 350,000                   -

Non-employee compensation expense for stock options issued                                        207,903           1,303,264

Beneficial Conversion on 6% convertible debentures issued                                          66,250                   -
</TABLE>

In addition the Company issued 30,000 shares of series C preferred 4% cumulative
convertible stock, with a fair market value of $312,000,  for the acquisition of
Enfacet.  The stock was  issued in  Enfacet's  name and,  accordingly,  has been
eliminated in consolidation.


NOTE 15.  COMMITMENTS AND CONTINGENCIES


COMMITMENTS

The Company leases a building  expiring in December 2004.  Future minimum rental
payments required in excess of one year at December 31, 2001 are as follows:

                Year ending December 31,                   Amount
                ---------------------------------------------------
                   2002                                 $  286,168
                   2003                                    480,890
                   2004                                     95,989
                   2005                                      7,596
                ---------------------------------------------------
                   Total                                $  870,643
                ===================================================



                                      F-28
<PAGE>

NOTE 15.  COMMITMENTS AND CONTINGENCIES (CONTINUED)

Rental expense for the years ended December 31, 2001 and 2000 was  approximately
$321,673 and $97,373, respectively.

In connection  with the Company's  joint  venture  investments,  the Company has
pledged to fund up to $500,000 of an investment in India,  of which $161,693 has
already been provided at December 31, 2001. There is also another  commitment to
fund up to $100,000 of a software joint venture investment, of which $91,983 has
already been provided at December 31, 2001.

In connection with the Ross Acquisition (ROSS), NOW Solutions agreed to pay Ross
an  additional  $750,000  if new  license  sales,  within  the first year of the
purchase exceed  $9,800,000 or if new license sales are less than $9,800,000 but
greater than  $8,500,000,  NOW Solutions  will pay Ross an additional  $250,000.
Within the second year from the purchase date of NOW  Solutions,  if new license
sales exceed  $11,500,000,  NOW Solutions will pay Ross an additional  $250,000.
For each  additional  $500,000  of new license  sales,  in excess of the maximum
earnout  amount,  in either the first or second year from the purchase date, NOW
Solutions  will pay Ross a bonus of  $100,000,  limited to a maximum of $250,000
for the first year and $500,000 for the second year.


ROYALTIES

On December 16, 1999,  the Company  acquired  the  software  rights to EMILY,  a
computer language,  for $5,000. As part of the agreement,  the Company agreed to
pay royalties every 6 months,  based on the net sales of products sold that were
developed  using the EMILY computer  language.  Royalties range from 1% to 5% of
net sales.  There were no sales for the years ended  December 31, 2001 and 2000,
respectively.

EMPLOYMENT CONTRACTS

In December  2001,  Vertical  Computer  executed an  employment  agreement  with
Richard Wade  pursuant to which Mr. Wade serves as CEO and President of Vertical
Computer.  This employment agreement replaces the previous employment agreement.
Pursuant to the terms of the December 2001 employment  agreement,  Mr. Wade will
receive an annual base salary of $300,000,  and the issuance of 5-year  warrants
to purchase  20,000,000  shares Vertical Computer common stock at a strike price
of  $0.10  per  share  and  5-year  warrants  to  purchase   600,000  shares  of
non-dilutable  stock Mr. Wade is also  entitled to an annual  bonus from a bonus
pool for executives equal to 5% of Vertical  Computer's  taxable income (without
deduction  for  depreciation  Mr. Wade's share of the bonus pool is equal to the
percentage of his annual base  compensation  to the total of the combined annual
base  compensation  of all executives in the pool. In the event the agreement is
terminated  by Mr. Wade's  death,  his estate shall be entitled to  compensation
accrued to the time of death plus the lesser of one year's base  compensation or
the compensation due through the remainder of the employment term.

In addition, the Company is committed under two employment  agreements,  one for
an annual  salary of $85,000 which expired in January 2002 and the second for an
annual salary of $150,000, which expires in December 2002 and has a renewal term
of two years at the Company's option.

OPERATING AGREEMENTS

NOW Solutions,  the Company's 60% owned  subsidiary  has an operating  agreement
with the Company and the other largest  shareholder,  in which NOW agreed to pay
the  Company  an  annual  management  fee  of  $50,000  and  the  other  largest
shareholder  an annual  management  fee of  $100,000.  The  management  fees are
payable on a monthly basis.



                                      F-29
<PAGE>

NOTE 15.  COMMITMENTS AND CONTINGENCIES (CONTINUED)


LAWSUITS

The  Company  is,  from time to time,  involved  in various  lawsuits  generally
incidental  to its  business  operations,  consisting  primarily  of  collection
actions  and  vendor  disputes.  In the  opinion  of  management,  the  ultimate
resolution of these matters,  if any, will not have a significant  effect on the
financial position, operations or cash flows of the Company.

In  addition,  we are  involved in the  following  litigated  matters.  The case
entitled,  MARGARET GRECO, ET AL., V. VERTICAL COMPUTER SYSTEMS,  INC., filed in
United States  District Court for the Eastern  District of New York (Case No. 00
Civ. 6551 (DRH)), involves allegations that the plaintiffs sustained damage as a
result of an alleged improper rescission of a subscription  agreement based on a
November 1999 private  placement  memorandum.  Plaintiffs  seek in excess of $18
million in damages based on the alleged increase in value of the stock since the
private  placement.  We believe  this  matter is without  merit and we intend to
vigorously defend this action.

A second matter,  entitled LE SOCIETE  FRANCAISE DE CASINOS V. VERTICAL COMPUTER
SYSTEMS, INC., was filed in Los Angeles County,  California,  Superior Court, on
January 19, 2001.  This action was filed by a former  customer ("Le Societe") of
Externet  World,  Inc., a wholly owned  subsidiary,  which claimed that Vertical
Computer was liable to it for in excess of $500,000 in costs  allegedly paid for
an Internet casino  software  package to be developed and maintained by Externet
World,  Inc. The plaintiff  also alleged that Vertical  Computer has breached an
agreement to pay the disputed sums flowing out of its October 2000 settlement of
litigated  matters  with  two  former  shareholders  of  Vertical  Computer.   A
settlement  agreement  has been  executed  and a dismissal  was filed in January
2002. As part of the  settlement  agreement,  the parties agreed that Le Societe
received   $400,000  and  the  remaining   $100,000  held  in  escrow,   net  of
approximately $35,000 in other costs, was distributed 60% to the Company and 40%
to Le Societe.

On April 10, 2002, Vertical Computer appointed a fifth representative to the Now
Solutions' Executive Committee.  On April 12, 2002, Vertical Computer received a
letter from Arglen  Acquisitions  LLC, a member of Now Solutions  LLC,  accusing
Vertical  Computer  of  defaulting  on  its  obligations  under  Now  Solutions'
Operating Agreement by failing to obtain a waiver of default from Now Solutions'
lender,  Coast Business  Credit.  The letter further stated that the default has
triggered the dissolution of Now Solutions,  and authorizes Arglen  Acquisitions
to  acquire  Vertical  Computer's  ownership  interest  in  Now  Solutions  at a
discounted price. On May 8, 2002,  Vertical  Computer demanded  arbitration from
Arglen Acquisitions seeking to enforce its rights under the Operating Agreement,
including the  appointment  of the fifth  representative  to the Now  Solutions'
Executive  Committee.  On May 9, 2002,  Arglen  Acquisitions  filed a Demand for
Arbitration  and Statement of Claim against  Vertical  Computer.  In its demand,
Arglen  Acquisitions  alleged  that  Vertical  Computer  is in  default  of  its
obligations under the Operating Agreement.  Arglen is seeking to enjoin Vertical
Computer  from  appointing  a fifth  member of the  Executive  Committee  of Now
Solutions and other  actions,  as well as seeking  specific  performance  of the
default provisions of the Operating  Agreement,  including the right to purchase
Vertical Computer's interest in Now Solutions.  Vertical Computer believes these
allegations are without merit.  Vertical  Computer  intends to defend its rights
and to assert its own claims against Arglen Acquisitions.


NOTE 16.  SUBSEQUENT EVENTS

In January 2002, the Company and Taurus Global LLC agreed to extend a consulting
services agreement for six months. In consideration of Taurus Global's services,
the Company will pay a monthly fee of $12,500 and issued an  additional  100,000
warrants on the same terms as the July 2001 consulting services  agreement.  The
warrants  have  vested and are  exercisable  for five years from  issuance  at a
strike  price equal to the fair market  value of the Company 's common  stock on
the day of grant.  The  Company  has the option to pay the monthly fee in common
stock  valued  at 95% of the  average  closing  price 3  trading  days  prior to
issuance.  In the event the  proceeds of the stock  result in greater than a 20%
profit  or loss  for the  monthly  fee,  Taurus  or the  Company  shall  pay the
difference in profit or loss, as applicable, at the end of the term. The Company
may buyback any unsold shares of stock at any time.

In January 2002, the Company  executed  indemnity and  reimbursement  agreements
with Mountain  Reservoir  Corporation  to cover the  10,450,000  shares of stock
pledged  by  Mountain  Reservoir  Corporation  with  regard to the  October  and
November 2001 notes,  whereby the Company  would  reimburse  Mountain  Reservoir
Corporation  with an number of shares equal to any shares sold as  collateral to
cover the  default of the  loans.  Mountain  Reservoir  Corp.  is a  corporation
controlled by the W5 Family Trust,  of which Mr. Wade is a trustee.  Mr. Wade is
President and CEO of the Company.

In January 2002,  the Company  executed  separate  indemnity  and  reimbursement
agreements with Mountain Reservoir  Corporation and Mr. Valdetaro to cover their
respective  36,303,932 and 15,000,000 shares of common stock pledged by Mountain


                                      F-30
<PAGE>

Reservoir  Corporation and Valdetaro in connection with the $425,000 note issued
in December  2001,  whereby  the  Company  would  reimburse  Mountain  Reservoir
Corporation  and  Valdetaro  with the  respective  number of shares equal to any
shares  sold as  collateral  to  cover  the  default  of any  loan.  The Note is
currently in default and the  collateral  is currently  being sold by the lender
account to cover the  amounts  currently  due.  Mountain  Reservoir  Corp.  is a
corporation  controlled by the W5 Family Trust,  of which Mr. Wade is a trustee.
Mr. Wade is President and CEO of the Company.



NOTE 16.  SUBSEQUENT EVENTS (CONTINUED)

In March 2002, the Company  issued a $100,000  convertible  debenture.  The debt
accrues  interest  at 5% per annum  and is due  March  2004.  The  debenture  is
convertible  into shares of common stock at either 120% of the closing bid price
on the date of agreement or 80% of the lowest closing bid prices 5 days prior to
the  conversion.  The debenture is convertible at the option of the holder,  any
time after purchase.  The holder of the debentures is a third-party  individual.
As of April 15, 2002, no conversions have taken place.

In April  2002,  a $180,000  note that bears  interest  at 12% per annum,  which
Vertical issued in August 2001 and which was due February 2002, was amended such
that the amount on the note was  increased to $211,136 and the maturity date was
extended so that the note will be payable in August 2002. In addition,  interest
on  $146,420  will  accrue  beginning  on August 17,  2001 and  interest  on the
remaining  $64,716 will accrue  beginning on September  27, 2001.  In connection
with the note,  the Company  issued  warrants to purchase  500,000 shares of its
common stock.  The Company pledged third party  securities of eResource  Capital
Group that is holds.  These shares are available for sale as collateral  for the
note. The warrants vested  immediately,  have a strike price of $0.028 per share
and are  exercisable  for three years from issuance.  The value of the warrants,
$5,000 (valued using the  Black-Scholes  valuation  model) has been deferred and
will be amortized over the term of the loan.

In April 2002,  the Company  entered  into an amendment  agreement  concerning a
$100,000  promissory  note that  Vertical  issued in October  2001,  which bears
interest  at 12% per  annum  and  was  due in  February  2002.  Pursuant  to the
amendment,  Vertical and the third party waived any default,  and Vertical  sold
400,000 shares of eResource Capital Group stock, which Vertical pledged pursuant
to the Stock Pledge  Agreement as collateral.  The Company further agreed to use
the  proceeds  of the  eResource  Capital  Group  sales of stock to  reduce  the
obligations  under the note  accordingly.  Pursuant to this amendment,  Vertical
agreed to make a minimum  payment of no less than  $31,500  by April 5, 2002,  a
payment  of $8,500 by April 6, 2002,  ten (10)  installment  payments  of $6,000
beginning on April 15,  continuing until all principal then outstanding with all
interest,  fees,  charges,  and other amounts owing hereunder and then unpaid by
June  2002.  The  first  $6,000  payment  has not bee  paid and the  Company  is
negotiating an extension.

In April 2002,  the Company  entered  into an amendment  agreement  concerning a
$100,000  promissory  note that  Vertical  issued in  November  2001 that  bears
interest  at 12%  and was  due in  February  2002.  Pursuant  to the  amendment,
Vertical and the third party  agreed  waive any default and  Vertical  agreed to
make monthly  installment  payments in the amount of $7500 each on the fifteenth
day of each  month,  beginning  in May 2002.  Pursuant  to this  amendment,  all
principal then outstanding,  and all interest,  fees, charges, and other amounts
owing  hereunder and then unpaid shall be paid by the end of September 2002. The
May 15,  2002  payment  has not been  made and the  Company  is  negotiating  an
extension.

In April 2002, the Company  entered into an amendment  agreement  concerning the
$280,000  note issued in  connection  with the  purchase  of various  intangible
assets by Vertical that bears interest at 4% per annum and was due in June 2004.
Pursuant to the terms of the  amendment,  Vertical and the third party agreed to
extend the date for which the remaining three $5,000 installment  payments would
be due to the first day of each month, beginning in May 2002 and the time to pay
all remaining $10,000 installments was extended so that each $10,000 installment
would be due and payable on the first day of each month  beginning  on August 1,
2002,  and shall  continue until the principal has been paid in full. All unpaid
amounts are due  September  2004.  The May 1, 2002 payment has not been made and
the Company is negotiating an extension.


NOTE 17.  CONCENTRATION OF RISK

During  fiscal  2001,  98%  of the  Company's  net  sales  were  made  up of NOW
Solutions'  client  base.  NOW  Solutions  had  one  client  who  accounted  for
approximately  5.6% of its total  revenues.  During  fiscal 2000,  there were no
significant customers.




                                      F-31





<PAGE>

                                    PART III


ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT

         Vertical  Computer's  present  directors and executive  officers are as
follows:

   NAME                   AGE    POSITION

   Richard S. Wade        58     President, Chief Executive Officer and Director
   William K. Mills       43     Secretary and Director

RICHARD S. WADE, AGE 58, PRESIDENT, DIRECTOR

         Richard  S.  Wade is  President  of  Vertical  Computer  and has been a
director since October 1999.  Before coming to Externet World, Inc. in mid-1999,
and then  transitioning to what is now Vertical  Computer in late 1999, Mr. Wade
held a number of executive positions with companies in the Pacific Rim from 1983
through  early  1999,  including  the  position  of Chief  Operating  Officer of
Struthers  Industries,  Inc.,  a public  company  in the  business  of  wireless
applications.  In March 1998,  Struthers  Industries,  Inc. filed a petition for
bankruptcy  under the Bankruptcy  Act. Prior to these executive  positions,  Mr.
Wade spent  over ten years with Duty Free  Shoppers,  Inc.,  culminating  in his
attaining the position of President,  U.S.  Division from 1978 to 1981. Over the
course of his career, Mr. Wade has accumulated  experience in retail operations,
distribution,  and financial matters. Mr. Wade is a certified public accountant,
earning his Bachelor of Science in Accounting at Brigham Young  University and a
Master of Science in Business Policy from Columbia University Business School.


WILLIAM K. MILLS, AGE 43, SECRETARY, DIRECTOR

         William K. Mills has been a director  since December 2000. Mr. Mills is
a founding  partner of Parker Mills & Patel LLP, where he specializes in complex
commercial  business  representations,  including  transactional  and litigation
matters, such as legal malpractice,  intellectual property and general corporate
and governmental  representations  since 1995.  Between 1991 and 1994, Mr. Mills
was a senior  attorney  and partner  with Lewis,  D'Amato,  Brisbois & Bisgaard,
prior to which he was a senior  attorney with Radcliff & West from 1989 to 1991,
senior associate with Buchalter, Nemer Fields & Younger from 1987 to 1991 and an
attorney with Daniels,  Baratta & Fine from 1982 to 1987. Mr. Mills holds a J.D.
from UCLA Law School and an A.B. in American  Government  from Harvard  College.
Active in  professional  and community  organizations,  he has served as General
Counsel to the  California  Association  of Black  Lawyers,  a member of the Los
Angeles County Bar Judicial  Appointments  Committee,  and a Board Member of the
John M. Langston Bar  Association.  Mr. Mills is also a Board Member of the Didi
Hirsch Dental Health Foundation. He has served on the boards of United Way's Los
Angeles  Metropolitan  Region Board, the Los Angeles City Ethics  Commission and
the Los Angeles County Judicial Procedures Commission.

         There are no family relationships between any of the executive officers
or directors.

         Directors are elected at the Annual Meeting of  Shareholders  and serve
until their  successors have been elected and qualified.  Officers are appointed
by and serve at the discretion of the Board of Directors.

         Vertical  Computer's  former  directors  were Dr. Terry  Washburn,  who
became a director in June 2000 and resigned in April 2001, and Gary Freeman, who
became a director in February 2001 and resigned in April 2001.


COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF 1934

         To the best of  management's  knowledge,  William  Mills did not timely
file a Form 3 to  report  his  appointment  to our Board of  Directors  or as an
officer of our Company;  and Richard Wade filed a Form 5 reporting a transfer of
shares during fiscal 2001.






                                       35
<PAGE>

SIGNIFICANT EMPLOYEES


         LUIZ VALDETARO, AGE 43, CHIEF TECHNOLOGY OFFICER

         Mr.  Valdetaro  was  previously  a  consultant  (1993-1997)  and  Chief
Technology  Officer  (1997-1999)  of  Diversified  Data  Resources,  a  software
company.  Mr.  Valdetaro  helped to implement the first PC to Mainframe in Latin
America in the late 1970s.  Mr.  Valdetaro  also developed a product called ACE.
ACE, an expert based system written in C and assembler  using HLLAPI to automate
the operations of IBM mainframes which was sold to Diversified Data Resources in
1991. Mr.  Valdetaro,  a member of Who's Who Executive Club prior to being Chief
Technology Officer of Diversified Data Resources,  was a Senior Systems Engineer
for  System/One.  Prior to that he was a  senior  systems  engineer  for Bank of
America.  Mr. Valdetaro is a graduate of Pontific  Catholic  University,  Rio de
Janeiro,  Brazil with a B.S.  in  Electronic  Engineering  and a M.S. in Systems
Engineering.


         VASU VIJAY, AGE 39, EXECUTIVE VICE-PRESIDENT, TECHNOLOGY STRATEGY

         As the President of EnFacet,  Mr. Vijay is responsible for managing the
overall operations of Vertical Computer while creating an over-arching  strategy
and vision to drive towards making EnFacet a successful  technology company with
a world-class team and a set of high value products and services.  Recently,  he
has  successfully  led the EnFacet team through  developing  and  releasing  two
leading  innovative  software  products   (NewsFlash  and  SiteFlash).   He  has
negotiated  and  consummated  the  acquisition  of EnFacet by Vertical  Computer
Systems Inc., EnFacet's parent company. From 1997-2001, Mr. Vijay led the Arthur
Andersen  Business  Consulting  Advanced  Technology team in Austin  assisting a
variety  of small and  medium  sized  businesses  in  strategy,  technology  and
execution. Mr. Vijay also worked at Accenture from April 1992 to September 1997.
Mr. Vijay's  extensive  industry  experience  also includes the  SuperConducting
SuperCollider, Intersoft Inc., and Siemens.


         AUBREY  MCAULEY,  AGE 38 EXECUTIVE VP,  PRODUCT  DEVELOPMENT  AND SALES
         SUPPORT

         Aubrey  is  the  founder   and  chief   architect   behind   Vertical's
award-winning SiteFlash products. His expertise is tightly focused on developing
core  technical  frameworks  and  leveraging  these  frameworks to solve complex
real-world  business  problems.  He has operational  responsibility for customer
sales  support,  customer  implementation  projects,  and product  research  and
development.   He  is  also  charged  with  combining   business  and  technical
perspectives to guide product  development such that our company and product are
well  positioned  to capitalize  on the markets of the future.  Mr.  McAuley has
spent  the last 14 years  researching,  writing  about,  and  creating  software
solutions  for the  integration  of  computer  technology  in  complex  business
environments,  including industrial design and manufacturing,  high-volume print
and multimedia production, and massive online repurposing.  He has been managing
the product  development and  professional  services teams for SiteFlash and its
predecessors since 1994.


         STEPHEN  O.  ROSSETTI,  AGE 51,  EXECUTIVE  VICE-PRESIDENT,  GOVERNMENT
         AFFAIRS

         As a former senior staff member of the House Armed  Services  Committee
and as director of the Readiness Subcommittee staff, Stephen Rossetti brings his
extensive  government  experience and crucial contacts to Vertical Computer.  As
director of the Readiness  Subcommittee  staff,  Mr.  Rossetti helped to oversee
nearly  $90  billion  in  annual  spending  of the  Department  of  Defense  and
management of the $16 billion defense  business and service  structure.  He also
was  responsible  for the  oversight of the  Department  of Defense  information
technology program, financial programs, infrastructure,  military readiness, and
counter-terrorism  including  chemical and biological  weapons  preparedness and
response.  In 1998, the White House  appointed Mr.  Rossetti to reform  Pentagon
business processes, including service as Chairman of the Defense Travel Board to
overhaul  the  Department's  travel and  relocation  services  for its 4 million
employees.  During his tenure with the U.S. Federal  government,  he worked with
the Senate and House Government  Reform  Committees,  Budget  Committees,  Armed
Services Committees,  Appropriations  Committees, and Federal Agencies. In 1996,
he was  appointed  Executive  Director for Morale,  Welfare and  Recreation  and
Resale  Activities  in the Office of the  Secretary of Defense  where he oversaw
on-base military  businesses with annual revenue of $16 billion. In 1999, he was
appointed  to serve as the  Director  of the  Department  of Defense  integrated
travel and relocation  office.  Mr. Rossetti has received several honors for his
service from the Congress,  the President,  and the Secretary of Defense.  Since
January  2001, he served as President of  Markquest,  a lobbying and  consulting
practice in  Washington  D.C. He now serves as our Executive  Vice-President  of
Government Affairs.






                                       36
<PAGE>

         LAURENT TETARD, AGE 32, DIRECTOR OF OPERATIONS

         Mr. Tetard joined Vertical Computer Systems,  Inc. from Externet World,
Inc.,  where he oversaw business  development,  managed software design projects
and handled daily operations. His responsibilities included working with clients
and strategic  partners to develop  business  plans,  implement  strategies  and
methodologies  to support  software  development.  Combining  his  education and
experience,  Mr.  Tetard has  specialized  in managing  design,  implementation,
documentation and installation of Internet compatible applications. From 1994 to
1996, Mr. Tetard was a Public  Relations  Officer with the French Air Force,  in
Toulouse,  France. Earlier in his career, he completed a thesis in collaboration
with the  French  Aeronautics  and Space  Research  Center  (ONERA)  and  served
engineering  internships  at  Aerospatiale  Matra S.A. Mr.  Tetard is an honor's
graduate  of the noted  French  Ecole  Nationale  Superieure  D'arts et  Metiers
(ENSAM), with a BS in Engineering and a MS in Multidisciplinary Engineering.


SIGNIFICANT EMPLOYEES OF NOW SOLUTIONS


         GARRY P. GYSELEN, AGE 39, CHAIRMAN

         As  Chairman  of  Now  Solutions,   Mr.  Gyselen  is  responsible   for
establishing  and  implementing the firms overall  strategic  direction.  He has
extensive   experience   in  the  areas  of  corporate   finance,   mergers  and
acquisitions, as well as in providing and structuring post-acquisition/financing
implementation and value realization strategies. Mr. Gyselen is also President &
CEO of Arglen Acquisitions LLC, a New York based private equity/leveraged buyout
firm and Senior  Managing  Director of Thurn & Taxis AG, a Zurich based  capital
management  organization.  Prior to founding  Arglen,  Mr.  Gyselen  held senior
positions with Nesbitt Burns Inc.,  one of Canada's  leading  investment  banks,
Ernst &  Young,  Deloitte  &  Touche  and  Playerston  Corporation  where he has
sourced,  negotiated  and structured  numerous  complex  transactions  including
multi-jurisdictional  financings,  strategic  acquisitions  and divestitures and
restructurings.  Mr.  Gyselen  is  a  Chartered  Accountant  (CA)  and  received
post-graduate  degrees in business and public accounting from McGill University,
Montreal and Insead, France. He holds a B.Sc. from Queen's University,  Kingston
and is a member of the Canadian Institute of Chartered Accountants,  the Ontario
Institute of Chartered  Accountants  and the Order of Chartered  Accountants  of
Quebec.


         MARIANNE E. FRANKLIN, AGE 42, PRESIDENT AND CEO OF NOW SOLUTIONS

         Marianne E.  Franklin is President and Chief  Executive  Officer of Now
Solutions.  Ms.  Franklin brings  extensive  experience in the payroll and human
resources industry, which included over 8 years working with this product, under
Ross Systems,  most  recently as  Vice-President  of North  American  sales.  As
Vice-President,  she built a  respected  sales  division  for North  America and
increased  sales  revenue  by  200%  over a  three-year  period.  Prior  to this
function,  she was Director of Ross' Canadian Operations where she grew customer
base by 400% over a four-year period.  Her background also includes 2 years with
ADP and 13 years in the banking industry, working with their payroll products.


         STEPHEN R. GUNN, AGE 47, CHIEF FINANCIAL OFFICER OF NOW SOLUTIONS

         Mr. Gunn was  appointed  Chief  Financial  Officer of Now  Solutions in
April 2001.  Prior to joining Now  Solutions  and  Vertical  Computer,  Mr. Gunn
served as the VP Finance for Intelligent  Reasoning  Systems,  Inc., a privately
held  company  that is a  provider  of capital  equipment  and  software  to the
electronics manufacturing industry from October 1997 through December 2000. From
April  1996 to May 1997,  He served as the CFO of  Austin  Computer  Systems,  a
Singapore  based  personal  computer  manufacturing  company with  operations in
Austin,  Texas.  From  August  1994 to March  1996,  he served as the  Corporate
Controller for Austin Computer Systems.  Mr. Gunn obtained his public accounting
experience with KPMG Peat Marwick and received his CPA designation and practiced
as a sole  practitioner  from  1986 to 1988.  He  graduated  with a BBA from the
University of Texas at Austin.


         KENT ORGAIN, AGE 51, VICE-PRESIDENT OF DEVELOPMENT

         Mr.  Orgain  joined  Ross  Systems in 1993.  From 1989 to 1993,  he was
Application  Maintenance  Manager for Tesseract  Corporation,  a recruiting  and
workforce  management  software  company.  From 1985 to 1989,  Mr.  Orgain was a
member of the technical  management staff at Argonaut  Information  Systems, the
original  developer of the human resources and payroll product  acquired by Ross
Systems.  Mr.  Orgain moves from Ross Systems  where he was Director of business
development.  As Vice-President,  Mr. Orgain manages the overall development and
direction  of the  product  and the  technology.  His  responsibilities  include
supporting the multiple  platforms,  operating systems and database platforms as
well as deciding the future technology of the product suite.




                                       37
<PAGE>

         DOROTHY SPOTTS, AGE 41, VICE-PRESIDENT OF SERVICES AND SUPPORT

         Ms.  Spotts'   responsibilities   include  the  overall  management  of
Application  Consulting,  Integration  Services and Customer Support. She brings
with  her  a  variety  of  practical  and  proven  skills  to  promote  customer
satisfaction.  She has effectively  transitioned  Customer Support through three
technology  generations.  Ms. Spotts graduated with a BBA from the University of
Texas at Austin. Ms. Spotts joined Ross Systems, Inc. in April 1991 as a Support
Analyst in the Customer Support  department  progressing to Operations  Manager.
Subsequently,  she attained the position of Manager of  Integration  Services in
September  1997.  In March 1999,  she was  promoted  to Director of  Integration
Services and then became Director of Professional Services in July 2000.


         CARMELINA UGGENTI, AGE 42, VICE-PRESIDENT, SALES AND MARKETING SUPPORT

         Ms. Uggenti has the overall  responsibility  for Now Solutions'  global
sales, pre-sales,  professional services pre-sales and marketing.  Prior to this
position,  Ms.  Uggenti  worked  with  Ross  Systems  for  over 8 years  and was
responsible for the Presales  organization.  During her tenure,  she assisted in
expanding the client base in her territory by 200%.


ITEM 10.  EXECUTIVE COMPENSATION

         The following  table shows all the cash  compensation  paid by Vertical
Computer,  as well as certain  other  compensation  paid or accrued,  during the
fiscal years ended December 31, 2001, 2000 and 1999 to Vertical Computer's three
highest paid executive  officers,  who were employed by Vertical  Computer as of
December 31, 2001. No restricted stock awards,  long-term incentive plan payouts
or other types of compensation,  other than the  compensation  identified in the
chart below, were paid to these executive officers during these fiscal years. No
other executive  officer earned a total annual salary and bonus for any of these
years in excess of $100,000.

<TABLE>
<CAPTION>
                                   ANNUAL COMPENSATION                        LONG-TERM COMPENSATION
                     ----------------------------------------------   --------------------------------------
                                                                                 AWARDS              PAYOUTS
                                                                      -------------------------    ----------
                                                          OTHER       RESTRICTED
NAME AND                                                  ANNUAL         STOCK         OPTIONS/       LTIP       ALL OTHER
PRINCIPAL POSITION    YEAR       SALARY      BONUS     COMPENSATION    AWARD(S)          SARS        PAYOUTS    COMPENSATION
------------------    ----       ------      -----     ------------    --------          ----        -------    ------------
                                  ($)         ($)          ($)            ($)            (#)           ($)          ($)
<S>                  <C>      <C>                 <C>        <C>             <C>       <C>               <C>            <C>
Richard Wade,(1)     2001     $162,500(1)         --         --              --        20,850,000        --             --
President and        2000       $145,000          --         --              --                --        --             --
Chief Executive      1999             --          --         --              --                --        --             --
Officer

Luiz Valdetaro,      2001       $150,000          --         --              --                --        --             --
Chief Technology     2000       $145,000          --         --              --                --        --             --
Officer              1999             --          --         --              --                --        --             --

Jeff Davison,(2)     2001       $108,000          --         --              --                --        --             --
Chief Software       2000        $54,000          --         --              --                --        --             --
Officer              1999             --          --         --              --                --        --             --
</TABLE>

         No stock options were exercised by the named executive  officers during
the fiscal year ended December 31, 2000.

(1)      Mr. Wade also serves as a Director of Vertical Computer. As a Director,
         he is entitled  to options to  purchase up to 250,000  shares of Common
         Stock that  expire 3 years  after the date of grant or on  February  5,
         2004.

(2)      Mr. Davison tendered his resignation in January 2002.





                                       38
<PAGE>

<TABLE>
<CAPTION>

                                                    OPTIONS/SAR GRANT TABLE
-------------------------------------------------------------------------------------------------------------------------------
                      NO. OF          % TOTAL
                    SECURITIES      OPTIONS/SARS                                                                        VESTING
                    UNDERLYING       GRANTED TO                                                             OPTION      FROM
                   OPTIONS/SARS      EMPLOYEES     EXERCISE OR   EXPIRATION   EXTENDED    STRIKE   GRANT    PRICE       GRANT
NAME                  GRANTED         IN 2001       BASE PRICE      DATE      POST SPLIT   PRICE    DATE    EXTENSION     DATE
----                  -------         -------       ----------      ----      ----------   -----    ----    ---------     ----
                                                      ($ PER
                        (#)             (%)           SHARE)
                        ---             ---           ------
<S>                <C>                  <C>            <C>        <C>         <C>          <C>     <C>       <C>        <C>
Richard Wade(1)       250,000            0.8%          $0.086     02/05/04       250,000   $0.086  02/05/01     21,500   1 year
                   20,600,000           62.2%          $0.100     12/19/04    20,600,000   $0.100  12/20/01  2,060,000  Monthly
Luiz Valdetaro             --              --              --           --            --       --       --          --     --

Jeff Davison (2)           --              --              --           --            --       --       --          --     --
</TABLE>

(1)      Mr. Wade also serves as a Director of Vertical Computer. As a Director,
         he is entitled  to options to  purchase up to 250,000  shares of Common
         Stock that  expire 3 years  after the date of grant or on  February  5,
         2004.

(2)      Mr. Davison tendered his resignation in January 2002.


<TABLE>
<CAPTION>
                                  YEAR-END OPTION VALUES (2000-2001)
------------------------------------------------------------------------------------------------------
                                   NO. OF SECURITIES UNDERLYING
                                       OPTIONS/SARS GRANTED         VALUE OF UNEXERCISED IN-THE-MONEY
                                    AS OF FISCAL YEAR END 2001     OPTIONS AT FISCAL YEAR END 2001 (1)
                                    --------------------------     -----------------------------------
       NAME                        EXERCISABLE    UNEXERCISABLE      EXERCISABLE        UNEXERCISABLE
       ----                        -----------    -------------      -----------        -------------
<S>                                   <C>             <C>                     <C>                <C>
       Richard Wade (2)                  822,222      20,027,778              --                 --

       Jeff Davison (3)               10,000,000              --              --                 --


       Steve Gunn (4)                    250,000              --              --                 --
</TABLE>

(1)      Based on Share Price of $0.013 on December 31, 2001.


(2)      Mr. Wade also serves as a Director of Vertical Computer. As a Director,
         he is entitled  to options to  purchase up to 250,000  shares of Common
         Stock at a strike price of $0.086 that expire 3 years after the date of
         grant or on February 5, 2004.  Pursuant  to his  employment  agreement,
         dated  December 1, 2001, Mr. Wade, as President and CEO, is entitled to
         purchase up to  20,600,000  shares of common stock at a strike price of
         $0.10 that  expire 3 years  after the shares  vest.  These  shares vest
         equally on a monthly basis over a 3-year period.


(3)      Mr.  Davison  tendered his  resignation in January 2002. Mr. Davison is
         entitled to options to purchase up to 10,000,000 shares of Common Stock
         at a strike price of $0.025 that expire 3 years after the date of grant
         or in December 2002.


(4)      Mr.  Gunn  tendered  his  resignation  as CFO of  Vertical  Computer in
         December  2001.  Mr.  Gunn is  entitled  to options to  purchase  up to
         250,000  shares of Common Stock at a strike price of $0.086 that expire
         3 years after the date of grant or in April 2004.


STOCK OPTIONS AND WARRANTS

         During 2000,  Vertical Computer granted  nonstatutory  stock options to
purchase  an  aggregate  of  11,236,364   shares  of  common  stock  to  various
individuals  for  services  provided.   These  options  are  non-assignable  and
non-transferable, are exercisable over a three to five year period from the date
of grant, and vest in various increments through 2001.

         On December 27, 2000 Vertical Computer executed a rescission  agreement
with a majority of the  individuals  that  exercised  their stock options during
fiscal 2000. As part of the rescission,  the individuals returned the previously
issued  shares in exchange  for the  cancellation  of the note  receivable  they
executed  to  purchase  the   options.   Julie  Holmes  and  Jeff  Davison  were
beneficiaries  of  this  program.   Vertical   Computer   recognized  a  $95,625
compensation expense in connection with the rescission.



                                       39
<PAGE>

         During 2001,  Vertical Computer granted  nonstatutory  stock options to
purchase an aggregate of 126,687,399  shares of common stock to individuals  for
services provided.  These options are non-assignable and  non-transferable,  are
exercisable over a three to five year period from the date of grant, and vest in
various increments through 2001.

         OPTION  PLAN.  Vertical  Computer  may issue  options to purchase up to
60,000,000  shares of common  stock under its stock  option  plan.  Most options
issued are non-assignable,  non-transferable,  have a vesting period of one year
from the date of grant and usually expire five years from the date of grant.

         As  of  December  31,  2001,   Vertical  Computer  had  a  subscription
receivable of $2,000 due in relation to warrants that were exercised.

         On December 27, 2000, Vertical Computer executed a rescission agreement
with a majority of the  individuals  that  exercised  their stock options during
fiscal 2000. As part of the rescission,  the individuals returned the previously
issued  shares in exchange for the  cancellation  of the notes they  executed to
purchase the options.  Vertical Computer recognized $95,625 compensation expense
in  connection  with the  rescission.  During  fiscal  2000,  Vertical  Computer
received  proceeds of  $1,792,204  from the exercise of  59,310,000  options and
warrants.

         Option activity within each plan is as follows:

<TABLE>
<CAPTION>
                                                                               Non-                                Weighted
                                                        Incentive            Statutory                              Average
                                                      Stock Option             Stock                                 Price
                                                          Plans               Options            Warrants          Per Share
                                                     ----------------      --------------      --------------     ------------
<S>                                                      <C>                 <C>                 <C>            <C>
Balance outstanding, December 31, 1999                    10,200,000          21,400,000          24,000,000    $        0.03
Options/warrants granted range from $2.00 to
  $0.05 per share                                          2,300,000           2,400,000           9,836,364             0.36
Options/warrants exercised range from $0.50 to
  $0.01 per share                                        (10,710,000)        (22,400,000)        (26,200,000)           (0.04)
Options/warrants rescinded range from $0.50 to
  $0.01 per share                                         10,710,000          21,000,000                   -             0.04
                                                     ----------------      --------------      --------------
Balance/warrants outstanding, December 31, 2000           12,500,000          22,400,000           7,636,364             0.17
Options/warrants granted range from $0.01 to
  $.11 per share                                           8,940,000           3,500,000         126,687,399             0.07
                                                     ----------------      --------------      --------------     ------------
Options/warrants outstanding , December 31, 2001          21,440,000          25,900,000         134,323,763             0.10
                                                     ================      ==============      ==============     ============
</TABLE>


         Information  relating to stock  options/warrants  at December  31, 2001
summarized by exercise price are as follows:

<TABLE>
<CAPTION>
                                                               Outstanding                              Exercisable
                                              ----------------------------------------------    -----------------------------
                                                            Weighted Average                          Weighted Average
                                              ----------------------------------------------
                                                                  Life           Exercise                         Exercise
Exercise Price Per Share                         Shares         (Months)          Price            Shares           Price
                                              --------------   ------------    -------------    -------------    ------------
<S>                                              <C>                  <C>    <C>                  <C>          <C>
Incentive Stock Options:
   $0.01 - $0.50                                 19,940,000           27.5   $         0.05       19,940,000   $       0.050
   $0.51 - $1.25                                  1,500,000           18.0             1.25        1,500,000            1.25
                                               -------------   ------------    -------------    -------------    ------------
                                                 21,440,000           26.8   $         0.13       21,440,000   $        1.30
                                               =============   ============    =============    =============    ============

Nonstatutory Stock Options:
   $0.01 - $0.50                                 25,100,000           33.4   $         0.06       25,100,000   $        0.06
   $0.58 - $2.00                                    800,000           19.9             1.11          800,000            1.11
                                               -------------   ------------    -------------    -------------    ------------
                                                 25,900,000           32.9   $         0.09       25,900,000   $        1.17
                                               =============   ============    =============    =============    ============

Warrants
   $0.01 - $0.35                                134,323,763           40.6   $         .009       51,992,953   $        0.08
                                               =============   ============    =============    =============    ============

</TABLE>



                                       40
<PAGE>

         All stock options  issued to employees  have an exercise price not less
than the fair market  value of Vertical  Computer's  common stock on the date of
the grant,  and in accordance  with  accounting  for such options  utilizing the
intrinsic  value method  there is no related  compensation  expense  recorded in
Vertical Computer's consolidated financial statements.


DIRECTOR COMPENSATION

         In  February  2001,  each  member of the Board  was  granted  an option
exercisable  for a period of three  years to  acquire  250,000  shares of Common
Stock at an exercise price of $0.086.  No other options or warrants were granted
as  director  compensation  during the  fiscal  year ended  December  31,  2001.
Non-employee directors are entitled to receive $3,500 per meeting.


LIMITATION OF LIABILITY: INDEMNIFICATION

         Our Bylaws  include an  indemnification  provision  under which we have
agreed to  indemnify  directors  and  officers of  Vertical  Computer to fullest
extent  possible from and against any and all claims of any type arising from or
related  to future  acts or  omissions  as a director  or  officer  of  Vertical
Computer.

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


EMPLOYMENT AGREEMENTS

         In December 2001,  Vertical Computer  executed an employment  agreement
with Richard Wade pursuant to which Mr. Wade serves as Chief  Executive  Officer
and  President of Vertical  Computer.  This  employment  agreement  replaces the
previous  employment  agreement.  Pursuant  to the  terms of the  December  2001
employment  agreement,  Mr. Wade will receive an annual base salary of $300,000,
and the  issuance  of 5-year  warrants to purchase  20,000,000  shares  Vertical
Computer  common stock at a strike price of $0.10 per share and 5-year  warrants
to purchase  600,000  shares of stock.  Mr.  Wade is also  entitled to an annual
bonus  from a bonus  pool  for  executives  equal to 5% of  Vertical  Computer's
taxable income  (without  deduction for  depreciation).  Mr. Wade's share of the
bonus pool is equal to the  percentage  of his annual base  compensation  to the
total of the combined annual base compensation of all executives in the pool. In
the event the agreement is  terminated by Mr. Wade's death,  his estate shall be
entitled  to  compensation  accrued  to the time of death plus the lesser of one
year's base  compensation or the  compensation  due through the remainder of the
employment term. In the event of termination by Vertical Computer without cause,
Mr. Wade would receive base  compensation  for the  remainder of the  employment
term and his all of his warrants would automatically vest. Mr. Wade did not have
a written employment  agreement with Vertical Computer during the years 1999 and
2000.  Due to Vertical  Computer's  cash  shortages,  Mr. Wade has  deferred his
compensation since January 1, 2002.

         In January 2000,  Vertical  Computer  executed an employment  agreement
with Luiz Valdetaro  pursuant to which Mr.  Valdetaro serves as Chief Technology
Officer  of  Vertical  Computer.  Pursuant  to the terms of the  agreement,  Mr.
Valdetaro  receives an annual base salary of  $150,000.  Mr.  Valdetaro  is also
entitled  to an annual  bonus  from a bonus pool for  executives  equal to 5% of
Vertical  Computer's taxable income (without  deduction for  depreciation).  Mr.
Valdetaro's  share of the bonus  pool is equal to the  percentage  of his annual
base  compensation to the total of the combined annual base  compensation of all
executives in the pool. Due to Vertical Computer's cash shortages, Mr. Valdetaro
has deferred his compensation since January 1, 2002.







                                       41
<PAGE>

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


SECURITY OWNERSHIP BY NAMED EXECUTIVE OFFICERS, DIRECTORS AND BENEFICIAL OWNERS

         The  following  table  sets forth  certain  information  regarding  the
beneficial  ownership of the shares of Common Stock as of December 31, 2001,  by
each of our directors and executive officers and any person or entity,  known by
us to be the  beneficial  owner of more than  five  percent  of the  outstanding
shares of common  stock.  The table also shows the  beneficial  ownership of our
stock by all directors and executive officers as a group. The table includes the
number of shares subject to outstanding  options and warrants to purchase shares
of Common Stock. The percentages are based on 615,191,422 shares of common stock
outstanding  as of December 31, 2001,  together with options,  warrants or other
securities  convertible  or  exchangeable  into shares of common stock within 60
days of December 31, 2001.

                                                   SHARES
                                               OF COMMON STOCK         PERCENT
  NAME AND ADDRESS OF BENEFICIAL OWNER(1)     BENEFICIALLY OWNED       OF CLASS
  ---------------------------------------     ------------------       --------
  William K. Mills                                  4,250,000(2)            *
  Richard Wade                                    139,325,500(3)        21.9%
  Total Directors and Officers (Two People)       143,575,500           22.6%
  Luiz Valdetaro                                   37,702,940(4)         6.1%
  Julie Holmes                                      5,000,000               *
  Jeff Davison                                     10,000,000               *
  Stephen Gunn                                        250,000(5)            *
------------------------------------
*        Means less than 1%.


(1)      Unless otherwise indicated, the address of each director and officer is
         c/o Vertical Computer Systems, Inc., Los Angeles, CA 90048.


(2)      Includes  options to purchase up to 250,000 shares of Common Stock that
         expire 3 years after the date of grant or on April 9, 2004.


(3)      Includes  options to purchase up to  20,850,000  shares of Common Stock
         that expire 3 years after the date of grant. Also includes  101,370,050
         shares owned by Mountain  Reservoir Corp., a corporation  controlled by
         the W5  Family  Trust,  of which  Richard  W.  Wade is a  trustee;  and
         includes  1,000,000 shares owned by Jennifer Wade, a minor child of Mr.
         Wade.  Pursuant  two  promissory  notes  for  $100,000  each,  Mountain
         Reservoir  Corp.,  pledged  to sell up to  10,500,000  shares of common
         stock  owned by Richard  Wade to cover any  shortfall  from the sale of
         shares of third party  common  stock owned by Vertical  Computer to pay
         the promissory notes. In addition, the $425,000 note issued in December
         2001 is  secured  by  36,303,932  shares  of common  stock of  Vertical
         Computer to cover any  shortfall in the event of default.  These shares
         are owned by Mountain Reservoir Corp. on behalf of the W5 Family Trust.
         Mr. Wade is a trustee of the W5 Family Trust. In January 2001, Vertical
         Computer executed separate indemnity and reimbursement  agreements with
         Mountain Reservoir  Corporation cover the two pledges of 10,450,000 and
         36,303,932  shares of common  stock,  respectively.  Pursuant  to these
         agreements,  Vertical Computer agreed to reimburse  Mountain  Reservoir
         for any shares sold as collateral to cover the default of any loan. The
         Note is currently in default and the collateral is currently being sold
         in the lender's account to cover the amounts currently due.


(4)      Includes 1,950,000 shares owned by Gabriela  Cuny-Valdetaro,  1,950,000
         shares owned by Eliza  Cuny-Valdetaro,  and  1,950,000  shares owned by
         Louis Francois  Cuny-Valdetaro,  each of whom are minor children of Mr.
         Valdetaro. In addition,  Valdetaro has pledged to sell up to 20,000,000
         shares as  collateral  for any  loans  executed  on behalf of  Vertical
         Computer.  The note is secured by 15,000,000  shares of common stock of
         Vertical Computer that is owned by Mr. Valdetaro,  Vertical  Computer's
         Chief  Technology  Officer,  to cover  any  shortfall  in the  event of
         default.  In January 2001,  Vertical  Computer  executed  indemnity and
         reimbursement  agreements with Mountain  Reservoir  Corporation and Mr.
         Valdetaro  to cover his pledge of  15,000,000  shares of common  stock.
         Pursuant to this agreement,  Vertical  Computer agreed to reimburse Mr.
         Valdetaro for any shares sold as collateral to cover the default of any
         loan.  The Note is currently in default and the collateral is currently
         being sold in the lender's account to cover the amounts currently due.


(5)      Includes  options to purchase up to 250,000 shares of Common Stock that
         expire 3 years after the date of grant or on, April 9, 2004.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         During the years ended  December 31, 2001 and 2000,  Vertical  Computer
paid Parker, Mills & Patel LLP ("PMP"), its general legal counsel, approximately
$182,000 and $4000 in consideration for legal services rendered.  William Mills,
a partner at PMP, is also a director  of  Vertical  Computer.  During  2001,  we
issued  4,182,000  shares of common  stock with a value of  $121,000  to William
Mills of Parker, Mills & Patel LLP for partial payment of legal services.



                                       42
<PAGE>

         During 2001,  PMP made advances of  approximately  $30,000 on behalf of
Vertical  Computer.  In exchange,  PMP received a 6% promissory note due January
2002 and  3-year  warrants  to  purchase  300,000  shares of  common  stock at a
purchase price of $0.014 per share. This note is currently in default.

         In February  2000,  Vertical  Computer  reached an agreement  with Marc
Elalouf holder of Externet World, in which 246,470,580  common stock shares were
cancelled.   Vertical  Computer  also  recorded  an  additional  $11,000  for  a
receivable due from the former owner.

         In October 2000,  Vertical  Computer  sold its wholly owned  subsidiary
Externet World,  Inc. to Eurovest,  Inc., a company of which Terry  Washburn,  a
former  member  of  Vertical  Computer's  Board of  Directors,  is an  executive
officer. Eurovest subsequently sold Externet World to two former shareholders of
Vertical Computer and received  147,350,980 shares of Vertical Computer's common
stock. As part of a settlement  agreement,  144,850,000 common stock shares were
cancelled and 2,000,980 shares were retained in trust for Vertical Computer.  As
part of the transaction, Eurovest received fees of $72,000 and 500,000 shares of
Vertical  Computer's  common stock.  An  additional  980 shares should have been
retired and the amount was deemed immaterial.

         In October 2001,  Vertical Computer executed a $100,000 promissory note
with an unrelated party. The note bears interest at 12% per annum and all unpaid
principal and interest was due February 2002. The note is secured by third party
securities  owned by  Vertical  Computer,  which it  intends to sell in order to
repay the loan and by a pledge against the loan by the Mountain Reservoir Corp.,
to sell up to 5,225,000 shares of common stock owned by Mountain Reservoir Corp.
to cover any shortfall.  Mountain Reservoir Corp. is a corporation controlled by
the W5 Family  Trust.  Mr.  Wade,  the  President  and CEO of Vertical  Computer
Systems, is the trustee of the W5 Family Trust. In April 2002, Vertical Computer
entered into an amendment  agreement whereby Vertical and the third party waived
any  default and agreed to  continue  to sell the  400,000  shares of  eResource
Capital  Group  stock,  which  Vertical  pledged  pursuant  to the Stock  Pledge
Agreement as collateral. Vertical Computer further agreed to use the proceeds of
the eResource  Capital Group sales of stock to reduce the obligations  under the
note accordingly.  Pursuant to this amendment, Vertical agreed to make a minimum
payment of no less than  $31,500 by April 5, 2002,  a payment of $8,500 by April
6, 2002, ten (10) weekly  installment  payments of $6,000 beginning on April 15,
continuing  until  all  principal  then  outstanding  with all  interest,  fees,
charges,  and other  amounts owing  hereunder and then unpaid by June 2002.  The
first $6,000  payment has not been paid and Vertical  Computer is negotiating an
extension.

         In November 2001, Vertical Computer executed a $100,000 promissory note
with an unrelated party. The note bears interest at 12% per annum and all unpaid
principal and interest was due February 2002. The note is secured by third party
securities  owned by  Vertical  Computer,  which it intends to sell to repay the
loan, and by a pledge against the loan by Mountain  Reservoir  Corp., to sell up
to  5,225,000  shares of common  stock owned by Mountain  Reservoir to cover any
shortfall.   In  January  2001,   Vertical  Computer   executed   indemnity  and
reimbursement  agreements  with  Mountain  Reservoir  Corporation  to cover  the
10,450,000  shares of stock  pledged by  Mountain  Reservoir  with regard to the
October and November  2001 notes,  whereby  Vertical  Computer  would  reimburse
Mountain  Reservoir  with an  number  of  shares  equal  to any  shares  sold as
collateral  to cover the  default of any loan.  Mountain  Reservoir  Corp.  is a
corporation  controlled by the W5 Family Trust.  Mr. Wade, the President and CEO
of Vertical  Computer  Systems,  is the trustee of the W5 Family Trust. In April
2002, Vertical Computer entered into an amendment agreement concerning the note,
whereby  Vertical  and the third party  agreed  waive any  default and  Vertical
agreed to make monthly installment  payments in the amount of $7,500 each on the
fifteenth day of each month,  beginning in May 2002. Pursuant to this amendment,
all principal  then  outstanding,  and all interest,  fees,  charges,  and other
amounts  owing  hereunder  and then unpaid shall be paid by the end of September
2002.  The first  $7,500  payment  has not been paid and  Vertical  Computer  is
negotiating an extension.

         In December 2001,  Vertical  Computer  executed a $425,000 note payable
with a third party.  Vertical  Computer received proceeds of $300,000 and paid a
commitment fee of $125,000.  The note accrues  interest at 12% per annum and was
due January 31, 2002.  The note is secured by 36,303,932  shares of common stock
of  Vertical  Computer  that is owned by  Mountain  Reservoir  Corporation,  and
15,000,000  shares of common  stock of  Vertical  Computer  that is owned by Mr.
Valdetaro,  Vertical Computer's Chief Technology Officer, to cover any shortfall
in the event of default. Mountain Reservoir Corp. is a corporation controlled by
the W5 Family  Trust.  Mr.  Wade,  the  President  and CEO of Vertical  Computer
Systems,  is the  trustee  of the W5 Family  Trust.  In January  2001,  Vertical
Computer executed separate indemnity and reimbursement  agreements with Mountain
Reservoir Corporation and Mr. Valdetaro to cover their pledges of 36,303,932 and
15,000,000 shares of common stock,  respectively.  Pursuant to these agreements,
Vertical Computer agreed to reimburse  Mountain  Reservoir and Mr. Valdetaro for
any shares  sold as  collateral  to cover the  default of any loan.  The Note is
currently  in default and the  collateral  is  currently  being  transferred  to
Vertical Computer's account to cover the amounts currently due.




                                       43
<PAGE>

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)    The following exhibits are filed as part of this filing:

<TABLE>
<CAPTION>
EXHIBIT NO.           DESCRIPTION                                              LOCATION
-----------           -----------                                              --------
<S>                   <C>                                                      <C>
2.1                   Certificate of Ownership and Merger Merging Scientific   Incorporated by reference to Exhibit 1.1 to
                      Fuel Technology, Inc. into Vertical Computer Systems,    the Registrant's Form 8-K 12G3 filed on May 2,
                      Inc.                                                     2000

2.2                   Stock Purchase Agreement dated April 5, 2000 between     Incorporated by reference to Exhibit 2.2 to
                      the Company and all the shareholders of Globalfare.com   the Registrant's Form 10-KSB/A filed on May
                                                                               17, 2001

2.3                   Stockholders Agreement dated October 12, 2000 between    Incorporated by reference to Exhibit 2.3 to
                      the Company and Vijay Amritraj                           the Registrant's Form 10-KSB/A filed on May
                                                                               17, 2001

2.4                   Vertical - iNPI LLC Operating Agreement dated            Incorporated by reference to Exhibit 2.4 to
                      April 26, 2000                                           the Registrant's Form 10-KSB/A filed on May
                                                                               17, 2001

2.5                   INet Government Services LLC Operating Agreement dated   Incorporated by reference to Exhibit 2.5 to
                      April 28, 2000                                           the Registrant's Form 10-KSB/A filed on May
                                                                               17, 2001

3.1                   Original Unamended Certificate of Incorporation of       Incorporated by reference to Exhibit 1.2 to
                      Vertical Computer Systems, Inc. (f/k/a Xenogen           the Registrant's Form 8-K 12G3 filed on May 2,
                      Technology, Inc.)                                        2000

3.2                   Certificate of Amendment of Certificate of               Incorporated by reference to Exhibit 3.2 to
                      Incorporation (change name to Vertical Computer          the Registrant's Form 10-KSB/A filed on May
                      Systems, Inc.)                                           17, 2001

3.3                   Certificate of Designation of 10% Cumulative             Incorporated by reference to Exhibit 3.3 to
                      Redeemable Series B Preferred Stock                      the Registrant's Form 10-KSB/A filed on May
                                                                               17, 2001

3.4                   Certificate of Designation of 15% Cumulative             Incorporated by reference to Exhibit 3.4 to
                      Redeemable Series D Preferred Stock                      the Registrant's Form 10-KSB/A filed on May
                                                                               17, 2001

3.5                   Certificate of Amendment of Certificate of               Incorporated by reference to Exhibit 3.5 to
                      Incorporation (2000)                                     the Registrant's Form 10-KSB/A filed on May
                                                                               17, 2001

3.6                   Certificate of Designation of 4% Cumulative Redeemable   Incorporated by reference to Exhibit 3.6 to
                      Series A Preferred Stock                                 the Registrant's Form 10-KSB/A filed on May
                                                                               17, 2001

3.7                   Amended and Restated Bylaws of the Company               Incorporated by reference to Exhibit 3.7 to
                                                                               the Registrant's Form 10-KSB/A filed on May
                                                                               17, 2001



                                                            44
<PAGE>

EXHIBIT NO.           DESCRIPTION                                              LOCATION
-----------           -----------                                              --------
4.2                   Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.2 to
                      and Ujjwal Bhowmik dated December 17, 1999               the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.3                   Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.3 to
                      and Juan Caballero dated December 17, 1999               the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.4                   Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.4 to
                      and Tawee Ekundomsin dated December 17, 1999             the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.5                   Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.5 to
                      and John R. Feeney dated December 20, 1999               the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.6                   Non-Statutory Stock Option Agreement between             Incorporated by reference to Exhibit 4.6 to
                      Registrant and Julie M. Holmes Dated December 20, 1999   the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.7                   Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.7 to
                      and Laurent H. Tetard dated December 18, 1999            the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.8                   Non-Statutory Stock Option Agreement between             Incorporated by reference to Exhibit 4.8 to
                      Registrant and Andre Bertrand dated December 16, 1999    the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.9                   Non-Statutory Stock Option Agreement between             Incorporated by reference to Exhibit 4.9 to
                      Registrant and Jeff Davison dated December 16, 1999      the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.10                  Non-Statutory Stock Option Agreement between             Incorporated by referenced to Exhibit 4.10 to
                      Registrant and Bee C. Lavery dated December 16, 1999     the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.11                  Non-Statutory Stock Option Agreement between             Incorporated by reference to Exhibit 4.11 to
                      Registrant and Donn F. Morey dated December 16, 1999     the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.12                  Incentive Stock Option Agreement between Registrant an   Incorporated by reference to Exhibit 4.12 to
                      Steve Lu dated December 19, 2000                         the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.13                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.13 to
                      and Ujjwal Bhowmik dated February 5, 2001                the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.14                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.14 to
                      and Juan Caballero dated February 5, 2001                the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.15                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.15 to
                      and Tawee Ekundomsin dated February 5, 2001              the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001



                                                            45
<PAGE>

EXHIBIT NO.           DESCRIPTION                                              LOCATION
-----------           -----------                                              --------
4.16                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.16 to
                      and John R. Feeney dated February 5, 2001                the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.17                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.17 to
                      and Laurent H. Tetard dated February 5, 2001             the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.18                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.18 to
                      and Diane Castillo dated February 5, 2001                the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.19                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.19 to
                      and Carlos Lomheim dated February 5, 2001                the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.20                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.20 to
                      and Alex Federico dated February 5, 2001                 the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.21                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.21 to
                      and Jeannifer Caldona dated February 5, 2001             the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.22                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.22 to
                      and Geoffrey Golliher dated February 5, 2001             the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.23                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.23 to
                      and Feng Yu (Frank) Zhou dated February 5, 2001          the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.24                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.24 to
                      and Jennifer Kim dated February 5, 2001                  the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.25                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.25 to
                      and Daniela Moura dated February 5, 2001                 the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.26                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.26 to
                      and James Kim dated February 5, 2001                     the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.27                  Non-Statutory Stock Option Agreement between             Incorporated by reference to Exhibit 4.27 to
                      Registrant and Gary Freeman dated February 14, 2001      the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.28                  Non-Statutory Stock Option Agreement between             Incorporated by reference to Exhibit 4.28 to
                      Registrant and William Mills dated February 5, 2001      the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.29                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.29 to
                      and Richard Wade dated February 5, 2001                  the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.30                  Non-Statutory Stock Option Agreement between             Incorporated by reference to Exhibit 4.30 to
                      Registrant and Terry Washburn dated February 5, 2001     the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001



                                                            46
<PAGE>

EXHIBIT NO.           DESCRIPTION                                              LOCATION
-----------           -----------                                              --------
4.31                  Non-Statutory Stock Option Agreement between             Incorporated by reference to Exhibit 4.31 to
                      Registrant and Vijay Amritraj dated June 5, 2001         the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.32                  Non-Statutory Stock Option Agreement between             Incorporated by reference to Exhibit 4.32 to
                      Registrant and Munish Gupta dated June 5, 2001           the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.33                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.33 to
                      and Tawee Ekundomsin dated June 15, 2001                 the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.34                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.34 to
                      and John R. Feeney dated June 15, 2001                   the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.35                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.35 to
                      and Laurent Tetard dated June 15, 2001                   the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.36                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.36 to
                      and Diane Castillo dated June 15, 2001                   the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.37                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.37 to
                      and Geoffrey Golliher dated June 15, 2001                the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.38                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.38 to
                      and Frank Zhou dated June 15, 2001                       the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.39                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.39 to
                      and Jennifer Kim dated June 15, 2001                     the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.40                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.40 to
                      and James Kim dated June 15, 2001                        the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.41                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.40 to
                      and James Kim dated June 15, 2001                        the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.42                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.42 to
                      and Fabian Marta dated June 15, 2001                     the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.43                  Incentive Stock Option Agreement between Registrant      Incorporated by reference to Exhibit 4.43 to
                      and Daniela Moura dated June 15, 2001                    the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.44                  Warrant Agreement between Registrant and Phil            Incorporated by reference to Exhibit 4.44 to
                      Alexander dated October 23, 2000                         the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001



                                                            47
<PAGE>

EXHIBIT NO.           DESCRIPTION                                              LOCATION
-----------           -----------                                              --------
4.45                  Warrant Agreement between Registrant and Phil            Incorporated by reference to Exhibit 4.45 to
                      Alexander dated October 23, 2000                         the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.46                  Warrant Agreement between Registrant and Michael Blum    Incorporated by reference to Exhibit 4.46 to
                      dated October 23, 2000                                   the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.47                  Warrant Agreement between Registrant and Michael Blum    Incorporated by reference to Exhibit 4.47 to
                      dated October 23, 2000                                   the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.48                  Warrant Agreement between Registrant and Gary Blum       Incorporated by reference to Exhibit 4.48 to
                      dated February 5, 2001                                   the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.49                  Warrant Agreement between Registrant and Donald P.       Incorporated by reference to Exhibit 4.49 to
                      Hatlely dated March 5, 2001                              the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.50                  Warrant Agreement between Registrant and Robert Wagman   Incorporated by reference to Exhibit 4.50 to
                      dated May 1, 2001                                        the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.51                  Warrant Agreement between Registrant and Robert Wagman   Incorporated by reference to Exhibit 4.51 to
                      dated June 1, 2001                                       the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.52                  Warrant Agreement between Registrant and Mark Kellner    Incorporated by reference to Exhibit 4.52 to
                      dated January 18, 2001                                   the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.53                  Warrant Agreement between Registrant and Stephen Gunn    Incorporated by reference to Exhibit 4.53 to
                      dated April 9, 2001                                      the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.54                  Warrant Agreement between Registrant and Gary L. Blum    Incorporated by reference to Exhibit 4.54 to
                      dated June 15, 2001                                      the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

10.1                  1999 Stock Option Plan of the Company                    Incorporated by reference to Exhibit 10.1 to
                                                                               the Registrant's Form 10-KSB/A filed on May
                                                                               17, 2001

10.2                  Business Development and Marketing Agreement between     Incorporated by reference to Exhibit 10.2 to
                      the Company and Avenel Alliance, Inc.                    the Registrant's Form 10-KSB/A filed on May
                                                                               17, 2001

10.3                  Marketing Agreement between the Company and              Incorporated by reference to Exhibit 10.3 to
                      Entertainment Marketing Group                            the Registrant's Form 10-KSB/A filed on May
                                                                               17, 2001

10.4                  Employment Agreement between the Company and Richard     Incorporated by reference to Exhibit 10.4 to
                      Wade                                                     the Registrant's Form 10-KSB/A filed on May
                                                                               17, 2001



                                                            48
<PAGE>

EXHIBIT NO.           DESCRIPTION                                              LOCATION
-----------           -----------                                              --------
10.5                  Agreement between Registrant and Xatnu, Inc. dated       Incorporated by reference to Exhibit 10.1 to
                      October 16, 2000                                         the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

10.6                  Agreement between Registrant and Xatnu, Inc. dated       Incorporated by reference to Exhibit 10.2 to
                      June 29, 2001                                            the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

10.7                  Agreement between Registrant and Parker Mills Patel      Incorporated by reference to Exhibit 10.3 to
                      dated June 29, 2001                                      the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

10.8                  Agreement between Registrant and Franklin Financial      Incorporated by reference to Exhibit 10.4 to
                      dated July 9, 2001                                       the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

10.9                  Agreement between Registrant and Gary L. Blum, Esq.      Incorporated by reference to Exhibit 10.5 to
                      dated July 10, 2001                                      the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

10.10                 Agreement between Registrant and Taurus Global, LLC      Incorporated by reference to Exhibit 10.6 to
                      dated July 9, 2001                                       the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

10.11                 Agreement between Registrant and M.S. Farrell & Co.,     Incorporated by reference to Exhibit 10.7 to
                      Inc. dated July 9, 2001                                  the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

10.12                 Letter Agreement dated as of February 23, 2001 between   Incorporated by reference to Exhibit 2.1 to
                      Arglen Acquisitions, LLC and the Registrant              the Company's 8-K filed on May 16, 2001

10.13                 Now Solutions, LLC Operating Agreement dated as of       Incorporated by reference to Exhibit 2.2 to
                      February 27, 2001 between Arglen Acquisitions LLC and    the Company's 8-K filed on May 16, 2001
                      the Registrant

10.14                 Certificate of Designation of Vertical Computers, Inc.   Incorporated by reference to Exhibit 3.1 to
                      Series "C" 4% Cumulative Convertible Preferred Stock     Company's Form 10-QSB/A filed on December 19,
                                                                               2001

10.15                 (a) Berche Promissory Note dated August 13, 2001         Incorporated by reference to Exhibit 10.1 to
                                                                               the Company's Form 10-QSB/A filed on December
                      (b) Berche Stock Pledge Agreement dated August 13, 2001  19, 2001

                      (c) Berche Warrants dated August 13, 2001

10.16                 Equity Line of Credit Agreement between the Company      Incorporated by reference to Exhibit 10.2 to
                      and Cornell Capital Partners, L.P. dated August 16,      the Company's Form 10-QSB/A filed on December
                      2001                                                     19, 2001

10.17                 Securities Purchase Agreement between the Company and    Incorporated by reference to Exhibit 10.3 to
                      third party buyers for $250,000 of Convertible           the Company's Form 10-QSB/A filed on December
                      Debentures                                               19, 2001

10.18                 Enfacet, Inc. Stock Purchase Agreement dated             Incorporated by reference to Exhibit 10.4 to
                      August 21, 2001                                          the Company's Form 10-QSB/A filed on December
                                                                               19, 2001



                                                            49
<PAGE>

EXHIBIT NO.           DESCRIPTION                                              LOCATION
-----------           -----------                                              --------
10.19                 Agreement between Enfacet and the Company dated August   Incorporated by reference to Exhibit 10.5 to
                      24, 2001                                                 the Company's Form 10-QSB/A filed on December
                                                                               19, 2001

10.20                 Agreement between Registrant and Chuck Ashman dated      Incorporated by reference to Exhibit 10.1 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.21                 Agreement between Registrant and Michael Blum dated      Incorporated by reference to Exhibit 10.2 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.22                 Agreement between Registrant and Gary Blum dated         Incorporated by reference to Exhibit 10.3 to
                      November 2, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.23                 Agreement between Registrant and Justin Davis dated      Incorporated by reference to Exhibit 10.4 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.24                 Agreement between Registrant and Allison Enderle dated   Incorporated by reference to Exhibit 10.5 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.25                 Agreement between Registrant and Robert Farias dated     Incorporated by reference to Exhibit 10.6 to
                      October 30, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.26                 Agreement between Registrant and Donald P. Hateley       Incorporated by reference to Exhibit 10.7 to
                      dated October 29, 2001                                   the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.27                 Agreement between Registrant and Annette Keith dated     Incorporated by reference to Exhibit 10.8 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.28                 Agreement between Registrant and Aubrey McAuley dated    Incorporated by reference to Exhibit 10.9 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.29                 Agreement between Registrant and Tom McCloskey dated     Incorporated by reference to Exhibit 10.10 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.30                 Agreement between Registrant and William Mills dated     Incorporated by reference to Exhibit 10.11 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.31                 Agreement between Registrant and Leroy Molock dated      Incorporated by reference to Exhibit 10.12 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.32                 Agreement between Registrant and David Rezeieh dated     Incorporated by reference to Exhibit 10.13 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001



                                                            50
<PAGE>

EXHIBIT NO.           DESCRIPTION                                              LOCATION
-----------           -----------                                              --------
10.33                 Agreement between Registrant and Steve Rosetti dated     Incorporated by reference to Exhibit 10.14 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.34                 Agreement between Registrant and Priyam Sharma dated     Incorporated by reference to Exhibit 10.15 to
                      November 2, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.35                 Agreement between Registrant and Jacob Stearns dated     Incorporated by reference to Exhibit 10.16 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.36                 Agreement between Registrant and Marilyn Stewart dated   Incorporated by reference to Exhibit 10.17 to
                      November 1, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.37                 Agreement between Registrant and Vasu Vijay dated        Incorporated by reference to Exhibit 10.18 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.38                 Agreement between Registrant and Vijay Armitraj dated    Incorporated by reference to Exhibit 10.19 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.39                 Agreement between Registrant and Taurus Global, LLC      Incorporated by reference to Exhibit 10.20 to
                      dated July 9, 2001                                       the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.40                 Agreement between Registrant and M.S. Farrell & Co.,     Incorporated by reference to Exhibit 10.21 to
                      Inc. dated July 9, 2001                                  the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.41                 Equity Line of Credit Agreement dated as of August       Provided herewith
                      2001, between the Company and Cornell Capital
                      Partners, L.P.

10.42                 Registration Rights Agreement dated as of August  2001   Provided  herewith
                      between  the  Company  and the  buyers identified
                      therein.

10.43                 Escrow Agreement dated as of August 2001 among the       Provided herewith
                      Company, Yorkville Advisors Management, LLC and First
                      Union National Bank.

10.44                 Form of Debenture                                        Provided herewith

10.45                 Securities Purchase Agreement dated as of August 2001    Provided herewith
                      among between the Company and the buyers identified
                      therein.

10.46                 Consulting Agreement dated as of August 2001 between     Provided herewith
                      the Company and Yorkville Advisors Management, LLC.



                                                            51
<PAGE>

EXHIBIT NO.           DESCRIPTION                                              LOCATION
-----------           -----------                                              --------
10.47                 Placement Agent Agreement dated as of August 2001        Provided herewith
                      among the Company, Westrock Advisors, Inc. and Cornell
                      Capital Partners, L.P.

10.48                 Registration Rights Agreement dated as of August 2001    Provided  herewith
                      between the Company and Cornell Capital Partners, L.P.

10.49                 Escrow Agreement dated as of August 2001 among the       Provided herewith
                      Company, Cornell Capital Partners, L.P., Butler
                      Gonzalez LLP and First Union National Bank.

10.50                 Warrant dated as of November 2001 given by the Company   Provided herewith
                      to Parker, Mills & Patel, LLP

10.51                 Promissory Note dated as of November 2001 given by the   Provided herewith
                      Company to Parker, Mills & Patel, LLP

10.52                 Promissory Note dated as of December 2001 given by the   Provided herewith
                      Company to Brighton Opportunity Fund, LP

10.53                 Bridge loan dated as of December 2001 given by the       Provided herewith
                      Company to Brighton Opportunity Fund, LP

10.54                 Option Agreement dated as of December 2001 given by      Provided herewith
                      the Company to iNetPurchasing, Inc.

10.55                 Stock Pledge Agreement dated as of December 2001 given   Provided herewith
                      by Mountain Reservoir Corp. to Brighton Opportunity
                      Fund, LP

10.56                 Option Agreement dated as of December 2001 given by      Provided herewith
                      the Company to Basil Nikas

10.57                 Option Agreement dated as of December 2001 given by      Provided herewith
                      the Company to Robin Mattern

10.58                 Option Agreement dated as of December 2001 given by      Provided herewith
                      the Company to Wayne Savage

10.59                 Consulting Agreement dated as of January 2002 between    Provided herewith
                      the Company and Taurus Global, LLC

10.60                 Reimbursement and Indemnity Agreement dated as of        Provided herewith
                      January 2002 between the Company and Luiz Claudio
                      Valdetaro Galvao e Mello

10.61                 Stock Pledge Agreement dated as of December 2001 given   Provided herewith
                      by Luiz Claudio Valdetaro Galvao e Mello to Brighton
                      Opportunity Fund, LP

10.62                 Amendment Agreement dated as of January 2002 between     Provided herewith
                      the Company and Strategic Media Alliance

10.63                 Memorandum of Agreement dated as of January 2002         Provided herewith
                      between the Company and Strategic Media Alliance



                                                            52
<PAGE>

EXHIBIT NO.           DESCRIPTION                                              LOCATION
-----------           -----------                                              --------
10.64                 Service Agreement dated as of October 31, 2001 between   Provided herewith
                      the Company and Robert Farias

10.65                 Promissory Note Agreement as of October 31, 2001         Provided herewith
                      between the Company and Paradigm Sales, Inc.

10.66                 Asset Pledge Agreement as of October 31, 2001 between    Provided herewith
                      the Company and Robert Farias

10.67                 Letter Agreement as of October 31, 2001 between the      Provided herewith
                      Company and Robert Farias

10.68                 Promissory Note Agreement as of October 31, 2001         Provided herewith
                      between the Company and Robert Farias

10.69                 Stock Pledge Agreement as of October 31, 2001 between    Provided herewith
                      the Company and Robert Farias

10.70                 Stock Pledge Letter Agreement as of October 31, 2001     Provided herewith
                      between the Company and Robert Farias

10.71                 Promissory Note Agreement as of November 7, 2001         Provided herewith
                      between the Company and Robert Farias

10.72                 Employment Agreement as of December 1, 2001 between      Provided herewith
                      the Company and Richard Wade

10.73                 Warrant Agreement as of December 19, 2001 between the    Provided herewith
                      Company and Richard Wade

10.74                 Warrant Agreement as of December 19, 2001 between the    Provided herewith
                      Company and Richard Wade

10.75                 Reimbursement and Indemnity Agreement as of January      Provided herewith
                      15, 2002 between the Company and Luiz Claudio
                      Valdetaro Galvao e Mello

10.76                 Reimbursement and Indemnity Agreement as of January      Provided herewith
                      15, 2002 between the Company and Mountain Reservoir
                      Corporation

10.77                 Reimbursement and Indemnity Agreement as of January      Provided herewith
                      15, 2002 between the Company and Mountain Reservoir
                      Corporation

10.78                 Reimbursement and Indemnity Agreement as of January      Provided herewith
                      15, 2002 between the Company and Mountain Reservoir
                      Corporation

10.79                 Letter Amendment Agreement as of April 5, 2002 between   Provided herewith
                      the Company and Robert Farias


                                                            53
<PAGE>

EXHIBIT NO.           DESCRIPTION                                              LOCATION
-----------           -----------                                              --------
10.80                 Asset Purchase Agreement dated November 14, 2001         Provided herewith
                      between the Company and Paradigm Sales, Inc.

21.1                  Subsidiaries of the Company                              Incorporated by reference to Exhibit 21.1 to
                                                                               the Registrant's Form 10-KSB/A filed on May
                                                                               17, 2001

23.1                  Consent of BDO Seidman LLP                               Provided herewith
</TABLE>

         (b)      REPORTS ON FORM 8-K:  NONE.

         On  October  19,  2000,  the  Company  filed a report on Form 8-K dated
September  29, 2000 to disclose  the  transaction  whereby the Company  sold its
subsidiary, Externet World, Inc.

         On  October  19,  2000,  the  Company  filed a report on Form 8-K dated
October 4, 2000 to  disclose  the  transaction  whereby two  shareholders,  each
deemed a control person of the Company, exchanged part of their shareholdings in
the  Company to purchase a former  Company  subsidiary,  and  thereby  each lost
"control person" status.

         On  March  23,  2001,  the  Company  filed a  report  on  Form  8-K for
acquisition of 60% of Now Solutions LLC.























                                                            54
<PAGE>

                                   SIGNATURES

         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following  persons on behalf of the  registrant  and in
the capacities indicated as of May 20, 2002.



                                 By:    /s/ Richard Wade
                                    --------------------------------------
                                        Richard Wade, President and
                                        Chief Executive Officer


                                 By:    /s/ Anthony Fidaleo
                                    --------------------------------------
                                        Anthony Fidaleo, Controller  (Principal
                                        Accounting Officer)


                                 DIRECTORS:


                                 By:    /s/ Richard Wade
                                    --------------------------------------
                                        Richard Wade, Director


                                 By:    /s/ William Mills
                                    --------------------------------------
                                        William Mills, Director








                                       55